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Tech Startups Don't Need the Valley Unless They Need VC

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At South by Southwest Interactive today, panelists from the Bay Area; Madison, Wisc.; Beijing; and Austin, Texas, debated the value of building your startup in the Valley, and the corrupting influence of venture capital on technology startups. The panel came to the conclusion that, if you want to build big and build fast, then you need to go to the Valley. However, few companies need to build big and fast.

The panel didn’t break any new ground with its discussion on the Bay Area’s proximity to capital, abundant talent and reverence of startup culture. However, cracks are beginning to show, as startups need less venture capital, California’s economy worsens and as the reverence of a startup culture that celebrates the go-big-or-go-home way of creating a startup fades.

The Bay Area startup ethos that calls for millions in venture funding and a giant business built in three to five years may be on the wane as the venture world faces its own tectonic shifts (see video below). “The model of tech getting used to VCs throwing crazy amounts of money at them is just crazy,” says Mike Maples, Sr., an angel investor who formerly worked at Microsoft (s MSFT) and has funded several businesses.

Panelist Penelope Trunk, founder of the Brazen Careerist, who started her company in Madison, Wisc., called the VC model shallow and limiting for an entrepreneur. She pointed out that the traditional startup culture embraced by Silicon Valley comes at a personal cost that makes it hard for women and those with families to become entrepreneurs, and she championed building a business that generates sales and grows organically.

Panelist Kaiser Kuo, a business consultant in China, echoed the call to bootstrap, saying, “VCs should be the funding source of last resort.”

I walked away thinking the big debate for entrepreneurs is less about where you start a company, than an effort to reclaim the word “startup” for entrepreneurs who bootstrap their technology business — in or outside of the Valley. Many of these companies get less PR (they can’t always afford it), but they will likely become increasingly relevant as the downturn forces a realignment of the venture industry and forces entrepreneurs to build a startup that can make it as a business from day one.

26 Responses to “Tech Startups Don't Need the Valley Unless They Need VC”

  1. I think people are missing the point. The location issue is not about whether the VC model will survive.

    The reason that the Silicon Valley survives is that there is an ecosystem that supports and connects start ups. VCs are a part of the ecosystem, but they are not the ecosystem. There are also banks, accounting firms, lawyers, PR, etc, that are fluent in working with and growing start ups. There are also groups allow developers, entrepenuers, service providers, etc. to mingle and cross pollinate.

    The problem in other areas is that start ups are out of the norm. They exist as islands and their is no connection with the other start ups around them.

  2. VCs don’t fund startups. VCs require a certain level of traction/usage/revenue/acceptance and then they provide money to grow. Look at the entire industry at the Risk Investing Industry.

    The Venture Risk Investing industry is divided into 3 distinct groups: (1) Seed/Startup; (2) Traditional VC and (3) Exit

    They are systemically, operationally and attitudinally different. They have different metrics for acceptance and success; funding, oversight, sourcing, profitability and, most importantly, infrastructure.

    What is needed is a Public-Private For Profit dedicated effort to work with, support and compensate the Seed Infrastructure (Incubators, Economic Development Agencies, Tech Transfers). This infrastructure, the public component, already exists and provides the efficient sourcing, screening and post-investment oversight needed to develop Series A worthy companies. What is needed is a dedicated effort that is not geographically constrained. What is needed is a thorough Virtual Incubation system that brings both Community and Collaboration to all elements of the total Investing community.

    The Venture Capital stage of the Venture Risk Investing industry has a valuable place – to expand Seed/Startup companies with money, targeted managerial talent and business development/partnership assistance.

    By dedicating a private/public collaboration to increasing the value and viability of early stage companies you are also increasing their valuation for their Series A round; thereby leveling the playing field with what will be a smaller group of Traditional VC funds.

    This Seed dedicated effort can take two forms:

    (1) Standalone Fund
    (2) Operating Division of a Traditional VC Firm

    Please review the powerpoint – The START Fund –

    I look forward to all comments.

    Thank you,

    Elliott Dahan
    Managing Partner
    The Growth Group
    652 Cuesta Drive
    Mountain View, CA 94040
    Email elliott(a)
    Phone 650 903 9990

  3. As a London based company we are attracted to the Valley for the growth opportunities it affords us as companies adopt our technology. We are 100% behind the organic growth model and at 100% growth per year for the past 4 years with no borrowings to date we are very much old school. Cash is king and banks are good partners who will back a good business with debt financing without a lot of red tape to encumber the small agile businesses. We like the idea of building the tools for the prospectors rather than doing the prospecting ourselves.

  4. There’s a reason behind that strong correlation of success in the Bay Ara versus elsewhere. But that reason is beginning to fade over time as more people collaborate across the globe in an online fashion.

    The valley and it’s culture is great but it also prevents and forgets about a lot of talented people who don’t live between San Francisco and San Jose. You can’t argue that every talented techy lives in that proximity. No, a lot of highly talented ones live in middle America, Australia, Europe, Israel, India or China.

    Great article, Stacey!

  5. I don’t think there’s any pressure whatsoever for bay are startups to get big fast. The fact of the mater is that there are far more successful startups in the bay area than anywhere else. If you think you can do it elsewhere, fine. But your going against pretty strong numbers.

  6. Richard

    Good post and interview.

    I’ve raised VC money in the past and would rather never go through it again. Having to manage VC’s on the board is a full time job- everybody is a Monday morning CEO:)
    The next cycle will have good exits in the $50M range. So a $5M Series A plus $8M Series B simply won’t work in the existing VC model.

    The biggest issue imo is the lack of alignment between entrepreneurs and VC’s.

  7. Chris Walker

    Finally – an article that makes sense when addressing the issues of funding and beyond. The days where you had to be in the valley to be taken seriously are well and truly over. With cloud-based infrastructure now becoming mainstream and offering almost zero cost to get started (other than internal development costs) startups with great ideas and but little capital can really make a go of it. And with no need for massive funding rounds why would you want to relocate to the Silicon Valley? I operate my company out of a warehouse in the bush in Australia and yet we have a vision for a global business, a plan to make it work and no plans to relocate anywhere anytime soon.