August 29, 2019Blog

Raising Venture Capital for the Rest of Us: Life Outside of Silicon Valley

I always get a kick out of reading about the Venture Capital world according to folks like Pitchbook. It’s a world of multimillion dollar seed rounds, and tens-of-millions of dollar A rounds, and it’s full of Unicorns. It’s an exciting place, where mega-funds do mega-deals backing bigger-than-life entrepreneurs. The place where the most deals get done, and even more so the most risk capital gets invested. Which is to say it’s about Silicon Valley, and a few other major venture capital hubs.

And, of course, that means that the rest of us mostly live in a different world. A world where seed rounds are routinely measured in thousands of dollars, A rounds are more often in the $1 million range than the $10 million range, and Unicorns are scarce outside of children’s books. The game is different here, and so are the rules.

And so today, a look at the other side of the high-risk/reward entrepreneurship and investing street, the side that does more dreaming about mega-deals than doing. Where positive cash flow is a virtue, not a sign of lost opportunities to scale. Herewith, some of the specific differences between seeking venture capital in Silicon Valley and a handful of other risk capital nirvanas, and seeking it everywhere else.

  1. Difference: Fewer and Smaller Risk Capital Pools. Northern California has more venture funds than anywhere else on the planet. And on average, those funds are larger than their peers pretty much everywhere else as well.

    Implication: Your business model should put more emphasis on profits than your Silicon Valley peers, and achieving them with an order of magnitude less capital. At the same time, your investment model must offer the same 10x+ return potential on your risk capital base.
  1. Difference: Fewer Role Models and Mentors. If you really want to know how Silicon Valley works, try living there for a couple of years: it’s in the air of the place. You can’t help but absorb it, from the culture to the lingo.

    Implication: You have to be aggressive in seeking out advice and perspective – and cautious about accepting what you hear as gospel. Beware the noise as you search for signal.
  1. Difference:  The market cycle is tamer. The Bull markets are not as frothy, and the Bear markets not as gnarly.

    Implication: Don’t put too much credence in what you read in the popular press about goings on in Silicon Valley. Or at least don’t get too discouraged about it. The trends – in deal terms, deal size, and market activity – may track where you are, but the peaks and valleys in your neck of the woods are almost certainly a fraction of the heights and depths.
  1. Difference: Valuations are lower. Less aggressive, capital efficient investment models don’t put as much emphasis on scale, so of course valuations are lower.

    Implication: Don’t focus on how big your pie is, focus on how big your slice is. If all you really care about is how rich you are if (and it’s a big if) your deal works, you should move to Silicon Valley. But, if tens of millions of dollars is enough – for your current deal, at least – focus on dilution, not valuation, and you will do just fine.

The rich really are different, and so is Silicon Valley. So unless you decide you belong there, don’t get hung up on what goes on there. Focus on the “real world” you live in, and you – and your investors – will do just fine. And when you and they do, if you want to try your next act on a bigger stage, you can always follow Horace Greeley’s advice and ‘go west young entrepreneur.’

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