Finding Success Outside of Silicon Valley

We’ve seen a lot of success in the Utah market. A lot of local companies that started from scratch and have now grown into companies with nationwide impact.

A couple of months ago, in the online version of the Harvard Business Review, investor and writer Maxwell Wessel published an article titled “Don’t Build Your Startup Outside of Silicon Valley.” In the controversial piece, Wessel urges fledgling entrepreneurs to tread lightly before launching a tech company outside of the three established startup meccas — Silicon Valley, New York City, and Boston.

Using what he referred to in the article as “shocking” data, Wessel made a compelling argument to support his thesis. According to his research, entrepreneurs living outside of the startup “superhubs” face three major roadblocks.

1. It takes longer to raise money.

The best performing funds are located in San Francisco, Boston and New York. So it should be no surprise that as VC coalesces, it’s also centralizing in the startup hubs.

For startups outside of those cities, that means there is a smaller pool of locally-managed dollars to chase for your startup. (And because of the increase in entrepreneurial activity, there are also more companies chasing those dollars in secondary markets around the country). Based on my analysis of AOL’s publicly available Crunchbase data, the average Seed and Series A stage companies take about 10% longer to raise funds outside of California, New York, and Boston than super-hub counterparts. That tends to mean companies outside of California, Massachusetts, or New York will spend more than a month longer searching after Series A capital and more than two months longer searching after Series B capital.

2. It decreases your odds of being bought.

Out of 335 acquisitions captured in Crunchbase in California since 2006, 225 were of California companies. If you assume acquisitions were to be distributed across states weighted by their startup population, that number is about 39% higher than you would expect. Similar numbers exist for Massachusetts and New York. For founders thinking about launching companies outside of New York, Massachusetts, or California, that means your odds of pre-IPO success are automatically lower before you’ve even started. And if you are the clear leader and an obvious acquisition target, founders still need to consider what being located far away does for valuations. Certainly, the additional risks, the lack of exposure, and the troubling funding environment make for legitimate reasons to put less money on the table than you’d otherwise deserve.

3. It decreases your odds of success.

If you judge entrepreneurial success as surviving or selling (including raising follow-on funding, being bought, or successfully IPO’ing) as no doubt your investors do, then your odds of success are lower outside of the superhubs.

Since the recession began more than five years ago, early stage entrepreneurial activity (Seed and Series A deals) have risen faster for companies in secondary markets than inside the superhubs. More and more founders are taking their shot at success where they live, instead of taking that journey to the valley, the alley, or Kendall Square. But the simple truth is that by every metric surrounding follow-on funding, acquisition, or IPO, the superhubs still have a distinct edge. Despite the fact that more companies are being founded outside of our traditional areas, there are noticeably fewer success stories at every step along the way. The percentage of all companies founded in 2008, 2009, and 2010 located in California, Massachusetts, or New York who have received a second round of funding is 10–15% higher than what you’d expect based on who received an initial round of funding.

On Tuesday, Marketplace senior reporter Mitchell Hartman published an article titled “Can Startups Succeed Outside Silicon Valley?” which essentially challenged the premise of Wessel’s piece. As one example of a secondary market exceeding expectations, Utah played a central role in the Marketplace story. Hartman believes Utah has two secret weapons that are contributing to its startup success.

Utah’s secret weapon Number 1 is location. It’s a place to which people want to come, and in which they can afford to stay. Meaning, entrepreneurs can afford to hire them, and might not have to outbid a rival startup trying to poach their talent.

Utah’s secret weapon Number 2 is talent. It’s been built up by older Utah tech companies, such as WordPerfect and Local universities also play a big role. Brigham Young, the largest Mormon university in the country, has a robust entrepreneurship program. The University of Utah ranks up with MIT for commercializing lab research, according to the Association of University Technology Managers.

I recently had the opportunity to meet with the Director of Silicon Valley Bank’s Utah branch, Gary Jackson, at the bank’s office in Salt Lake City. Jackson seemed to share some of Hartman’s assumptions on Utah’s unique entrepreneurial ecosystem.

“It’s a very favorable entrepreneurial environment, relative to other parts of the country,” said Jackson. “It’s hard to compete with Silicon Valley, New York, and some of these major population centers. That’s not where Utah has its advantage. But Utah does have an incredible advantage in terms of talent. The quality of life that people can have here has attracted a lot of people and a lot of talent to this area.”

Jackson has had the advantage of being able to be on the ground here in Utah for the past five years, working with local startups like Ominiture, AtTask, Fusion-io, Hirevue, and countless others to help them grow to become successful, nationally recognized companies.

“We’ve seen a lot of success in the Utah market. A lot of local companies that started from scratch and have now grown into companies with nationwide impact. It’s a very favorable environment due to the business community. You have major universities. You have a culture of really scrappy, boot-strapped entrepreneurs, especially in the software space,” said Jackson.

The startup environment Utah has managed to culitivate hasn’t gone unnoticed. In fact, Wessel himself believes the Beehive State may be something of an outlier when compared to other secondary markets. He attributes a lot of that success to Mormonism, the state’s prominent religion.

“It is very meaningful,” Wessel told Marketplace. “There is nothing quite like the drive and approach [Mormons] have to building a business.”

In the coming days, we hope to publish an extensive piece further delving into the correlation between Utah’s inherent entrepreneurial spirit and The Church of Jesus Christ of Latter-day Saints. In the meantime, we can all sleep a little bit better knowing Wessel isn’t quite ready to lump Utah in with other non-superhubs across the country. You likely won’t hear him discourage local entrepreneurs from launching a startup in the state.

“I think Salt Lake City is a very interesting market with an extensive amount of venture capital flowing in,” Wessel told Marketplace. “So it might be the anomaly.”

Published 1/9/2014

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