A growing number of VC professionals are leaving the venture capital industry hubs of big coastal cities for greener pastures and undiscovered talent.
Startups in Montana, Nebraska, New Mexico, North Carolina and other places across the country are benefiting from an influx of venture capitalists who see a future in their companies, and in their lower-cost, less crowded locales outside California, New York and Boston. Thus startup ecosystems are taking root farther afield, creating more opportunities for entrepreneurs and increasing the number of small businesses, particularly software firms and online ventures.
“Covid-19 will accelerate the demographic shift away from coasts,” said Will Price, a venture capitalist who left Silicon Valley and opened his firm, Next Frontier Capital, in Montana. The general consensus among VC professionals is that while capital will likely drop in a recession, the inland trend will continue. As long as a location has talent, a nearby research university, local wealth, and an airport with flights to both coasts, it has potential.
Venture capital firms are funding talented people from local universities and corporate offices, as well as those who are retreating from bigger cities. “After the financial crisis, the careers of many people stalled, and they moved to lower-cost, higher-quality-of-life places to reinvent themselves,” said Dino Vendetti. He moved to Bend, Oregon in 2011 after working in California’s venture capital industry and started one of Oregon’s first early stage venture funds.
As the New York Times explains, Silicon Valley, New York, Boston and other places where startup capital is concentrated, “have been victims of their own success.” Real estate prices have skyrocketed, and those who have yet to strike it rich cannot buy a home. Even Facebook’s Mark Zuckerberg has said that he would not start a company in Silicon Valley now. “The infrastructure exists for people to do stuff like this in more places,” he said at a conference in Utah.
Big coastal venture capital firms like Sequoia Capitals and Greylock Partners invest in startups all over, but the strict financial metrics they use to evaluate a business are beyond the means of many startups in the country’s interior. Typically a company cannot produce meaningful data until it has several million dollars in revenue. “It’s a catch-22,” said Price. “Without a local source of capital to get startups over that hurdle, the big firms will never look at you.”
Likewise, many cities have angel investors with the startup capital to get entrepreneurs started, but not to scale up significantly. “There’s usually a gaping hole in what’s classically called early stage venture capital,” Vendetti said. Without a $25 million to $50 million fund to make it in their local market, startups head for the coasts. Their talent and the wealth they eventually generate goes with them.
“I think the best market for venture capital happens to be Middle America,” said Mark Kvamme, co-founder of Drive Capital in Columbus, Ohio, adding that if the Midwest was a country, it would be the fourth largest by GDP. Kvamme came to Ohio from the Bay Area in 2010, and now has $1.2 billion under management. He believes the Midwest could support a dozen more funds of the same size. “If we had co-investors here, this place would be just going crazy.”