5 Reasons to Seek Geographic Diversity in a Venture Portfolio
Silicon Valley. New York City. Boston. Call them tech hubs or startup capitals, they are drawing in our nation’s venture capital dollars. But when it comes to new investments, venture capitalists can’t be so short-sighted. The opportunities beyond these markets may be richer than many realize.
In July 2018, my venture capital firm, Alumni Ventures Group (AVG), encountered an investment opportunity in RealSelf, a marketplace that features reviews of providers of medical aesthetics and cosmetic treatments. It’s a platform for people to learn about cosmetic procedures, share experiences, and connect with providers—bringing transparency to life-changing decisions. We liked the market opportunity and the company’s track record. RealSelf was a profitable company with a $50 million annual revenue run rate, and it had taken on little outside capital to get to that level.
The twist to the story: the company was in Seattle—a respected tech hub, but not the place most VCs go hunting.
But there’s a strong argument for “venturing” more broadly. Here’s why AVG has five regional offices and a national deal hunter network to cast a wider net.
Untapped Targets
Thanks to a variety of factors—including access to technology and lower launch costs—the barriers to starting a company are much lower than they used to be, and startups are springing up everywhere.
However, capital has been slower to follow, with three-quarters of venture dollars going to California, New York, and Massachusetts. That leaves many great untapped targets. For instance, the Kauffman Index of Entrepreneurship lists these “newcomers” among the top-10 metro areas with the most startup activity: Miami; Austin, TX; San Antonio, TX; Houston; and Denver. And five states that ranked at the top of the 2015 startup activity were Montana, Wyoming, North Dakota, Colorado, and Vermont. At AVG, we have invested in companies located in approximately 25 different states and eight different countries.
Early Money Is Local Money
There’s an old saying in the startup world that early money is always local money, and late money comes from anywhere. By being geographically diverse in a portfolio, you can participate in rounds that other firms in major markets do not have on their radar. Our First Check Fund focuses on seed investments, and we’ve participated in deals for young companies in Florida, Virginia, Maryland, North Carolina, Pennsylvania, Washington state, and Washington, DC.
Spreading the Risk
Geographic diversity minimizes portfolio risks associated with any one economy or regulatory or competitive environment. Powered scooters and whiskey distilleries are two such sectors we invested in where the regulatory environment is variable, depending on the locale.
Multiple Angles on Consumer Offerings
As a consumer-focused problem is being addressed by multiple startups (e.g. bike or scooter sharing), most begin by serving their home market. By having a global investing focus, you can explore and invest in multiple independent solutions as they grow, letting the market decide the winner for you.
For example, we have invested in multiple digital management tools employing artificial intelligence and machine learning, multiple talent management platforms, and several online loan and credit platforms. These are opportunity-rich fields where competitors (and clients) abound, with no obvious winner at this point.
Early Valuations Vary
The cost of living and talent varies wildly in different markets. And the valuations of the startups in different markets will also vary wildly.
Comparable startup investments in Boston, Silicon Valley, or New York City can have valuations twice as high as startups not located in one of those hubs.
In April, AVG was able to invest in an early growth round for an Austin-based company named Tethr, which has developed a communications intelligence platform designed to surface insights from large volumes of customer phone conversations, in order to influence business decisions. With the company based in Austin, we were able to participate in an investment that, based on prior experience, we knew was priced more cheaply than a similarly staged company on either coast. In addition, Tethr represented the diverse technology target that can be found in non-traditional startup markets.
Of course, AVG does its fair share of deals in California, New York, and Massachusetts. But having the broader lens allows us to offer investors greater deal diversity, opportunity, and value.