By Chris Langford, Partner
The evolution of IDEA Fund Partners’ investment thesis has been one of the most interesting and rewarding exercises that I have been involved in professionally. As the firm has doubled in size over the last 18 months from the two original team members to include myself and our Principal Joe and as our ambitions have grown along with it, we have been thoroughly evaluating every aspect of the IFP platform. This includes future fund size, check sizes, investor composition, geographic focus and areas of interest. Through this blog series, we will continue to unveil that evolution piecemeal to help walk through our future investment thesis and provide insight into how we got there. In this post, we introduce the cornerstone of our investment thesis: our geographic thesis.
My partners John (the founder and Managing Partner of IFP) and Lister (co-founder and Managing Partner) have devoted nearly two decades of their lives to bring venture capital to underserved geographies starting with the Research Triangle of NC and expanding across the Southeast and up the East Coast into Fund III. Our Principal Joe, although from NYC, spent his earliest years in venture at a Midwest based firm. And while the vast majority of my own venture journey and investment history has been centered around companies in major venture hubs, I devoted nearly a year of my professional career to researching and visiting all of the major cities of the U.S. that touted an emerging entrepreneurial ecosystem to validate those communities for investment and determine the key ingredients that makes a market successful. The collective experiences of the team have led us to firmly believe in this defining statement: Great Companies Can Come From Anywhere.
Starting with that statement as a universal truth, we set out to determine where we should focus our efforts to produce the best venture returns possible. We started with the notion that we would exclude major West Coast and Northeast markets to provide potential institutional investors with some geographic diversification against the bulk of their venture holdings and due to expected levels of competition in market. We then analyzed dozens of data points for each major city (population 2 million+) in the United States and Canada and determined that, for us, the best places to invest were cities that maximized the following equation:
Ingredients + Outcomes — Competition.
The key ingredients were concluded to be a large number of talented people with an entrepreneurial spirit and a business environment that supports their establishment and scale. For outcomes, we looked at total value created through exits and unicorn valuations as both provide liquidity options for early-stage investors. And for competition, we looked at how many early-stage firms were in the region and their currently investable AUM.
After collecting, structuring and analyzing these data sets we began for force rank the cities against each other using a stage gated analysis and asked the following questions:
1. Does the city have a thriving entrepreneurial spirit?
We measured this by total companies founded in the last 5 years on both an absolute and per capita basis. We segmented them into cohorts and eliminated the long tail of cities that don’t produce enough opportunities to justify our focus. Cities that performed highly in this analysis included D.C., Toronto, Chicago, Austin, Denver/Boulder, Raleigh/Durham (RDU) and Miami.
2. What is the city’s track record?
This was measured through analyzing the number of exits above $100 million in total deal value, a reasonable threshold for producing a venture return, and total aggregate value created through exits and unicorns. Per our analysis, the best outcomes were again from Chicago, Austin, Denver/Boulder, RDU and D.C. (a pattern is forming here).
3. Does the market use VC dollars efficiently?
This was measured by looking at both the total exit value created and the total value created inclusive of highly funded private companies created as a ratio of local venture capital to be deployed. In essence, where has the value creation far exceeded the amount of available capital on a multiple basis. Per our analysis, the best performing cities were Denver/Boulder, RDU, Minneapolis and Miami.
4. What would the impact of IFP be on the ecosystem?
Finally, we looked at the current level of local, early-stage capital in the remaining cities. The idea being that if we were satisfied by the above metrics indicating that solid venture capital returns can be generated there, we should see where competition for deals would be the lowest and our dollars would be more appreciated. Top performing cities were RDU, Minneapolis, Atlanta and Miami.
After performing this analysis, several cities were clearly within our target having performed well across all categories. Additionally, several cities either excelled at performance but were more competitive or were less competitive but their performance was more on the come. To decide on our final markets of focus we asked the following questions: 1) Are we better served to focus on markets that are slightly higher in competition but with a more proven track record or the inverse? And 2) how do we think about broader geographic coverage as opposed to just picking a top performing city?
One final perspective that we overlaid when choosing markets of focus was to think about the ancillary, regional deal flow that the market attracts. To put it another way, what cities serve as the crossroads for early-stage investments within their respective regions? Taking all of these factors into consideration, we decided to focus our sourcing efforts on five markets:
RDU: Our home market and where we have the most contacts/reputation. From RDU, we feel that we can create a crossroads of capital for deals ranging from D.C. to Nashville to Charlotte.
Atlanta: A market we are familiar with and have deep sourcing connections within already. Taking a deeper focus here, we see Atlanta as the crossroads of early-stage capital for the Southeast United States and this gives us reach both into Nashville and down into Florida.
Chicago: The epicenter of venture activity in the Midwest. It has a stellar track record of producing significant exits and deals from Minneapolis, St. Louis, Detroit, Columbus and Indianapolis find their way to the Chicago region.
Denver/Boulder: A rapidly growing technology hub, Denver/Boulder has produced solid venture outcomes and has become a haven for West Coasters who are relocating from California and Seattle. We believe that not only will Denver/Boulder attract deals from places like Salt Lake, Las Vegas and Phoenix, but that increasingly it will see some California and Seattle deal flow as well.
Austin: Similar to Denver/Boulder, Austin is far from undiscovered and has really staked its claim as the technology and startup hub for the Texas market. Investors and entrepreneurs are flocking here for the talent, emerging capital scene and lack of state income tax. Austin will naturally attract deals from Houston, Dallas and San Antonio markets as well.
So, there you have it. A brief glimpse into where we plan on expanding our geographic focus and some of the thought process that went into that decision making. My partners and I will explore these geographies individually in greater detail in future posts. Until then, I’ll see you at the crossroads.