As someone born and raised in the Midwest (and who takes great pride in that) now leading a company in SF, the difficulty truly isn't lack of capital, it's lack of founder talent (and ideas). People with big ideas that can inspire the best technical leaders to join their crusade. There are plenty of great schools (Michigan, Purdue, IU, ND, U of Chicago, Northwestern, Rose Hulman, Depauw, U of I, and many more) churning out folks that are hungry to work hard and get ahead. What's missing is a sufficient population of 25-45 year old inspiring founders with enough of a nest-egg to take a big risk, willing to put a hold on family life, and with a big idea.
There's a second problem that comes about when these rare combination of things come together - which has to do with cap tables... In that good teams get pummeled on early stage valuations compared to the coasts, resulting in exits that return far less to founders than investors (and thus stunt "the ecosystem" growth that exists in SV), but this is secondary to above IMHO.
Nah. The second thing is the main thing. Your first point is just the typical SF exceptionalism narrative that has been touted by the Bay VC startup ideology for the last 20 years.
The sad truth is, it's not a coincidence that so many of the biggest economies in the world are built inside of self-perpetuated real estate bubbles. Pockets of land trapped in by ocean and mountains. There's a feedback loop involved in companies that get big enough to own their own buildings, their companies' continued growth drives up the value of their real estate which they can re-finance for easy loans.
There's plenty of people who think it makes sense to take the startup culture to cheaper areas like the midwest or Austin. And they "succeed" in founding profitable startups. But they'll never create the next great thing, specifically because the big companies in big cities didn't succeed in spite of their higher costs, but because of them.
I think if I wanted to move silicon valley I'd look for some cheap semi-peninsular coastal city which is currently priced like a midwest city. Then I would drive up that price. I've eyed Charleston SC as a potential target but I've never actually been there to know if that makes sense.
what you're claiming is plausible but how many successful companies are actually refinancing real estate they own in order to get capital (for further growth?)? do you have proof this happens as regularly as would have to happen to be the largest component of sv success, as you claim?
> the difficulty truly isn't lack of capital, it's lack of founder talent (and ideas)
IMO the VC culture in the midwest is also a lot more conservative. The money isn't held by former programmers, as they are in SF. They're usually more finance execs.
Couldn't agree more. Was trying to make that my second point - how founders (and early employees) getting diluted and end up not having the gains to pump back into investing when exits actually do happen. They may be able to retire, but they can't also invest $10M over 10 yrs - it's one or the other.
Yup, there's a network of angel investors here. But most of the VCs tend to invest in very traditional markets, regardless of founder talent. It's more worth your time to fundraise out in the valley and setup shop in the midwest.
Operating costs here are so cheap, and a lot of uninspired talent around. You can tell because of the sheer number of consulting firms in the midwest. There just aren't enough great companies to keep people's interest. Anyone who's worth their salt leaves, and then comes back when they want a family.
I went to one of those great midwest schools (though you missed it). But, I left as soon as I graduated.
Since then I've lived on the east and the west coast (in popular, expensive cities), and nearly all of my classmates are no different. Places they go other than those two coasts? Other well known places... The Texas Triangle, Colorado, Chicago, Florida...
It's exciting and fun to think that the "next Silicon Valley" will pop up in one of those midwest cities that has been in decline since the mid-20th century... But the truth is, if there is going to be a "new Silicon Valley", it will be in a boring, popular (probably expensive) place... I'd sooner bet on the Texas Triangle...
I don't see it changing in the short term, though I think there's potential in the long term. In between, I feel like towns need to organize around a particular niche / focus. For example, Indianapolis is a hub of marketing technology (ExactTarget, Aprimo, etc.). It's hard to compete w/ the (PR?) machine the coasts give you, but if you have a competitive advantage in some market - don't ignore it just because it's not SaaS. Examples include autos in MI, Medical Devices in Northern Indiana, manufacturing region-wide, distribution, real estate (Simon Malls, General Growth in Indy, Chicago respectively), etc. Build for those local customers and then spread geographically. I feel like that's overlooked far too often in the "David" (non-Goliath) markets.
The midwest isn't in any regard lacking entrepreneural mass. The parent is taking liberties with the premise. There are as many entrepeneurs per capita in Ohio and Illinois as there are in California (defined by new business formation and new employer business formation).
The problem is what you'd expect in fact: network effects, hyper concentrated talent pools, extraordinary expertise, very large amounts of capital tilted toward higher risk / higher return pursuits.
If you're in Kansas and have the next big tech idea...
- If it requires significant venture capital, you're not going to be able to locate that capital in Kansas. The capital available in Kansas, isn't interested (it's only interested in hindsight; Silicon Valley capital is actually often interested a decade or two before an idea / business concept is ready to boom, which produces a constant cycle of being early with things, which finally only work years later). If you're in Kansas and need to raise $100m or $300 million over six years to build the next great fast growing technology business, you will not be able to find that scale of VC there, period. I can't emphasize that enough, there is no scenario under which you will ever raise that capital in Kansas - it did something like $13m in total traditional VC deals in 2016.
- If it requires the most talented engineers (and lots of them) to scale big + fast (ie the engineers that are among the best in the world at that thing), you're not going to find that talent in Kansas. The hyper concetrated talent pools available in California, give you that critical mass for almost any given technology focus. You see similar effects for eg biotech in the greater Boston area (which gives that area vast advantages for the next great biotech start-up as opposed to somewhere in Ohio).
- If you need exceptionally talented managers, with experience at building large, fast growing, cutting-edge technology companies. You're not going to find very many of them in Kansas. There's an immense experience advantage in Silicon Valley, generations of it has built-up in fact. These people make a critical difference during any kind of meaningful ramp growth phase.
- If you need the world's best venture capitalists, to help steer your new tech company through all the typical dangers for such a company, you're not going to find them in Kansas. The best VCs can help you recruit in a huge way, for both executives and engineers; they can steer you through all sorts of problems in fund raising and public relations; they can push through political obstacles with their connections and wealth (ie pick up the phone and get someone politically powerful in Washington DC on the other end of the line). A VC in Kansas has no ability to do most of those things.
The list just keeps going.
In short: the risk capital isn't there, the hyper concentrated large talent pools for a given expertise are not there, the management experience is not there, the venture capitalists are not there. There are plenty of entrepreneurs to go around, and if they want to create the next great tech company they usually have to leave for all the previously listed reasons.
There's a second problem that comes about when these rare combination of things come together - which has to do with cap tables... In that good teams get pummeled on early stage valuations compared to the coasts, resulting in exits that return far less to founders than investors (and thus stunt "the ecosystem" growth that exists in SV), but this is secondary to above IMHO.