Location, Location, Location

Steve Shu's post on VC in different geographies got me thinking.  Steve wrote it on July 28th, but it only showed up in technorati's link search this week so that's when I read it.

I also got a trackback from the people at Qumana who noted that my recent posts on Word of Blog and Posting, Subscribing, and Tagging confirm my interest in what they are doing.  They went on to say that I wasn't interested when they contacted me because they are in Vancouver.  Which is true.

This blog attempts to do a bunch of things, but clearly one of them is to broadcast the things I am interested in investing in to anyone who wants to read that information.  Hopefully I am doing a decent job at that.

One way for me to measure that is looking at the "yield" of incoming investment opportunities.  If we measure "yield" as the percentage of incoming opportunities that fit our investment strategy, then the "yield" is probably 90% or higher.  Charlie can produce an exact percentage if anyone wants it.

So we are seeing a ton of opportunities that are interesting to us.

But then we need to filter them a couple more ways and that's when the "yield" drops significantly.

We generally want to be the first venture investor in a company.  We are happy to create a syndicate with other investors and do the deal together, but we generally do not want to come into an investment in the later rounds.  There are a bunch of reasons for this, some economic, but more that relate to our role in the company and our relationship with the entrepreneurs and managers.

But maybe even more important is the role of location which was the subject of this post after all.  Steve Shu says in his post:

VC have historically invested closer to where they are located than farther away [because of deal management and deal sourcing concerns]

Steve is spot on.  The best VCs, which are the ones that can actually help you build a business, have learned that it is a face to face business. And it is very hard to do a face to face business from 3000 miles away.  Some VCs do it and do it well, but I believe that they are the exception that proves the rule.

Here are some concrete examples:

- Board meetings where everyone is face to face are always better than those done over a conference call
- Recruiting senior management to the team often required the involvement of the VC investors.  You can't really help an entrepreneur recruit a team from 3000 miles away.
- The impromptu breakfast, lunch or jamba juice or shake shack run with the entrepreneur never happens from 3000 miles away, but is invaluable in creating the trust and friendship that is critical to the entrepreneur/VC relationship

The fact is that we have a great network here in NY in terms of talent, business development, marketing, etc.   If you are a local company looking to tap into that network, we can really help.

So in the end, VC is like retailing.  Location matters - a lot.

This does not mean that Union Square Ventures won't do a deal outside NY.  We will and are working on several right now.  But it does mean that we won't be able to do everything for our portfolio companies that are outside of NY that we do for the ones that are in NY.  It means we will have to travel more, which is OK, and it also means that we'll probably find like minded VCs who are local to do the deals with us.

So keep the investment opportunities coming even if you are located in Vancouver.  We enjoy meeting entrepreneurs who are working on the opportunities we are interested in.  And if we get really excited about something, we can help find local investors who can do the things that we do with our local investments, and we'll travel more and make the face time that's required.

Another thing this blog attempts to do is educate the entrepreneurs out there who are doing for the first or second time and have yet to learn all the lessons of the VC business.  An important one is location matters when picking your VC.  It's not the only issue, but its an important one.

Comments

[Raj Bala]

We know how to get crunk in the ATL, but that doesn't attract the investors.

I will likely move for this specific reason. (shameless plug: which I am completely willing to do in case you are a VC and are reading this)

[Steve Shu]

Fred,

Thanks for the link. I've always been interested in your use of blogs at many levels. Your comment about broadcasting information on things you are interested in investing in is something I've gleaned from reading your blog. It's an excellent use in my mind and probably helps to reduce search costs (or at least make them more efficient for both entrepreneurs and the VCs).

It's funny how the reach of blogs is enormous these days. Really seems to be an order of magnitude more effective even though the market is getting orders of magnitude more crowded (in terms of number of blogs).

[Ian Wilson]

What would be great of course is some kind of central resource/matrix/wiki that identified VCs by their investment parameters. This way you could easily see who invests in what, where and at what stage.

The flip side of this, however, is something that I have begun to realize through reading VC blogs, unless you fit certain specific parameters (i.e. "A" round web service development company with serial entrepreneur CEO, "A" team developers, based in Silicon Valley or to a lesser degree NY and Boston) youre chance of getting funding is slim to none.

That does not mean that any company outside of those parameters cannot get funded but what it does mean is that looking objectively, outside of those parameters youre options are very small.

For example a consumer package software (non internet) seed/start up in Missouri. How many VC companies are local, a handful? In 2003 a grand total of 3 start ups were funded in the *entire* year, with only $163 million being invested in *all* sectors (bad year that it was). None were software. (http://www.technologygateway.org/pdf/3Q_2003_VC_Stats.pdf)

Now trying to raise capital from a VC company is generally a long, difficult and no doubt expensive process (or so it seems from what I read) but I wonder what would happen to VCs deal flow if entrepreneurs had a clearer picture of the possibility of actually obtaining financing? Our example company above might be a great business but might conclude that its chances of success are a fraction of 1%. Thats not business thats gambling.

This then becomes a bit of a VC paradox, where those (particularly non serial entrepreneurs) outside of the VC hot spots who go searching for VC money while needing to show their business credentials to the VC community are by their very presence saying "I dont understand the VC Industry, if I did I would not be here I would be in Silicon Valley with a few engineers building cute web apps that generate lots of users (revenue optional)".

Could it be that the process of opening up and demystifying the VC industry through great blogs like this one causes a sharp reduction in the number of deals you see coming across your table as entrepreneurs look for better odds of success elsewhere?

[Dave McClure]

hmmm... so based on location logic, if you lived closer to SimplyHired out here in Silicon Valley, perhaps we'd have let you invest in our recent round? ;)

seriously tho, i agree... tough to invest too far away from home. you can do a lot of things remotely, but still helps to be nearby when things are getting started.

[Daniel Nerezov]

hehe

Vancouver's nice. What about Sydney, Australia?

We could use a vc who can spell "Web 2.0"

syke, i kid, i kid, i don't think my joke's working

[simon]

Out of curiosity, what would be your general area? NY City, NY State, New England, the beltway?