Startups are Hard. Funding is Harder.

Back in October, I had the pleasure of driving Lydia DePillis from New Republic magazine around Des Moines for a day and introducing her to a number of startups.  Earlier this month, she wrote a story based on some of those discussions entitled "Silicon Valley's Profit Killing Provincalism" that bemoans the lack of easy-to-find capital for technology startups in the Midwest.  The story is replete with anecdotes from top tier VC firms about the Midwest ('icefishing') and local startup founders lamenting the lack of local/regional VCs.

Life sucks.  Get a helmet.

Funding is hard.  I'd wager that 98% of companies that climb up Sand Hill Road to secure funding come away empty-handed.  You never read about them in Pando Daily, TechCrunch, or VentureWire.  You read about the funded.  As such, it's an easy fairytale to believe that there are magic money trees that exist in a grove between El Camino Real and 280N, which is sadly not true.

The reason that (probably, again) 98% of companies don't get funded is that about 85% of them should never get funded. Their idea sucks. 10% of them probably don't get funded because their pitch sucked, which got between their idea and the investor.  The other 3% were victims of the associate being hungover, negative association, or some other externality that they had no control over.  

You read about the 2% and think "Wow, these midwestern investors just aren't investing!".

Midwest investors are investing, in companies and markets they understand, like biotech, ag, and manufacturing.  This is why Silicon Valley VCs invest in tech deals, because that's what they see most of in deal flow.  We have ~200 tech startups in Iowa, and the percentage of these that hit local money is relatively low, so it's not surprising that they don't know what the hell you are talking about most of the time.  And when you whip out that valuation that looked so good in "The Social Network" outtake, don't be surprised when these professional investors, who are accustomed to looking at manufacturing deals where the valuations are far more reasonable than tech, do a spit-take of their chai latte all over the Microsoft Word term sheet template you scraped off Google.

Go get funding from people that understand you.  That's always good advice.  Find people that believe in you and your idea.  It will take fucking forever to find these people, just ask Ben at Dwolla who spent a year finding the right investors .

HINT: They won't be the people who offer you money first.

As Bob Marley said,  “If she's amazing, she won't be easy. If she's easy, she won't be amazing. If she's worth it, you wont give up. If you give up, you're not worthy. ... Truth is, everybody is going to hurt you; you just gotta find the ones worth suffering for.”

So load up your iPod with some Bob Marley and start knocking on a lot of doors, in the Midwest and outside of the Midwest.  If anyone ever told you that your startup was in any way entitled to be funded, they lied to you.

Comments

[Jschnip]

Well put. Something noteworthy to add, is that the "do what you know" isn't just for investors, but for the entire community. While I do believe that you can build a company anywhere, if you don't build it where you have a community with early adopters who "know" what you are doing and help you out, its just as bad as not having investors who understand. Case in point - look at the traction Dwolla garnered with Des Moines merchants early on (maybe I'm wrong, but it looked huge from the outside looking in). If you can't mobilize a local user base of early adopters who understand and rally behind your product, go find a user base somewhere else - just like funding. If you can't find one anywhere...you're probably doing the wrong thing (just like with investors).

[Christian Renaud]

Agreed. This is a midwestern entrepreneur problem too, which is "I'm going to do this in my own backyard first, then scale regionally, then perhaps nationally." when you have competitors going national day one. Find where the need exists the strongest, and do it there.

[Geoff Wood]

[more than] a few thoughts:

First, the problem of access to capital outside the established "tech hubs" is obviously real as expressed the frustrations shared by the Johns Jackovin and Schnipkoweit. I doubt either of them (er, you Jschnip) pursued their startup without already having that knowledge, though. It’s a fact of building here and that doesn’t preclude anyone from becoming successful. Otherwise, they would have just moved elsewhere or not started in the first place.

Second, DePillis gives no consideration to the positives of growing here instead of Silicon Valley. You have all the typical workforce and cost-of-living related statistics that are provided by any local economic development official and then other less obvious benefits like being able to stand out more easily in a less crowded technology community.

Also, she seems to infer that a certain level of access to capital is the only mark of an area becoming a “tech hub”. While it’s importance is obvious there are plenty of other factors like a culture where people are willing to take risks, the infrastructure to support a startup ecosystem, university- and big company-support of new ideas, etc. that I believe are just important.

In a related note, she also doesn’t seem to take time into account. In referencing the NVCA numbers on capital, she notes that it’s only “a trickel” outside SV, NYC, Boston, Boulder and Austin. Each of those communities had to start somewhere to get to where they are today and I’d imagine in each case the time to get “there” was unique.

She mentions USV’s investment in Dwolla, A16Z’s investment in AgLocal and Social Money’s deal with ICICI bank as “exceptions”. She missed out on another exceptions, too, like USV’s investment in KC’s Pollenware and LightBank’s investment in Omaha’s SkyVu. I look at these a different way - as proof that things are starting here in the Silicon Prairie. Had she written this article 18 months ago shouldn’t would not have even had those to point out. Let’s see how many more exceptions that we have 18 months from now.

[Christian Renaud]

Agreed Geoff on all counts. I was disappointed that she chose to focus on a 'poor me' theme and the cliche midwestern bashing from the big VC, rather than the opportunity and growth.