Calling Bay Area Investors: Seattle Entrepreneurs Want To See More of You, and Help Build Your Brand
Lately I’ve been hearing from the tech-startup community about the need to get venture capitalists from the San Francisco Bay Area to spend more time in Seattle—and with the companies they invest in here. The topic first came up during a coffee chat with Kevin Merritt, founder and CEO of the social-database site Blist. (Back in February, his company raised a $6.5 million Series A round from Seattle-based Frazier Technology Ventures and Menlo Park, CA-based Morgenthaler Ventures.) Merritt clearly has good relationships with VCs from both locales, but he’s interested in strengthening connections between Seattle and its California counterparts, who represent the largest concentration of venture capital in the world.
It certainly makes sense for entrepreneurs to want more attention from the Bay Area. At the same time, plenty of money from California is already finding its way into Seattle-based startups. So I decided to ask around in various tech-business circles—entrepreneurs, investors, media relations, academics—to see what people thought could be done to attract an even greater share of attention from Bay Area VCs. Some of what I heard back was surprising.
I first reached Ed Lazowska, the Bill & Melinda Gates chair of Computer Science & Engineering at the University of Washington (and an Xconomist). In typical Lazowska fashion, he questioned the very premise of wanting more outside VCs here, and proceeded to bring up some interesting funding issues:
—Lazowska (via e-mail): “Why do we want more of them? Is it for the money? I’d say no. Every credible study says we have plenty of money. But if you think we don’t, then is the problem in some particular sector (maybe local VCs are not doing green power?), or is it some particular stage of the funding pipeline (angel, early-stage, late-stage)? Angel seems fine here. Late stage seems fine. Less sure about early-stage.”
That last bit goes against my impression of the Seattle venture scene, which is that most VC firms here tend to do primarily early-stage deals. But maybe that’s changing. In any case, Lazowska continued: “Is it for the expertise? For example, it is often the case that technical due diligence by California VCs goes deeper faster than technical due diligence by Seattle VCs.” (Interesting observation—I wonder what others have to say about that?)
Lazowska finished: “Is it for peer-to-peer connections? Bottom line: Exactly what value do California firms bring that we need? There is some, but [we] need to be specific about it. It ain’t the money.”
Local entrepreneurs might beg to differ on that point. I reached several successful software startups that have raised capital this year, and each brought up certain issues of getting the right funding options, fostering the innovation ecosystem, and having close proximity to VCs in early-stage deals, as detailed below:
—Deep Dhillon, director of engineering at Seattle-based Evri, which is backed by Paul Allen’s Vulcan Capital: “I think this matters most at the seed stage. For A or post-A, its really not that tough to hop on a plane down to the valley and meet with your investors. It’s seed and earlier, where it is really nice to have your investment partners close by—this is the formative stage when entrepreneurs need the most help with business plan formulation, strategic hiring, etc.”
“I’m not really sure if it makes sense to do anything other than build a more attractive startup ecosystem. I think if the ecosystem is thriving, and investors are in relatively short supply, the Bay Area VCs, along with any other VCs, will set up satellite offices; some have done so already. As far as how to build a more attractive startup ecosystem, well that’s a tough one. Myriad factors contribute to this, most not centrally planned a priori, like the presence of wealthy tech-minded individuals (angels), entrepreneurially-oriented academic institutions, entrepreneurs themselves, the city’s coolness factor.”
—Kevin Flaherty, VP of marketing at Wetpaint, which raised $25 million in May from Bay Area investors DAG Ventures, Accel Partners, and Trinity Ventures: “There are a group of VCs from the Bay Area that do spend a lot of time up here in Seattle. When I asked them why, I’ve heard they like to come up here because they feel there are good teams with really good ideas. They also benefit from less competition. Per capita, there are just less folks up here chasing deals versus down in the Bay Area.”
“In terms of what we can do to get more VCs up here more often…If I were charged with that objective, I would focus on helping build the valley VCs’ personal brands among the local entrepreneur community. They want to be known among the entrepreneur community so we turn to them when we’re looking for money. If we can craft events that helpthem build their personal brands, I would imagine we could get the VCs up here more frequently. I think the WTIA does a pretty good job of this.” (It’s an interesting point that Silicon Valley VCs need branding here.)
“Is getting more VCs up here important—absolutely from an entrepreneur standpoint. The more options you have from a money perspective the better. Having more valley VCs willing to invest in Seattle companies is a good thing. However, it never is about getting a lot of options, it’s about getting the right options. I would much rather have one term sheet that I’m really happy with versus a lot of term sheets that I’m only marginally happy with.”
—Kevin Pedraja, VP of Sterling Communications (which does media relations for a number of local companies in wireless, software, social media and security) and head of Sterling’s Seattle office: “I think the expectation of most VCs, Bay Area included, is that startups will come to them, not the other way around (at least until things get to the due diligence stage). My sense is that when they do travel, VCs like to maximize their time, getting to see as many companies as possible. So they’ll go where they think there’s a critical mass of interesting startup companies and/or where the options for local funding might be lacking. The first part certainly applies to the Seattle area, but since we’ve got our own active and strong community of VCs, I suspect Bay Area investors think they’re at a disadvantage in terms of knowing the key players and generally just breaking in.” (This echoes Wetpaint’s point about Bay Area branding.)
So what do investors think about all this? At least the national VC firms I talked to in Seattle don’t seem to see reaching out to the Bay Area as a big need. Bill Bryant, a locally based partner at Draper Fisher Jurvetson, pointed out that every big VC firm in the Bay Area already has deals in Seattle. Alex Rives of Arch Venture Partners reiterated an earlier point that, at least money-wise, Seattle is not wanting for venture deals. And what about local versus non-local expertise? At least one authority from the angel community cautions against seeking outside seed funding at the expense of local financing:
—Rebecca Lovell, program director at Seattle-based Alliance of Angels: “Though my experience is in the angel realm, for the group of investors I represent, these are highly engaged professionals who seek to invest not just their money but their time with their portfolio companies. And for the entrepreneurs seeking funding from professional angel organizations, one of the benefits of this process is building out a strategic board of advisors who can help move the company forward….angel investors are prime targets for such critical roles. So to that end—should local companies seek purely non-local financing, something very valuable could be lost.”
Lastly, one Bay Area VC, who declined to be named because of company media rules, gave what I suspect is a pretty representative view from Silicon Valley: “Seattle is close enough to the Bay Area that we’re very comfortable investing there. It’s not a 15-minute drive, but it’s one short hop on a plane. As it’s really quite competitive in the Bay Area, you see more VCs going north or south. I see lots of VCs on Southwest [Airlines] flights.”
Agreeing with an earlier point about geographic hurdles, the VC added, “For early-stage deals, there’s more conversation about syndicating with someone next door. It’s ‘we could do that, but should we call our friends in Seattle?’ So yes, geography is an issue with very early-stage businesses. You’re spending a lot of time with them. When a company is more mature, that sort of goes away.”
And as for innovative ideas coming out of Seattle? “The University of Washington has a lot of interesting technology. It’s very fertile ground. The perception is it’s a little less visited than the grounds of MIT and Stanford.”
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