Startup entrepreneurship is en vogue, and the last decade has seen meaningful startup scenes blossom in cities across the country. Boulder, Austin, Chicago, Detroit, Atlanta, Chattanooga, Provo, and so on are all on the rise. With advances in technology and cloud infrastructure, it’s never been easier for “two dudes in a garage” with a few thousand bucks in their pockets to get a nascent idea off the ground and test the market. And for those outside the classic startup hubs of California, New York and Massachusetts, venture capital has never traveled easier.
Despite the ease of “starting up,” it’s still exceedingly rare that startups outside these three major markets get “big.” According to a new report released by CB Insights, 93 percent of all companies valued at or greater than $ 500 million in 2014 have been based in these states. And since 2011, that figure has steadily climbed from 83 percent. These states, however, have only taken in 80 percent of venture dollars and represented just 66 percent of venture deals this year.
There’s a number of possible explanations for this overrepresentation. The first is that while it’s possible to build a small team in other markets – think a few engineers, a designer, and a couple “business guys” – it can be far more difficult to scale that team, and do so rapidly while maintaining talent levels, outside of these markets. Sure there are talented engineers and designers everywhere, but where there isn’t the same culture of startup entrepreneurship, these potential employees take more traditional jobs at established companies.
In these secondary and tertiary markets, there’s also a lack of experienced talent in many specialized fields, like enterprise SaaS sales. During his PandoMonthly fireside chat, Chris Dixon noted that this problem hinders even New York and Los Angeles. In the Bay Area, companies can easily bolt on 50 or 100 employees with relevant experience from the last generation of companies, but elsewhere this option is not available, Dixon explained. It’s hard to overstate the impact that this level of experience and hiring speed can have on a company’s growth trajectory.
Beyond talent, established startup markets that have seen a few boom and bust cycles have a different level of institutional knowledge among second and third time founders, angel investors and advisors, and service providers like lawyers and headhunters that can help young companies move quickly while avoiding unnecessary mistakes. There’s no substitute for time and experience, meaning there’s no way for up and coming startup markets to shortcut the gradual process of building this sort of hard-earned knowledge. Sure, experienced VCs and advisors routinely work with companies outside of their backyard, but it’s different than being surrounded all day, every day by this kind of guidance.
While we’re on the subject, it’s worth acknowledging a few recent success stories that buck this trend. Provo Utah has shown a remarkable propensity for building massive technology companies, including in this current generation, Qualtrics, Domo, and Insidesales.com, all of which are valued in the vicinity of $ 1 billion. Since 2011, Chicago has also produced Groupon, Grubhub, and Braintree, which have all excited north of $ 800 million. Arkansas’ Acumen Brands recently raised $ 93 million (over 90 percent of all the VC in the state in the last decade) at what one must assume is a stout valuation.
But despite these outliers, the data still shows that getting big is much more difficult outside of major startup hubs. While this picture of the national startup scene may be discouraging, it’s really just a reflection of the last 20 plus years of deal making, and innovation, and failure. Today’s successes are earned with yesterday’s blood, sweat, and tears. No region has a permanent hold on startup success and no market is precluded from developing its own mature and well-rounded ecosystem of experienced talent, investors, advisors, service providers, and so forth. It just takes time.
Most of the startup markets outside California, New York, and Massachusetts simply haven’t been at it long enough to regularly buck this trend. Others fundamentally lack some key ingredient like a world class university, an environment people want to live in, healthy risk tolerance, or access to the kind of seed capital that gets this whole flywheel spinning. That’s the reason why some entrepreneurs and investors in these secondary markets advocate promising young companies move to a major startup hub when its time to scale.
For the foreseeable future, while venture cash will continue flowing into all the nooks and crannies where innovation is occurring in this country, we’re likely to see a disproportionate number of outsized success stories occurring in those markets best equipped to nurture and support them. But there will always be outliers. Building a startup is by definition crazy, so long odds are simply par for the course. There’s also something to be said for being the company that bucks this trend and becomes a big fish in a small pond.
May the odds be ever in your favor.