Building a Great Tech Firm Outside Silicon Valley

  • February 24, 2011
  • Scott

Given that Launch is going on right now in San Francisco, it just seems appropriate to take up this topic that Mark Suster raised on his blog.  Maybe you think you can launch anywhere, or maybe you think you need to launch in the Valley.  But can you build a great tech firm outside the Valley?

Mark Suster‘s “Both Sides of the Table” blog has great content for any entrepreneur or investor.  Recently he asked the question: “Can You Really Build a Great Tech Firm Outside Silicon Valley?

And of course the short answer is yes, but the interesting part of the question isn’t the yes or no, the interesting part is answering how you overcome the challenges of being outside the Valley (and conversely, how you overcome the challenges of being inside the valley).

Mark does a pretty good job of doing both.  Focusing on the challenges outside the valley:

The VC partner, somebody I greatly respect said, “Yeah, we like Gil and what they’re doing. I’m just not sure you can build a great technology firm outside of Bay Area.”

That bias is the first challenge. Mark focuses on the challenges in LA in particular, using that as a well-researched example.  I’ll take each of his points, and look at how well they apply to another “outside the Valley” origination of startups: Austin.

1.  Funding is different outside of Silicon Valley.  No argument here. Austin gets a disproportionate share of Texas VC funding, but still Texas gets about 2.74% of funding while the Valley gets nearly 40%.  There may be less competition for funding in Austin, but there is definitely less competition among the investor class.  That makes it more challenging for good ideas to get funding.  On the other hand, Austin Ventures has reasonably deep pockets to get some ideas to quite a good scale (they aren’t afraid to commit  $50M on an investment).  But like LA, Austin struggles with swing-for-the-fences funding, locally.  Having said that, there are outliers.  HomeAway is Austin-born and -based and has raised something like $500 million. Dachis Group is a well-funded startup.  And Demand Media isn’t based here but has purchased a couple of Austin-based companies which continue to operate in consolidated offices here.  In fact, if you just cruise the headlines in Austin from February Austin Business Journal articles, you’ll see quite a bit of funding going on:  CyberKnife ($850k), Movero Tech acquired, Vermillion ($21.8M), CacheIQ ($6M),  Cinsay ($40M debt financing), Firefly LED ($3M from ETF), Lion Street ($220K), Boundless Networks ($4M), SocialWare ($3M), TechSkills ($5M), uShip ($2M), LibreDigital ($4M), ReachForce ($4.6M).  Nothing compared to the Bay Area, but for Austin, this is the most I can recall since before the dot-com bust.

2.  Necessity is the Mother of Invention. Definitely we see signs of this in Austin – very few models that depend on growing without making money.  And as Mike Maples, Jr. has pointed out, there seems to be a real critical mass around the intersection of enterprise software and social software here.  Let’s not count our chickens before they hatch, however.

3. Recruiting and Retention will be different outside the Valley. Very true.  Easier to retain talent in Austin once you have it.  Mark says:  “But we do have great technology developers.  You can build a team of 100+ people in LA without needing to hire outside of LA.  If you want to scale to become a ‘huge’ company you will find it difficult to scale to the level of the Valley sized companies.  But if you grow to be that big it would be a very nice problem to deal with.”  In Austin, there are a few companies with 100+ teams.  And one reason the talent pool is so deep is the University of Texas Computer Science department (not to mention EE, and other technical majors).  But the other reason worth mentioning is that back in the 90’s, a company called Trilogy bulked up to nearly 1500 people, probably two-thirds or more with technical backgrounds.  Referring back to #2- Trilogy couldn’t possibly find enough talent locally and keep up with growth goals, so it looked outside of Austin and brought talent in – perfecting the sales pitch for Austin in the process.  It helps to be minting money in such a situation – you can afford to ramp up a huge college recruiting operation and fan out to not only the top engineering schools.  Trilogy was the top recruiter from CS programs at several top schools for a few years.  This is the kind of long bet you can make if you’re making real money.  But it is harder to make this kind of bet if you’re making it with Other People’s Money.  They’re not investing in you to reinvent college recruiting, training, and onboarding – they’re investing in your business.  But the point is, if you’re outside Silicon Valley, you have to be more creative to grow beyond the natural limits of your city.  You can argue whether Trilogy should have imported all that college talent or not, but it is hard to argue that it can’t be done.  As a result of all the imported talent in Austin, you’ll find Trilogy alumni at virtually every software company in Austin these days.

4.  There are strategic assets outside of the Valley. So true.  Austin has an interesting mix of enterprise software heritage, hardware and chip design heritage (especially analog), and music.  You’d hope to see startups leverage what “keeps Austin weird” to build differentiated businesses.

5.  Communities outside the Valley have matured. So true.  Austin has a more active and interesting entrepreneurial scene than ever, thanks to that generational development.

At BP3, we should be so lucky to worry about what happens when we need to cross the 100+ employee barrier in Austin.  But our model is already set up to be more distributed – Austin is our HQ, but more than 2/3 of our employees live outside of Austin.  We’ll have a different set of challenges as we grow.  But for startups swinging for the fences in Austin (Bazaarvoice, and HomeAway, to name two), we Austinites know it can be done right here in Austin.

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