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Geography not as much of a challenge for SE start-ups as it used to be

36-86 v2By Tom Ballard, Chief Alliance Officer, PYA

Is geography an undue hindrance to starting and growing companies in Tennessee and its neighboring states?

That was the theme of two panel discussions during Launch Tennessee’s recent “36|86 Conference” in Nashville. My takeaway from the discussions is “no” if you are smart about what you do. The topics and panelists were:

  • “How to Raise $ on Main Street (and Sand Hill Road)” – Anthony Lee, Managing Director of Altos Ventures; Michael Gilroy, Principal at Canaan Partners; and Victoria Fram, Co-Founder and Managing Director of VilCap Investments LLC.
  • “How to Use Geography as a Growth Asset” – Ken McElrath, Founder and Chief Executive Officer (CEO) of Chattanooga’s Skuid; Todd Olson, Co-Founder and CEO of Pendo; and Cynthia Kaye, Founder and CEO of Alive Studios.

Both Fram and Gilroy had made investments in start-ups in the state, so they were positive about the region. In Fram’s case, it was an investment in Stoney Creek Colors, while Gilroy’s firm invested in Chattanooga’s Bellhops.

Lee explained that nine out of 10 of Altos Ventures’ most recent investments went to start-ups outside Silicon Valley. More insightful, however, was his observations about the perceived geographic advantages of being in the Valley versus outside. Start-ups outside the California area are desirable because of their focus, efficiency, and talent base below the senior level. Conversely, the advantages of being in Silicon Valley are its culture of velocity, proximity to other similar companies, and robust pool of senior talent.

“While we have a predisposition to doing deals outside the valley, the bar is higher,” Lee explained. “A $2 to $3 million run rate for a company in the Valley could have to be $3 to $4 million outside the Valley.”

For Fram, investing in Silicon Valley actually is more challenging. She said that her firm’s bar is higher in the Bay Area and in particular, the valuations have to be more reasonable.

“It doesn’t make sense to us that all of the great ideas are in so few markets – Silicon Valley, New York City and Boston,” she added.

Gilroy did offer an interesting insight related to Bellhops, the moving services company co-founded by Cameron Doody, a Knoxville native. Canaan Partners invested in the start-up’s Series B.

“If we had seen Bellhops at the seed stage, it would have been more difficult,” Gilroy said.

McElrath, whose company is growing at a good pace in Chattanooga, offered a number of insights for Tennesseans.

On the topic of raising money without relocating, he said “yes, you can,” then added, “Can you on good terms? That’s a different question.”

Skuid just recently raised $25 million in a Series B round that was obviously easier than a Series A two years ago, in part because of his ability to convince investors to travel to Chattanooga.

“We interviewed 75 firms and invited 10 to Chattanooga,” McElrath said. Debunking the myth that you personally must travel to one of the coasts to meet with investors, he said that all 10 came to Chattanooga for discussions.

“Once you get to a certain stage, location (of the start-up) doesn’t matter,” Olson added. “Now, they (the venture capitalists) get on a plane.”

We also hear frequently about the challenge of recruiting talent to the region. While it can still be a burden, McElrath offered a bright spot.

“We grew organically for the first few years, pulling in people,” he said. “Now, we have 165 employees and are getting 150 applications a day.”

Kaye underscored the point, noting that all of the employees of her start-up located outside Atlanta came from the local pool of talent.


Tom Ballard

By Tom Ballard, Chief Alliance Officer,
Pershing Yoakley & Associates. P.C.

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