Last week, I was seated at a café in Silicon Valley speaking to the founder of an early-stage enterprise software company, when we got to the nut of the conversation: he was raising money. The problem was: he was raising $4m at a $10m pre-money valuation, for a $14m post-money, for a company with eleven clients on pilot contracts paying under $2,000 per month, in several cases under $1,000.

This was not someone who found me on Linkedin or Gust; this was a meeting that came out of an introduction from a Valley insider who I have worked with on several deals in the past year - one of which is performing superlatively well. It is a company with well-qualified and experienced founders, a strong product intriguing enough that I was still interested in making introductions to potential clients, and a large market opportunity.

But the valuation, and the estimation of potential scale, was so far out of whack with current market realities as to be grotesque, and it is this growing factor that makes New York and mid-Atlantic region companies increasingly superior investment opportunities to those in Silicon Valley.

As the gap in cluster size, investment capabilities, and talent between the East and West coasts has narrowed consistently in the past several years, the difference in early-stage valuations between the two investment ecosystems has widened just as consistently, which makes non-Valley investments now safer opportunities for stable growth and more consistent exits that are less vulnerable to severe down rounds and zero-return scenarios.

What used to be rapidly summed up as a cleaner "valuation question" - that investors put up with higher valuations in the Valley because the teams were better and the exits were bigger - is now muddier: while the biggest exits are still biggest in the Bay, the East Coast is now just as capable of producing routine strong exists in the $50-200m range, it's teams have caught up, and its companies raise after far more risk-mitigation.

Consider: just five days before my Tuesday meeting, I signed documents and wired for an investment in one of my existing portfolio companies not based in the Bay Area. The company's investment terms were very similar - $2m raise on a $12m cap for a $14m post-money - but their actual traction could not be more different: this company already has $3m in 2015 SaaS revenue from over 10 enterprise-level clients and a new preferred partnership with one of the top five software vendors in their vertical, reaching over 80% of applicable clients in the US.

Moreover, whereas several years ago the Valley company might have boasted a stronger, more experienced team, that was not the case - in fact the non-Valley team, if any, had the stronger previous success.

The same gap exists, and is perhaps even more acute, at the earliest stages. A day before Tuesday, I spoke with a good Valley founder I know about his company, which was raising at a $8m pre without any rollout - pilot or no. The founders' background was unimpeachable, but that is a tall ask for a company that isn't a unicorn-type play and would have a likely acquisition top target size of $50-75m.

By contrast, I are completing investment this week in a New York company that had $600,000 in revenue in 2015 with several major clients, on a $4.5m pre-money. Neither company, in my view, is a likely exit over $100m but the East Coast one, with its first major clients already paying and reviewing seven-figure opportunities for 2016, strikes me as a far better bet to achieve at least a 'mid-major' exit of 5x or more - in this case about $20m. 

So, for a few select VC firms investing in later-rounds and needing unicorn-sized exits with at least eight zeroes, the Valley is still the most tantalizing investment ecosystem. But for 95% of investors - from angels to even some larger VCs seeking a safer risk pool, New York's companies look like the less risky, more proven, better investments.

Published on: Mar 3, 2016