5 Winning Strategies for Building a Tech Business Beyond the Bay Area
Tech startups have finally cracked the code to succeeding outside San Francisco. Will they make it last?
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Another day, another incredible success beyond the borders of the Bay Area: Root Insurance Co., a digital auto insurance company that plans to expand nationwide by the end of next year, was valued at $1 billion after it raised $100 million in a Series D funding round.
More impressively, it managed to secure that capital from its headquarters in ... wait for it ... Columbus, Ohio.
It's happened: The mass migration of tech from its longtime confines in San Francisco/Silicon Valley is well under way. Both nationally and internationally, money is following tech into new territories.
The largest venture capital fund in the world is now in Tokyo. For the first time, American VCs are investing more money outside of San Francisco than inside, The Economist reported. In the second quarter of 2018, startup deals in China accounted for nine out of the 10 largest deals globally, including the largest-ever VC financing deal -- $14 billion for the Chinese company, Ant Financial.
Clearly, the mass migration of tech is more than a cute catchphrase.
Related: 3 Cities That Taught Me What Tech Looks Like Outside of Silicon Valley
The new techies
As the startup landscape shifts, so does the workforce. More "nontechies" are gaining access to the tools they need to launch their own startups. In fact, Mary Meeker's latest Internet Trends report showed that more than 50 percent of the globe is now plugged into the internet.
Easy access to the internet -- combined with better development tools and platforms -- has democratized the creation of companies by nontechnical co-founders. The next generation of tech leaders will be older, will be industry experts rather than coders and will be spread all over the world. Unconvinced? Let's explore a tale of success beyond Silicon Valley.
That story focuses on Ernie Garcia, the founder and CEO of Carvana, a Phoenix-based tech company that's working to revolutionize the way we buy cars. The company has a $5.65 billion market cap, and it's one of the largest tech companies in Arizona.
Garcia went to public school in Phoenix before heading to Stanford for college. He stayed in the Bay Area after earning his degree and began working with Y Combinator in 2014 to flesh out his idea for Carvana.
This sounds like the story of countless San Francisco tech co-founders, right? But, here's where things take a turn: Garcia decided to leave San Francisco and move Carvana to the middle of the desert, back in his old stomping grounds of Phoenix. A few years later, Carvana entered the unicorn club and went public on the New York Stock Exchange.
As Ernie says, a successful startup ecosystem requires four components: ideas, people, capital and a catalyst. He believes many markets (such as Phoenix) are simply missing the right catalysts. The key to startup success is finding those sparks in your community.
Related: The 2 Words That Can Shift Your Company
Interested in launching your own company beyond the safe confines of the Bay Area? Here are a few pointers to get you started:
1. Don't bank on VCs getting you started. All too often, as the head of an accelerator, I meet founders who are trying to raise money with a pitch deck. The problem is, it's actually quite rare for us to see ideas raise capital, particularly outside of San Francisco. And when we do, that money is typically coming from angel investors, friends and family members.
Of course you probably know that it's going to take a little elbow grease and some savvy cash management before you're far enough along to bring in the big VC guns. So, think like Ipsy founder (and YouTube star) Michelle Phan. Having built a name for herself online, Phan was able to leverage her eight million followers and $500,000 in seed funding to launch a subscription-based beauty startup that generated $150 million in revenue before ever turning to a VC.
Phan is one of the countless examples of startup successes that didn't begin with a massive amount of VC funding. So, emulate their model, because there are plenty of ways to get things started that will make your long-term funding prospects brighter.
2. Validate unit economics, and invest in those channels. As you validate the most critical assumptions in your business model and begin to generate revenue, take note of the mechanisms you use to get those first customers. In the early stages, cycle small and inexpensive user acquisition (and marketing) experiments. Measure your investment in each experiment and the revenue that it generates.
Don't invest in marketing channels until you've validated their efficacy on a smaller scale. According to a Rakuten Marketing report, marketers suspect that 30 percent of their budgets are wasted because of poor planning. A premature marketing push can turn into a black hole of cash if you sink money into untested and unproven channels early on.
3. Work your network. Research by The Economist Intelligence Unit suggests that networking has been vital to the entrepreneurial success of 78 percent of startups.
No man (or woman) is an island, and the same is true of companies. A significant part of your time as a founder should be devoted to networking. Get past the tired competition routine and connect with other startups and corporations. (I've previously written about how to leverage those relationships to gain new insights into your local business community.)
Master the art of persistence. Never stop asking other people questions about your existing or future products. There's no better way to build brand awareness and excitement (or to learn how you can improve your products). Getting in front of as many people as possible will help you test and refine your value proposition, generate new sales leads and gather valuable feedback on what you're building.
4. Play to your city's strengths. Cisco recently announced plans -- to the tune of $2.35 billion -- to acquire Michigan-based cybersecurity startup, Duo Security. The deal shined a spotlight on the modest Midwestern town of Ann Arbor, revealing it to be a major player in the cybersecurity industry. Plenty of other cities have their own unique niches. Take some time to discover your city's.
When you understand the key industries of your area, you'll be better positioned to build your startup in sync with those industries. And when your company meshes with your community, you'll be poised to enter the market and attract investors.
5. Refine your fundraising. At some point, you'll need to go after capital. When that time comes, you'll need to put yourself in the shoes of your potential investors. There's plenty of money to be had -- $57.5 billion has been invested in VC deals so far this year -- but there are also a wealth of startups going after a slice of the same pie. Why should you get a piece?
The key to acquiring that precious investment from VCs is understanding their strategies. What types of deals do your targeted VCs prefer (B2B or B2C?). Do they do lead-rounds, or do they prefer to follow on the heels of other investors? What are their revenue expectations for a Series A round? I've seen too many deals fall through simply because founders didn't know these crucial details about their investors.
Tech's great migration presents exciting opportunities for a new breed of founders and the cities where they choose to incubate. With a little forethought, many of these entrepreneurs can attract VC funding and see their startups soar. Follow these strategies, and all you have to decide is where you want to put down roots.