How to Kick-Start Your Community's Startup Scene
I just returned from three days in Cincinnati where I attended the annual meeting of one of Upfront's LPs--Cintrifuse.
I have never been more optimistic about the impact that the tech startup community is having on cities in America. Or about the role that cities outside of San Francisco/Silicon Valley can play in our future.
Cincinnati, like many startup communities in the US over the past five years, has revitalized important regions in its urban core, created accelerators, built co-working facilities, pooled together angel capital, attracted VCs, involved educational institutions and solicited the help of important corporations in a more cohesive ecosystem. I believe the next 20 years will be an exciting time of regeneration for Cincinnati and many more progressive communities across the country.
The “Infrastructure Phase” of the Internet …
Before we had an Internet startup explosion, we needed infrastructure which spawned the original tech startup community in Silicon Valley. It required a diffusion of personal computers that led to the massive growth of Hewlett Packard, Intel, Apple Computers and others. To interconnect these computers we needed IP-based telecommunications equipment build by the likes of Cisco Systems and Juniper Networks.
To build applications we needed databases (Oracle), browsers (Netscape), servers (Sun Microsystems), storage (EMC), security (Semantic), application servers (Apache), caching software, load balancers, hosting facilities, programming languages and methods, CDNs, DSL equipment, Wi-Fi routers and so forth. Not all of these products and companies came from Silicon Valley, but the overwhelming majority did.
And then the world changed.
I've outlined some of the changes in the following posts:
1. Changes in the Software World & in Venture Capital
2. Changes in the Startup Ecosystem
But notably you heard about the following changes:
- Horizontally scalable computing and storage systems, which required less capital up front for hardware
- Open source computing, which reduced costs to start a company by 90 percent
- Web Services, led by Amazon's AWS, which reduced the costs a further 90 percent
- Less capital to start a company, thus the rise of "micro VCs"
- Younger, more technical founders (not as big of a leap to take a risk on a 24-year-old when it's $250k and not $5 million
- A move to more urban environments (SF over SV, Cambridge over Waltham, London over Thames Valley, Santa Monica / Venice, Flatiron and so forth) as basically young people want to live where young people want to live. So the startup work moves to where the startup founders live and not vice versa.
The “Three C's” of the Internet …
The infrastructure and web services phases of the Internet are built. To be clear we will continue to see great infrastructure companies built, and these will mostly come from Silicon Valley.
But what is it we actually DO on the Internet? I like to boil down the overwhelming majority of what we do on the web to just three primary activities, which I call the three C's: Content, Commerce and Communications.
And when you think about the three C's you begin to realize that the first two of these activities are ones where the economic powerhouse networks are driven in cities outside of Silicon Valley. I'm not arguing that San Francisco or Silicon Valley will decrease in importance--merely that other great economic zones will rise in prominence. Indeed we have already seen the beginnings.
TrueCar, an LA-based company, sells more cars now than any physical dealer in the country and recently went public and has a $1 billion market cap. It was always more likely that auto industry commerce prowess would come from LA or Detroit. Maker Studios, the largest producer of online short-form videos (content) recently sold to Disney for nearly $1 billion. Also LA. I don't need to tell you what else is LA … SnapChat, Whisper, Tinder. All great communication companies. And in commerce we have NastyGal, DailyLook, JustFab and many others.
Etsy? KickStarter? Buzzfeed? Gilt Groupe, AdoreMe, Thrillist, Birchbox? Artsy? MakeSpace? And on and on. The New York startup scene is vibrant and launching companies that play to New York's great strengths, which are many.
And with the three C's driving many of today's startups, with the infrastructure and web services largely built and with founders raising smaller pools of capital and wanting to live where they want to live, I believe it will continue to push innovation nationally.
Twenty years ago could you have imagined ExactTarget becoming a multi-billion company in Indianapolis? Or the growth of Dwolla in Iowa or C2FO being built in Kansas City? Welcome to the future.
What Does a City Need to Compete?
The basic components are obvious: talented founders, great engineers, angel money, venture capital, access to larger corporates (for business, funding and talent), great education / research (for IP breakthroughs) and a sufficient ecosystem of mentors, advisors, executive coaches and mavens.
It really only needs a few community leaders to kick things off and land a community on a map. I've blogged about this before and provide a lot more details in these posts:
1. The Foundations of the Seattle startup community
2. The Components of any Great startup community
But there are ways to drive the growth of a community that I see out there when I travel the country and talk with local startup leaders.
