Startups and “superhubs”

Max Wessel, writing in the Harvard Business Review blog, looks at technology entrepreneurship across the country and states that “ if you start a technology business somewhere other than the San Francisco Bay area, New York, or Boston” — what Wessel terms the “superhubs” — “you’re stacking the deck against yourself.”

What does Wessel mean by “stacking the deck against yourself?”

#1 – It takes longer to raise money. He concludes that the average Seed and Series A-stage companies take 10% — about a month — longer to raise a round outside of the superhubs. He attributes this to the consolidation of VC money at firms located in the superhubs.

#2 – It decreases your chances of being acquired. He attributes this to “clustering” effects (a term popularized by Harvard Business School professor Michael Porter), describing the relationships among many in the community. “Risks are minimized when the acquirer has more familiarity with the acquired company,” Wessel claims.

#3 – It decreases your odds of succeeding, with success defined as obtaining follow-on funding.

Acknowledging that any single business might succeed anywhere, Wessel concludes that “[f]or all the reasons you can think of — talent gaps, cultural differences, funding environments, etc. — the odds just plain favor a few geographies. None more than the SF Bay area.”

I read this and wondered how to reconcile this with my perception that the startup community is flourishing in Chicago, where I am based. (And I am certainly not the only one with that point of view.)

Ultimately I think some of Wessel’s claims may be true, however, not altogether as important as he believes.

For example, that there is more venture capital money based in the superhubs is indisputable. A company founder I know, who closed a Series A round not too long ago, recently said to me: “If we want to raise a real Series B, we’d just leave,” he said, citing the fact that only 1% of “early stage money” is located in Chicago. (I don’t know if that 1% figure is correct, by the way.)

If money tends to invest locally, and there’s a lot more money in the superhubs, then as a matter of sheer logic, it’s advantageous to locate in the superhubs (from a funding standpoint — which of course is only one among many possible considerations for a founder). But what if there is more money in the superhubs because, historically, there was a larger pool of startups there? If so, then this becomes a self-reinforcing pattern: companies draw money, and money draws companies. Which doesn’t necessarily undermine Wessel’s point but it could mean that if other concentrations of startups emerge in other locations, money will follow them there.

And indeed, startups — either ignorant of or not concerned about the factors Wessel cites — are locating outside of the superhubs, and in great numbers. As Wessel himself states, “Since the recession began more than five years ago, early stage entrepreneurial activity (Seed and Series A deals) has risen faster for companies in secondary markets than inside the superhubs.” If money really does care about being local, it’s hard to imagine that it will not follow the startups wherever they are planting their flags. At the same time, with the rise of platforms such as Angel List, emerging crowdfunding options, and other innovations in financing, and with cloud technologies decreasing the need for capital in many startup endeavors, it’s also hard to imagine that sources of startup funding will need to be as proximate in the future as they may want to be today.

Wessel’s piece is interesting, but focuses quite heavily on institutional funding. This is one of many factors entrepreneurs might consider when deciding where to locate. But it’s not the only one. Others might include: existing family or other personal ties; cost of living and the costs of starting a business; “quality of life,” subjectively defined (e.g., cultural opportunities, bike lanes, etc.); and costs of and competition for specific talent.

Since founders are, in fact, starting many companies in other cities such as Austin, Boulder, Chicago and other cities, it would be interesting to track what happens over time, and learn about how these new “mini-hubs” resemble (or not) the characteristics and success rates of the superhubs.

Categorised as: Entrepreneurship, Startup Stuff

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