Flyover country isn’t the endless venture capital desert it used to be. There are scattered oasis’ of variously significant venture hubs, at least one of which (Austin) is as big as Silicon Valley was a couple decades ago. Still, for entrepreneurs between the coasts, especially those outside of the more significant flyover country hubs, the venture capital game still has some quirks relative to the way it is played in Silicon Valley. Today, a review of some of those quirks.
- Valuations in flyover country – and capital raised at similar stages of development – are typically lower. That’s mostly because entrepreneurial teams between the coasts are, on average, less experienced than their Silicon Valley counterparts; the competition for deals is less intense; and funds are smaller. In my own experience, when I once suggested that deals like the one I was pitching were getting twice the valuation I was being offered, a VC casually noted “that’s the North Carolina discount.
- Smaller funds, and smaller rounds at lower valuations, have significant implications for business models and exit planning. Between-the-coasts venture investors have the same 10x+ return hurdles for deals but generating them doesn’t require the mega exit values of startups blessed (or in some cases cursed) with bigger piles of risk capital. Shallower venture pockets also put a greater emphasis on achieving profitability, or at least breakeven cash-flow, sooner rather than later.
- Smaller and fewer funds also makes the market less volatile between the coasts. The market never gets as hot or cold as in Silicon Valley. The market temperature trend, up and down, typically lags Silicon Valley and deal terms generally never go to the same pro-company/pro-investor extremes seen across market cycles.
- Entrepreneurs between the coasts, the more remote the more so, need to be more diligent in building information networks. The density of qualified peers, service providers, investors and talent are of course lower. Even more so, the population of the same includes a larger proportion of less seasoned/qualified players. It’s rare to find a clueless startup lawyer or venture investor in Palo Alto: it’s rarer still to stumble across a clued-in startup lawyer or venture investor in Sioux Falls. So, be careful who you take advice from.
Raising early stage venture capital is always challenging, particularly for less seasoned entrepreneurs. The challenges differ in degree, and even in some ways in kind, as you get deeper into flyover country, and further from the few more significant between the coast venture hubs. Knowing and addressing those differences can make all the difference. Now you know at least some of them.