You can hold great events that attract people to a city on an annual basis. This is important because it creates awareness in outside capital and corporations about the good things going on in your town, and it also creates the human relationships which are the glue to future business interactions. Obvious examples include SxSW in Austin or Big Omaha in, well, I'll let you guess.
I've also talked extensively about f.ounders & web summit in Dublin--which draws some of the top Internet CEOs and VCs in the world for three days every year. Importantly the Irish government and local businesses roll out the red carpet to make sure everybody visiting leaves with a strong appreciation of the economic benefits for US startups in locating their European headquarters in Ireland vs. all of the other continental options available.
2. Co-Working Space
There is no question in my mind that getting the startup community located within close proximity of each other has enormous benefits. The obvious starting point is the cross-pollination of ideas and talent. Importantly by locating a large number of startups in a single building or region it makes it easier for people passing through town to come to one place and meet with or speak to a large number of startups.
I was blown away by my visit to Chicago’s 1871 building that has set aside 50,000 square feet for tech startups. I wish every city could have an 1871. Frankly, I wish LA had one. But across Santa Monica and Venice we increasingly have smaller but important versions like Cross Campus, Amplify, Mucker Labs, Science and so forth.
Cincinnati has had the accelerator The Brandery for several years, which caters to the great strengths of design and brand management that are dominant in this city. But soon Cincinnati will also have a 38,000 sq ft co-working facility in its historic Over-the-Rhine neighborhood. Awesome.
3. Angels and Recycled Capital
While the costs of starting a tech company have plummeted it still does take money to hire a team, launch products and market oneself. The problem that I've seen historically in cities like Los Angeles, San Diego or Seattle is that their historic high-net-worth individuals didn't come from the tech startup world. That didn't make them bad--it just didn't make them efficient at making rapid decisions of whether to fund a startup or not and the terms on which they would fund were typically not "market" for a startup company that would become venture backed one day.
When I work with community leaders I often encourage them to "pool capital" together from many angels into a fund structure run by a small investment committee that can make more rapid funding decisions, take more risks (it is pooled capital so goes across more investments), and standardize investment terms. This can have an enormous benefit to kick-starting a local startup community as it will ensure many more early-stage at-bats happen locally.
On my trip to Cincinnati I was giving my standard speech about the need to pool capital on my first morning in town. I was pulled aside after my speech and told that a group had already done this with much success. CincyTech is a local early-stage public private funding entity that pools together capital from local high-net-worth individuals with local community money who want not only returns on capital but also local jobs and innovation. If that isn't the original definition of "angel" money I don't know what is. It's worth having a quick read of the first few paragraphs of their annual report.
CincyTech today has $28.5 million under management across three funds. We have invested $17.3 million in 46 companies and we have helped those companies raise an additional $215 million from venture capital funds and individual investors.
These companies employ 417 people at an average wage of $71,000, and their rate of job creation is accelerating as they move into their growth stage.
One measure of CincyTech's overall impact is that in 2013, its portfolio companies represent 80% of total seed and early stage capital invested in Southwest Ohio.
This includes AssureX Health, which has raised $71 million including capital from Sequoia.
As big wins happen in regional markets this capital often gets "recycled" back into the startup community in the form of angel funding for other startups. As you have more exits in your startup community and more second-time entrepreneurs the growth of a local startup community becomes a self-fulfilling prophecy.
4. Venture Capital
Of course a very important component of any startup community is venture capital, because ultimately to scale large businesses you still need to raise large sums of capital and you need the access to major Silicon Valley tech giants that often comes with venture capitalists.
Here Cincinnati was really creative to its approach to attracting more venture capital to the region--including this author. In 2012 Upfront Ventures raised its 4th venture capital fund--this one was $200 million. We started investing the fund in April 2012 and by early 2013 had closed our fund to new investors. In the middle of the year I was introduced to Tim Schigel, the founder and chairman of ShareThis who had become the manager of a Cincinnati-based fund called Cintrifuse.
Tim told me that Cintrifuse was a "fund of funds" (they pool together money from many investors and then invest in VC funds) with investments from many of Cincinnati's biggest corporations including Procter & Gamble, Kroger, Western & Southern Financial, University of Cincinnati, Cincinnati Children's Hospital, Cincinnati Bell, Duke Energy and others.
