Entrepreneurship in flyover country

As most WTN readers probably know already, here in Wisconsin we are in the heart of what is referred to in the venture capital business as “flyover country.” While the industry has established a few outposts between the coasts, the New North is not one of them. Fair or not, if you are an entrepreneur here in Wisconsin the implications of being in flyover country are serious. You face a number of funding and execution challenges your Silicon Valley and Corridor counterparts are generally spared. Let's explore some of those challenges, and what you can do about them.

Investing in Flyover Country is Inefficient.. The first big handicap entrepreneurs face in flyover country is that it's just plain inefficient for investors in the deal rich venture centers to source, investigate, close and manage isolated deals far from home. As an entrepreneur in North Carolina's Research Triangle Park, I was told by several west coast investors that “we don't do deals if we have to change planes to visit the company.” One tier-one VC said simply “we don't invest east of the Mississippi,” and several more said that they did not invest in companies that are more than two hours away from their office. This problem is most severe for early stage deals, where in industry lingo the rule of thumb is that “early stage money doesn't travel well.”

Dealing with it. This is a tough one. It is inefficient, from a time and expense perspective, to invest far from home, and it is harder to stay on top of a deal by telephone/email than face-to-face. That said, it is easier to convince a far-away investor to come to a region if they already have another deal nearby. Further, a “local lead” that is respected by a far-away firm can sometimes give the far-away firm the confidence to invest in a distant location. Beyond that you should recognize that you are probably going to pay a price in terms of valuation. As one prospective investor told me in my North Carolina days when I commented that he was offering a lower valuation than he did in many of his other deals: “That's the flyover country discount.”

Entrepreneurs in Flyover Country Lack “Situational Awareness.” Fair or not (and, sad to say, in my experience it is often fair), word on the street in the venture centers is that entrepreneurs in flyover country don't know how the game is played; don't appreciate that they are competing (for markets, money, and people) on a national and international basis (and even if they do don't have a good feel for who the key competitors are and what their strength and weaknesses are); and don't understand that things like cheaper office space and lower compensation costs are not the key mission critical variables for high-risk/reward technology deals. Worse, because they start with this stereotype in mind, venture center investors will seize on any “situational awareness mistake” by a flyover country entrepreneur as decisive reinforcement of the stereotype - even a mistake they might have glossed over if it was made by a venture center entrepreneur. Fair? No. But that's the reality.

Dealing with it. This is one that flyover country entrepreneurs can attack. How? By spending extra time and effort on situational awareness. Business plans, pitches and other communications with venture investors should hammer home the key situational awareness issues, primarily knowing how the game is played in the venture centers (including the lingo); knowing who the key players (entrepreneurs, companies and investors) are in their space across the country and around the world and how they stack up with them; and knowing (and respecting) the real special challenges (details below) that entrepreneurs in flyover country face. Finally, don't suggest that potential investors should be focusing on things like reduced operating expenses rather than mission critical variables like access to proven talent, customers, suppliers, partners, investors, etc. It's Hard to Build a Team in Flyover Country. Some entrepreneurs in flyover country, albeit less so in Wisconsin than, say, Phoenix, make the mistake of thinking that the lifestyle and cost of living advantages of flyover country will make it easy to recruit key managers and technologists from the venture centers. Wrong. In fact, it is harder to build teams in flyover country even if the lifestyle and cost of living advantages are real. Why? Because Silicon Valley-class managers and technologists generally look at a new opportunity as a career stop, not a career terminus. That is, they recognize that most deals don't work, and that even when a deal works their own contribution will likely max out before retirement time arrives. In both cases, they will most likely be looking for another opportunity in a few years. Are they likely to find many near at hand in flyover country? Not likely, at least compared to the near certainty that they will find plenty of such opportunities back in the venture center. There's a reason birds of a feather flock together.

Dealing with it. Once again, valuation is a good place to start…. But, seriously, to the extent its feasible, the flyover country entrepreneur should make an extra effort to include people with venture center experience on the team, even if only as advisors or, if appropriate, as directors. (But make sure any such people you list really are on the team, and really will know what's going on and be intelligent advocates if/when they get calls from potential investors and recruits). Make sure your lawyers have real venture capital experience and connections. If possible, bring a senior person in from a venture center as a key player: offer them “above market” if necessary (another way of caving on price, but one that you might get back with a premium from the investors). Whatever you do, don't pretend that the charms of flyover country are somehow an advantage. This is one of those issues you are better off facing than featuring.

Flyover country entrepreneurs face several obstacles their venture center counterparts don't. That said, if a deal is otherwise compelling, and the flyover country entrepreneur takes the special challenges of flyover country entrepreneurship seriously, they can often be overcome. As life, the venture capital market may not be fair, but that doesn't mean it can't be won over.