America may be the land of opportunity, but Silicon Valley is where those opportunities converge with dreams. It’s the land of sky-high valuations, infinite funding, and an endless parade of prancing unicorns. From Barcelona to Brazil, start-ups around the world largely view Silicon Valley as the promised land, and blame their own entrepreneurial ecosystems for lack of funding and networking opportunities. But Valley veterans believe that it’s time for a reality check. Silicon Valley is a thriving hub for innovation, the exchange of ideas, and insanely high funding rounds, but it’s not the only hub.
“The Valley is the Valley. It’s expensive and crowded, and so hard to get a quality start-up off the ground these days. I would not suggest early-stage start-ups move there,” legendary Valley investor, Neal Dempsey, said, addressing a room full of bright-eyed European entrepreneurs at White Bull Summit today.
As a general partner at Bay Partners, Dempsey rose to the top after founding and exiting a tech business of his own. For him, Silicon Valley is a lot of things, but it’s not the right place for fledgling companies desperately seeking finance, something which Beringea’s chief investment officer, Karen McCormick also stands by.
“America is definitely the land of opportunity, but if you’re not dominant in your home market, why bother going there? The same principles still stand. If you have clients that are generating revenue in the US, and you need to expand your team there, then it makes sense to consider moving to the US. It has to be more than just for funding,” she said. Beringea consolidated in 2009, in the wake of the financial crisis, and decided to set its base in Michigan, a decision that was partly serendipitous, and partly strategic.
“At the time, Detroit and the Midwest became synonymous with downtrodden America, and the Obama administration was doing a lot to fix that,” McCormick said. It was a time when Detroit as a city filed the largest municipal bankruptcy on record, which prompted a local and even national-level private-public partnerships to boost the city and state’s economic standing. Beringea’s decision to move away from the Valley helped the firm establish itself as a leader in a burgeoning market, and allowed it to have the pick of the litter when growing its portfolio.
“Beyond Silicon Valley, the rest of the US is really greenfield. We even brought some European businesses in, and they’ve thrived in Michigan,” she added.
So what are the benefits of looking further afield? According to McCormick, it depends on your growth ambitions.
“There are upsides to the Valley, of course. But it really depends on what you’re looking for. We don’t need everybody to be a unicorn. We co-invest with (Silicon Valley-based VCs like) Index Ventures and Accel Partners, and we´re not paying a different price for that.”
The fact is that start-ups that raise money in the Valley will get a higher valuation, and funds based there will write bigger cheques.
“In the Valley, a big fund is about $3 billion, but a big fund in Europe is probably a tenth of that. VCs in the Valley can offer to write $100 million cheques they can afford to lose. The benefits of securing investment from the Valley will be that higher valuation and bigger funding package, but it also means the risk for entrepreneurs is also much higher. These firms assume 80 per cent of you will fail.”
For Dempsey, a CEO’s job is never done, particularly when it comes to preparing for more fundraising. “We tell our CEOs that they always have to be raising money, whether it’s through strategic investors or corporates. Keep growing that network of investors and partners, because you really can’t have too many partners. It’s part of your job as CEO, I’d say 20 per cent of your job, to get traction early for additional rounds of funding.”
But the lure of Silicon Valley is a lot more than its limitless funding potential. According James Harrison, the man behind UK tech firm, Sky Futures, the Valley is more about making connections. The firm raised a total of $11 million, from friends and family, business angels, a Series A round from MMC Ventures and a strategic investment last year from a firm in Texas.
“It’s about making meaningful connections now, and for the future. You can’t close a round fast without putting in the groundwork. When people look for innovation, they go for a shopping trip to the Valley. For us it’s more the network the Valley can bring. We raised maybe 10 per cent of what our competitors could raise in the Valley, but they’d probably burn through a lot of that investment,” Harrison said.
Ultimately, Silicon Valley is a unicorn in its own right, having grown rapidly yet sustainably into the global hub for entrepreneurship, innovation and investment they way it did. According to Beringea’s McCormick, a lot of that success is down to a spirit of openness and collaboration. “There’s a huge willingness and openness to meetings in the Valley. Even if you’re an early stage company, a good two to three weeks there could open many doors. If you’re at a seed or Series A stage, there’s no point going to Silicon Valley for fundraising, but there’s so much more to the Valley than just that.”