Move to Silicon Valley

An old friend sent me this bit on how Paul Graham wrote that start-ups should move to Silicon Valley. He cited that investors in the regions know more about start-ups, and are more aggressive.

I agree.

But there are a few other elements that should be noted.

Finding the right talent for a team is very important. Management is constantly cited by investors as a critical factor in the success of an investment. Go to where the people are. I’ve written about how the Quartermen became the Beatles, and how finding the right group of people to run a company is similar to finding the right players to make up a musical band. Being just one person off is the difference from being local, to global.

On the money side, there’s the risk tolerance element. If you have a high risk tolerance, and are able/willing to lose 100% of an investment, then you can take more, smaller bets. If, however, you are less willing to lose 100%, and will fight tooth and nail in order to preserve 20% of your initial investment, then you are going to be investing slower. Getting more peace of mind, and taking your time, also means allowing someone with a higher risk tolerance to swipe away interesting deals from you.

Say two investors have $20 mil:

One person could be looking at making 8 $1 mil investments, and having $3 mil in follow on funding for each of the 4 companies that look promising.

The Other could be making 20 $500,000 investments and have $2 mil in dry powder for the 5 companies that look promising.

For the guy who has 20 companies to select from, the quality of his top 5 is probably higher than the quality of the first investor’s top 4.

And this presumes that they both start off with $20 mil each.

But silicon valley has more money in VC than Boston, or London, or DC.

What if the Boston fund has $20 mil, and the SV fund has $40 mil?

Then the Boston investor is looking at the same 8 companies for $1 mil, and $3 mil in dry poweder for each.

The silicon valley investor is looking at putting $1 mil (same amount) into 20 companies, and has $4 mil in dry powder for the 5 most promising companies.

Now, who would you rather be working with?
With 19 other companies in your “family”, with the tacit expertise that the investor will have by making many other investments in a similar space, with the larger amount of financing available. Why would you go with someone who has more limited support?

Customers are still important. If you are going to be selling to the DoD, there is no better place that being around the beltway. Here in D.C. folks know how to sell to the government, understand the process, understand how the process works, and why it does what it does. Short answer: Government purchases are not to be the fastest, or most efficient, but are made to be the most FAIR. Try explaining that to some folks and they look at you confused.

Go to where the money is, go to where the talent lies, do what it takes to keep your company in business, and give yourself the best shot at success. Anything else, is lazy and foolish.

One day I might start following my own advice.