So you are not in a top startup ecosystem like San Francisco, NYC, London, Beijing, Tel Aviv or Bangalore? Many investors will tell you that your company will suffer in terms of hiring, business development and culture, with legitimate concerns. But there is a flip side of the story that often goes unspoken in the narrative, which is why this post will focus on the significant benefits.
1) Hiring — Yes, the talent pool may be smaller but so will costs. And the difference is quite dramatic even within the same country — in the US hubs like Austin or Cincinnati are still regional powerhouses but ~2/3 of Silicon Valley. Salaries is a controversial metric given the cost of living also differs but as a snapshot, data from the 2018 Global Startup Ecosystem Report below.
Another advantage of a narrower funnel is your startup’s marketability. For instance, say in ecosystem A you are one of a hundred startups competing for a thousand engineers but in ecosystem B you are one of ten startups competing for two hundred engineers. Then if you are early stage or are building a distributed team why wouldn’t you be in B? There are some assumptions in this example, the biggest one being a normal distribution ie that A and B have a similar range of talent. But the point is that if you don’t need many engineers yet then B is quite attractive.
2) Business Development — Most VCs are in tech hubs but most customers aren’t, which creates for a cognitive dissonance. Being in a major hub is a big plus if your business is actually about selling into tech, say enterprise sales. But it’s hardly the answer for other verticals, especially in a larger country like the US. Media is skewed towards LA and NYC. Agtech is in the Midwest. Oil and gas is about Texas and especially Houston. A business model built on providers is heavily correlated with population since hospitals are inherently local. But a business model built on pharma is a stronger fit for Boston and New Jersey while for payors NYC and Chicago stand out. A framework for visualizing this specialization is the biggest company by revenues and market cap in each US state:
There is also something to be said about being closer geographically to your potential customers in terms not just of access but also understanding their mindset. Indeed, if you are trying to decide on which investors to work with, assessing their knowledge of specific economic clusters relevant to your startup is a very good litmus test.
3) Culture — Ask any CEO in a smaller tech ecosystem and they will highlight higher loyalty, namely that they are not losing as many employees to other startups or corporates. A bigger fish in a smaller pond can also create conditions for higher motivation since you are the biggest game in town. Case in point, in Missouri tech startups paid more than double consistently, compared to all startups in 2018:
After all, morale and performance often get diluted when you are in the backyard of much more successful companies. Startups in college town can also build stronger links to academia relative to their peers in a tech hub. Obviously where you are based will not condition your culture, it’s one of many factors, but even in a flatter world with instant global communication it can be a differentiating asset.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.
