The Road Increasingly Traveled

By: Joe Darcy, Principal

Much has been written of late about the flight from big cities. San Francisco vacancies are skyrocketing and Manhattan rents are plummeting. And while I personally don’t believe the big cities are “dead” - there is no replacement in my mind for hustling to “make it” in a big city as a young professional and the sophistication of growth capital infrastructure is damn near impossible to replicate - I also believe a fundamental awakening has occurred in the world of startups which founders should carefully consider. An awakening I have come to fully understood by becoming a textbook transplant.

I grew up on the outskirts of New York. I recall being enamored by the lights, the crowds, and the sounds when going to New York Rangers games as a child. The energy the city exudes at all hours of the day. I remember the PA announcer proclaiming “Welcome to the World’s Most Famous Arena” as the lights went down in anticipation of puck drop. It is this superiority complex that drew me to the “Big City” as I grew older. The center of the universe; the see and be seen. A friend once summed it up so simple, yet so eloquently: “Entire movies are made about dreams of living in this place, so every day I’m living a movie”.

However, to pursue my MBA I moved to North Carolina seeking something new and, during my program, I spent a summer in St. Louis. It was only by removing myself entirely from New York that I realized the “big city lights” had blinded me. The “Big City” is not a be-all-end-all but rather a part of a bigger picture. I had thought a place like New York was the entire movie, but rather it is just an actor in a bigger cast. Specifically, as it relates to startups, I observed:

  1. The Melting Pot 2.0

New York and San Francisco were built by the migration of people flowing through their cities –first immigrants from around the world, and then a constant flow over the years of new professionals trying to “make it there”. With the current wave of migration into cities like Denver, Austin, Raleigh, Charlotte and Atlanta, I believe a similar phenomenon is occurring. Those cities have a lot of offer to new residents in the form of their own established culture, but I also believe a new collective will form combining the best of legacy attributes of a city with the best a person’s homeland can offer. While simplistic, a personal example of this is the Southern hospitality of true New York caliber bagels at Brandwein’s Bagels in Chapel Hill, NC.

2. The Ultimate Alignment of Incentives

In venture, we often talk about aligning incentives between founders and investors or LP’s and GP’s. Everyone needs to have enough skin in the game to keep growing a company and work tirelessly towards a good outcome. However, unlike in a large city which is fully-developed, in smaller cities like Raleigh, Durham, or Austin, the cities themselves are growing alongside the startups nurtured from within. Founders are not only building a business, but they and their businesses are building the city. As jobs are created, identities are forged. This symbiotic relationship of startups and cities are in fact the ultimate form of incentive alignment, with city and startup moving in lockstep. This kind of relationship is nearly impossible to replicate in a major city like New York or San Francisco where founders and their companies will likely blend into the sea of established enterprises and business titans.

3. The Maximization of Options

As a founder, it is tempting to own an asset(your company)that, on paper, is worth tens of millions overnight based on an early, large post-money valuation–and in a place like New York or San Francisco this can more easily happen. However, in doing so you limit your options due to a high bar needed to eclipse to raise your next round and available investors with deep enough pockets. Smaller rounds, like those more common in places like Chicago or Charlotte, maximize your options. These cities present more investors with capital who can participate, more reasonable/tempered growth requirements, and the ability to structure deals more creatively. Moreover, capital is “pretty smart”, so whether you’re looking to raise a growth round or just have an affection for the Silicon Valley or Alley, the successes shine bright and it’s more likely for a big city VC to invest in a smaller market than the other way around.

A core tenet at IDEA Fund is that “great companies can come from anywhere”; an ethos that has persisted since the inception of our firm. If there is to be some good to come out of this year’s pandemic, I am hopeful that others will have the fundamental enlightenment and opportunity to experience the benefits that a market outside of traditional “big cities” have to offer. As pandemic-conscious individuals and businesses escaped their dense, indoor-centric lifestyles, I’m optimistic the merits of sociological, economic, and operational opportunities smaller markets have to offer have shone bright, and are on the path to becoming deeply entrenched for the next generation of entrepreneurs to consider when starting their companies.

IDEA Fund Partners is one of the oldest and most active early stage VCs headquartered in the Southeast United States.