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The Achilles Heel of Startup Ecosystems

Submitted by admin on Mon, 2019/03/18 - 11:33am

Across the world, various economic development organizations, government agencies, and non-profits are putting in admirable and well-intentioned efforts to develop startup ecosystems. They’re building campuses, districts, buildings, spaces, as well as running new educational efforts and contests—basically anything they can think of to foster the growth of new and innovative companies.

One thing they’re spending very little time on could wind up being the reason why all of these efforts dry up. Very little time and effort is spent helping professional, full time investors raise capital for venture funds. Everyone is excited when a new company gets funded in their ecosystem, but no one spends much time thinking about where the money comes from to fund that deal.

To care about this issue, you have to believe one thing—that the presence of full time, professional investors in an ecosystem catalyzes funding rounds better than a collection of part time angels, accelerators, and/or government entities that usually don’t lead deals. Accelerators can be great, but they’re not giving companies enough money to achieve the kind of escape velocity needed to get on the radar of national Series A firms that will invest anywhere. At some point, a real seed round needs to get raised—and it needs to get led by someone. Angels will often sit on the sidelines until someone comes in to set the terms and write a bigger check.

Take the example of goTenna, a thriving communications hardware startup located in Downtown Brooklyn that employees almost 50 people. I backed that company in 2013 when it was basically a table top science project, but the key was a series of connections that could have only been possible as a full time investor. I first met Daniela Perdomo, goTenna’s founder, at SXSW. So, number one is that I needed to be at least engaged enough as an investor to be out there attending gatherings of innovative people.

Second, I sought her out at that conference because I saw on SXSW’s intranet that she had listed NYC Resistor, a hardware hacking space and collective, on her bio. Resistor is a bit under the radar as a very cool community—and so being associated with it was a signal that I could have only known about if, again, I spent all of my efforts as a seed investor turning over every rock looking for opportunity. This isn’t the kind of thing your average high net worth individual who occasionally does a deal would know about.

This company would have had a much harder time getting a seed round together had it not been for the presence of professional seed fund investors—and my seed fund wouldn’t exist had it not been for the 50 different individuals and entities who participated in my first fund.

Yet, do you know how many of those investors came through intros made by those who have a strategic economic development interest in fostering the NYC ecosystem?

Zero.

Not a one—and through conversations with other seed funds I know, this is pretty widespread. A lot of these strategic entities have boards that are filled with some of the most successful high net worth individuals, family offices, foundations, etc. but the connections are not being made to support the funds that are supposed to be funding all these local startups.

I was talking with someone who worked for one of these entities recently and they gave me some insight as to why. This person told me that their group was worried about these folks “getting hit up all the time”.

This is exactly the wrong way to think about the economic opportunity presented by innovation. Innovation isn’t a charity—it’s a ticket to a very interesting and exciting future.

Wealthy people trade that wealth for interestingness—and the opportunity to economically participate in the upside of your local startup ecosystem is super interesting to many people. Not only that—these people are doing all sorts of different kinds of deals—and you don’t do deals without deal flow. No one has to say yes, but rather than this seeming like a bother, anyone with an investment mindset is going to welcome the opportunity to roll up their sleeves and dive into thinking about an opportunity.

Not only that, but for many in the real estate world, their economic upside is already tied to innovation. The growth of the local NYC startup community has been a huge moneymaker for many of those folks and can continue to be if the ecosystem continues to roll.

This won’t happen if all the seed funds become institutional, get larger, and stop writing the kinds of small checks that turn science projects into 50 person companies.

The other reason why development related entities that support startups should be making these introductions is because of some of the indirect roles VCs can play in the startup ecosystem. By being full time in the community—they can make connections to help market various programs and opportunities. They can help filter who these organizations should be focusing their time in supporting. They can also help generate interest across different types of wealth through their history of success. There’s no better way to get a room full of people who made money in real estate, manufacturing, or natural resources to care about tech startups than to have a professional investor up in front of a room sharing their approach, their wins and translating the enormous amounts of individual deal risk they appear to be taking into a sensible investment philosophy others can buy into.

Raising for a seed fund is exceptionally difficult. Institutions typically don’t participate until you’ve already got a few funds under your belt, and even when they do, their average check size is often too large for what you’re trying to put to work. That leaves seed funds out trying to gather a random mix of high net worth individuals and family offices, which is a bit like trying to find a needle in a haystack in a dark room with one hand tied behind your back.

It’s not exactly like anyone puts “willing venture fund investor” on their LinkedIn profile.

If you really want a solid startup ecosystem, you need multiple seed funds all coming at the community from different perspectives both funding a wide variety of companies but also working collaboratively together. It’s not just about having one dedicated fund—you need many funds coming together in a marketplace of ideas.

No one is asking the Mayor to tweet their fund prospectus, but hosting informal meetings with members of community economic development boards, looking into small baskets of endowment funding that can go into local early stage funds, and just generally being willing to help because they understand that we can’t fund your local startups unless someone funds us would be enormously helpful.

Read Complete Article Monday, March 18, 2019