What Entrepreneurs Get Wrong About Funding
They shouldn’t want just any money.
This article originally appeared in Fortune on Nov. 14, 2015.
By Linda Darragh
The Entrepreneur Insider network is an online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers. Today’s answer to the question “How important is it for startups to be in Silicon Valley?” is written by Linda Darragh, professor of entrepreneurial practice at Northwestern University.
When choosing where to locate a startup, the default answer should not be Silicon Valley.
There are plenty of places outside of the Valley with access to funding, incubators, and expertise—Chicago, Boston, New York, and Austin, among others. But before opting for any of these locales, entrepreneurs should start with a far more relevant and fundamental question: Where’s my customer?
As someone who has advised many startups, especially in and around the Midwest, I remind entrepreneurs that revenues are far more important than funding. If yours is a business-to-business startup in logistics, for example, is it better to be in Chicago or Sheboygan? With customers as the primary focus, the business model determines the location—not the other way around.
A secondary concern is getting access to mentors, advisory board members, and other experts in a particular industry or market segment. Granted, certain locales have a reputation for particular specialization—Silicon Valley for business-to-customer startups or Los Angeles for media and entertainment, for example. However, we live in a virtual world, and this type of expertise can often be tapped no matter where you’re located.
Seeking access to programmers and software engineers may also send people to Silicon Valley. This high-demand talent, however, is scarce everywhere—especially in the Valley. Unless your business model specifically puts you there, it makes no sense to be in a saturated hub where everyone is looking for the same talent. And although you won’t find talent just sitting on a bench somewhere, it is available in other markets. Programmers and software engineers can be found outside of Silicon Valley, and they may even be more cost-effective for your business. You’re also likely to find more loyalty outside of the oversaturated hubs where everyone is trying to recruit away everyone else’s talent.
Cost of living cannot be overlooked, either, especially for the startup team that is minimally compensated in return for a stake of what they hope will be the next big idea or category disruptor. While I’m not suggesting locating a company on the outskirts of nowhere to take advantage of cheap housing, if there is no compelling reason to locate to an inflated market for office space and housing, then why do that?
The last part of the location equation is funding. My advice to entrepreneurs is that they shouldn’t want just any money—they should want strategic and smart money—that means people who know your industry and (once again) your customer base. The best funding comes with great advice and partnership. Do your due diligence on a fund with respect to how it has worked with other portfolio companies and if the fund is in its early years and offers a long runway that lets you grow, rather than a seven-year fund that is in year five.
More funds are popping up everywhere, many with specialties. For example, S2G Ventures in Chicago recently closed on $125 million for a debut fund to invest exclusively in agriculture and food ventures. These days, funds are more willing to travel to check out startups—especially to markets that aren’t oversaturated with VC firms.
For startups, the location decision should be based on many factors, rather than default to the conventional wisdom of going to the Valley. When choosing the locale, focusing on customers is a great place to start.
- Linda Darragh is a professor of entrepreneurial practice and executive director of the Kellogg Innovation and Entrepreneurship Initiative (KIEI) and the Levy Entrepreneurial Institute at Kellogg School of Management at Northwestern University.