The goal of the fund is what we in the startup world might call "double bottom line" in that it is meant certainly to drive returns for the capital raised but it is also meant to attract capital to the local community. Tim made it clear to me that there was zero obligation on behalf of VCs in whom they invest to commit money to Cincinnati. They were looking for funds that were committed to national investment strategies and who were interested in closer ties to the local community.
I was instantly intrigued. It might not surprise you that VCs have no problem meeting just about any startup entrepreneur and have no problems getting to know senior executives from every major company in Silicon Valley. VCs generally have had an easy time fostering relationships with large ad agencies and media companies given how much our businesses have intersected over the past 20 years.
The hardest relationships to establish have been with the biggest product companies (auto makers, consumer product companies), retailers (Walmart, Kroger) and big transportation (UPS, FedEx), logistics, energy, healthcare, shipping and telecommunications companies. Its just that with such big, historic companies often based all across the US its hard to know the right entry point from which to establish relationships.
Yet our firm has had some of its biggest wins historically on a national basis: Chicago (Envestnet, Ulta), Baltimore (BillMeLater), NYC (DealerTrack, UGO), Las Vegas (HealthDataInsights), Los Angeles (Overture, CitySearch, TrueCar, Maker Studios), Scottsdale (PF Changs) and even internationally (LastMinute.com, DataSift).
So when Tim floated the idea of chipping in a small amount to our fund I was immediately excited at this new relationship.
So when my friend Willis Jackson from Kansas City asked Cintrifuse the question 'how did you get Mark Suster to Cincinnati?" the answer was obvious. Money is the easy part. Our fund has more interest from potential LP investors than our fund needs. What Cintrifuse was selling was help in facilitating meaningful relationships to Cincinnati's great consumer product, retailing and healthcare companies and an instant filter on who some of the most promising young startups are in the region. And I'm proud to say that one of our startups is already exploring the idea of opening a local office nearby with the help of Cintrifuse.
On my trip I also gave my usual advice to entrepreneurs who don't live in a major tech funding hub:
- Find VCs who are from your area originally. They often fly back at least once if not twice a year to see family. Investing becomes easier when you already need to be there
- Fly out to CA, NY, BOS and tell investors that you'll willing to do the majority of board meetings there. You only want them to commit to attending one to two board meetings a year in your home town. I gave a full explanation here on why that’s important
5. Mavens and Marketing
Every community needs its "mavens" or as I wrote in this well-read post, "mothafuckas who know mothafuckas." Mavens are the people who attract outsiders to visit your community and who make sure your emerging startup companies are on the consciousness of people outside of your community. Mavens are people like Gary V or Joanne Wilson in NY, Brad Feld and David Cohen in Boulder or Paddy Cosgrave in Dublin. Mavens help put your startup companies on the map. Mavens are evangelizers. They are the connective fabric that binds your community to those outside.
Mavens are critical. And like Shak, Chanstein ;-), Hammerling, McClure and others they spend lots of time on airplanes traveling the country and world and cross-pollinating companies and ideas.
You also need marketing muscle. Fred Wilson has done this for the NY startup scene but of course you also have mass media located there. In some way your local community needs a megaphone and messaging.
I've been very public about how much I think the term "Silicon" in front of every city name is a waste. Silicon Mountains, Silicon Beach, Silicon Heartlands, Silicon Alley, Silicon Roundabout, Silicon Silly.
I spoke publicly about Silicon Silliness and how to brand a local startup community here.
None of us are derivatives of Silicon Valley. In LA we have entertainment, finance, textiles, aerospace, transportation, fashion and so forth. In Cincinnati they have the country's best and largest consumer product company (P&G) and the 2nd largest retail company (Kroger). It doesn't need to be Silicon anything. It should play to its strengths. It should solidy its expertise in the minds of people outside the region. Being a derivative of somebody else never does your strengths justice.
Many things go into a successful startup community: talent and engineers, co-working facilities, angel money, venture capital, attracting outsiders, great educational institutions, support of local corporates and the community. There is much that communities can do to foster this environment from making an urban core attractive to live, hosting outsiders with access to community leaders, pooling angel capital and attracting VCs.
It is clear to me that the coming 20 years will see more successes in cities across America and the new battleground will happen at the mayoral and community levels.
This article was originally published on Mark Suster's blog, Both Sides of the Table.