Don’t Slam the Door on Your Way Out

It’s a tale as old as time.

An ambitious young founder starts a company in their hometown. After struggling to raise funding locally, they decide to make a trip to California. In a matter of weeks, the young founder successfully raises money from from “Silicon Valley investors” and returns home triumphant. Then, they go on to tell anyone and everyone they meet how much better it is “in Silicon Valley”.

In most cases, this is beneficial for the ecosystem. Other young founders see someone “like them” succeed raising money abroad and learn to expand their fundraising horizons. Local investors get a healthy reminder to stay competitive.

But occasionally, an excited founder takes it too far.

In their eagerness to ingratiate themselves with other founders in the ecosystem, the tone of their message turns from positive (“Silicon Valley is great / Silicon Valley investors are great”) to negative (“this ecosystem is not great / local investors are not great”). Before long, the young founder is known more for railing on their local ecosystem than anything to do with their startup.

While other founders eat it up — especially those who’ve struggled to raise — the founder can become persona non grata to many others in the ecosystem. And chances are, they don’t even know it.

At this point, some of you might be rolling your eyes at me (“aren’t you the guy who’s always talking about San Francisco?”).

But if you pay close attention to my writing, you’ll find that I never express a blanket perspective that “Silicon Valley is better” — because I simply don’t believe that. For example, last year I wrote a post titled The Mythical U.S. Lead Investor in order to debunk the overly-simplistic stereotype that U.S. investors are more risk-taking than investors in other countries. I’ve also written about The 9 Types of Startup Investors to help explain the varying motivations held by different categories of startup investors and how those impact their behavior.

While I absolutely believe that a significant number of VCs outside of Silicon Valley do themselves (and their ecosystems) a disservice by not building deep connections to Silicon Valley, I don’t believe that investors in the Bay Area are inherently better than investors in other ecosystems.

They’re just different.

But enough about me. Let’s get back to our intrepid young founder…

When we last left our heroes…

The problem with spending too much time comparing and contrasting your fundraising experiences at home and in Silicon Valley is that the story you tell yourself is often self-serving. Local VCs obviously didn’t invest because there is something wrong with them. Silicon Valley VCs clearly saw the potential and were willing to take the risk.

End of story.

Local investors obviously didn’t get it

In some cases, that might actually be the story. But 99% of the time, it’s not that simple.

In reality, most founders have no idea why local VCs actually passed on their startup, or for that matter what caused the investors on their cap table to lean in.

Here are 3 key differences between the perspective of Silicon Valley investors and those in other ecosystems when it comes to evaluating out-of-town startups:

1. History

For better or worse, local investors have more intimate access to your recent history. That promising startup you previously worked at? They know if it was legit or a total sh*tshow. The regional tech company you cut your teeth at? They know whether it hires the cream of the crop or pays the bare minimum and takes whoever it can get. They also likely have access to people who can vouch for your reputation — good, bad or otherwise.

As a result, local investors will sometimes pass on promising startups because the founders didn’t reference well or they have negative perceptions about their prior work history.

Silicon Valley investors are often unaware of the baggage an out-of-town founder brings (and many are less inclined to find out). That gives you an opportunity for a clean slate, but it also means that they won’t give you as much credit for some of your “locally famous” accomplishments.

2. Generalist vs. Specialist Investors

Outside of Silicon Valley, the vast majority of investors are generalists. That means they might not have any prior experience in your space (and may never have met a single company doing what you’re doing). There are some things you can do to more effectively pitch to a generalist investor, but you should also expect that you’ll get far more noes than you will yesses.

From a VC perspective, investing in something you don’t understand is akin to playing the lottery. That’s not a good investment strategy. While this can be frustrating as a founder, don’t blame it on risk-averseness.

By simple virtue of the number of investors in Silicon Valley (there are nearly 2,000 active early-stage funds between San Francisco and San Jose), you’re more likely to run into investors that understand and have experience with what you’re working on. Which makes it more likely that you’ll be able to secure investment if your space is less widely-understood.

3. Power Law

The majority of Silicon Valley investors rely heavily on the concept that returns in venture follow a power law distribution. These investors expect one or two companies to drive the returns of their fund, while the rest will provide a rounding error.

VCs that adhere to power law investing presume that any startup they invest in which is not a “breakout win” will not be material to their returns and, therefore, spend little-to-no time evaluating alternative scenarios. That can be good or bad for startups.

If you have a clear thesis as to how you could become a billion dollar company but no credible “Plan B”, it could be a great fit for Silicon Valley investors but a turnoff for local VCs (who tend to — correctly — discount the likelihood that you’ll actually become a unicorn). On the other hand, if your trajectory lends itself to multiple options should the primary hypothesis fail, local investors might lean in whilst Silicon Valley VCs worry that you’re straddling the fence.

All of this is to say, be careful about how and when you share your reflections on fundraising. Chances are, your perspective is hidden behind rose colored glasses. Also keep in mind that there’s a big difference between sharing your experiences with a group of founders under Chatham House Rule and airing your dirty laundry on stage at a conference. Or worse, in the media.

Not only do negative quotes in press statements take attention away from your company (the story isn’t about how awesome your company is, it’s about how bad your ecosystem is), it can burn a lot of bridges. That might feel good for a moment, but I promise you that in exchange for your 15 seconds of fame, you’ve lost potential local champions.

Often because those folks “knew the real story.”

Like the founder whose funding announcement was focused his big “decision” to move the company to San Francisco, when everyone in the local ecosystem knew he’d been trying to get a U.S. visa for years. Or the founder who complained that local investors only wanted safe investments with complicated deal structures, when all of the local VCs had passed due to concerns over a prior company.

Or the founder who publicly complained about how atrocious Salesforce’s reporting interface was, only to have the SVP of Analytics for Salesforce call him incensed because they were supposed to be partners.

…oh wait, that was me. 😬

What were we talking about again?