Southeast Investment Culture
Mentoring entrepreneurs on raising capital, I repeatedly hear that investors in the South are risk averse, difficult to work with and want too much equity in their companies. And when discussing the funding landscape with investors, I get the response that there aren’t enough good, early stage companies in the region. It’s just the culture, they say, and there’s nothing we can do to fix it.
None of these revelations are new to anyone that spends any amount of time in the startup community in the Southeast. But, very little is being done to fix these issues. Instead, both sides of the equation write it off as “just” the culture of the Southeast and continue to do nothing to try to rectify the problem.
In this an inefficient market, the people that are investing largely have free reign – take our money or don’t get funded. It’s a highly problematic mindset that creates an adversarial relationship between investors & startups. Which is a terrible starting point for a company. This leaves startups with two options – take money at poor terms which leads to greater difficulty in growing a big company OR don’t take the money, which leads to a slower growth company that can’t innovate as quickly as competitors. If a startup can’t grow as big as its competitors, an investor’s exits are smaller than elsewhere in the country which leads investors to pull back further.
It’s a vicious cycle. How do we fix it?
First, recognize that investors should be partners in funding companies, not simply a source of capital. This requires a mental reset on both the part of investors and startups. Startups, don’t treat your investors as piles of money and the occasional introduction when things are going poorly. Keep them constantly engaged and constantly working. Investors, engage and help your portfolio. Or, don’t invest!
Second, investors need to recognize that startups have more efficient access to capital than ever before. Angellist, kickstarter, techstars, y combinator, sparkmarket & more have given startups a myriad of options to get funded. Investing is a competition (just like building a business). We need to fight to keep the best talent, the best resources and the best companies in the Southeast. We fight by showing we can support startups and that we care about them. Investors need to open their Rolodex, roll up their sleeves and get dirty. They need to be a company’s best advocate. They need to get in their cars and go source deals, find hidden gems and uncover unknown talent. If we don’t fight, startups will simply go where it is easier to get capital. The more we dilute our talent pool, the harder it becomes to build that next great company. Eventually we won’t have the talent left!
As a corollary to the above, not only do startups have easier access to capital, but they have access to standard deal terms. With a simple google search, one can quickly find deal terms being offered to companies across the country. If the terms they are seeing are out of line with industry standards, they are more likely to turn it down, move away or try to bootstrap. All of these can be potentially detrimental to a company. Again, an investor’s job should be to facilitate the growth of a startup and make the process as painless as possible, not waste a startup’s time.
Finally, the community as a whole needs to talk more about funding. Let’s hear stories, not of successes, but of struggles raising capital, of challenges and failures. Let’s celebrate those founders that haven’t quite made it yet. We take pride as a region on being able to bootstrap and fund companies from revenue only, but this isn’t the ONLY way to build a company and, in fact, can stunt the growth of a company. Startups – dream bigger, be more aggressive and challenge investors to come along. In short, do more. Don’t be satisfied with enough.
If we don’t fix these problems the best startups are going to leave the region, becoming a self-fulfilling prophecy of “no good deals in the region”. At present, the investor community is still a largely closed network that is going to be overrun by new avenues to fund companies, more entrepreneur-friendly funds and generally poor deal flow. Culture isn’t stunting us. It’s a lack of education, an inefficient market that allows ignorance to persist and poor attitudes that are holding us back. If we don’t do something fast, we won’t have the talent left to build companies. It’s time for someone to disrupt the funding market in the Southeast.