Explore Startup Investing Beyond Silicon Valley…

January
9, 2019

6 min read

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Startup unicorns and billion dollar funds grab headlines these days, but most investors only hear about these opportunities late in the investing cycle, when growth is slowing. Increasingly, company value is realized in the private markets vs. after initial public offerings (IPOs). And recent performance data shows that early stage investing can capture more alpha than investing in larger, later stage companies and funds.

But the vast majority of investors only get into these companies when a major bank includes a late-stage, multi-billion dollar “startup” like Uber or WeWork in a mutual fund. Even if they do hear about a company early, how can new investors compete in the frothy funding environment that is Silicon Valley, with thousands of angels and venture capitalists?

Related: With an Increase in Venture Capital Mega Deals, How Can Startups Stand Out?

The reality is there are ample opportunities to invest in startups outside Silicon Valley and beyond the billion dollar, unicorn-hunting echo-chamber. With the rise of the third wave of the internet, there’s a proliferation of savvy entrepreneurs launching companies across the country. A diverse roster of cities are building reputations for specialized innovation: St. Louis for agtech, Austin for artificial intelligence, Detroit for mobility, D.C. for cybersecurity, Nashville for HealthTech and many others. Much of this wave is driven by the fact that 479 of the Fortune 500 companies are headquartered outside of the Bay Area. These corporations spin off entrepreneurial talent with deep industry expertise along with ecosystems of partners and customers to boost early success.  

Accordingly, there’s increased demand for new investors to fuel startup capital needs, and the venture industry is diversifying to meet these needs. While behemoths like the $100B Softbank Vision Fund soak up a lot of media ink, the median size of a U.S. venture capital fund is just $68M. There are thousands of these small funds investing in 50+ markets across the country.

So, how can someone new to the market find these startup investment opportunities?

First, be smart about it.

• Read up on it — follow industry or location specific media. Think about what captures your interest and inspires you. What industries do you find fascinating? In what sectors have you built your career and are positioned to add value to a growing company? What communities do you care about? Then go find media and journalists who cover those beats. If agriculture interests you, John Deere’s The Furrow offers insights into cutting edge innovation. If virtual reality is your intrigue, resources like VR Scout may fit the bill. Many local media outlets write about early-stage companies long before they grab national attention.

• Attend a startup investing workshop. Not all angels invest in groups; in fact, ACA reports there are about 300,000 “active angels” in the U.S., but only about 15,000 are members of angel groups. This suggests that the vast majority of angels go it alone or invest through syndicates. One way to start this journey is to attend a startup investing workshop. Some angel groups offer educational programs — though there’s usually an expectation that you become of a member of that group. Other workshops are more agnostic, such as those run by Angel Resource Institute and Startup Angels.

• Head to local startup events — tap into accelerator deal flow. Gust reported 178 accelerator programs across the U.S. and Canada, and 579 across the world in 2016. This number is likely higher today as more industry and corporation-specific programs have spun up. Multi-city/multi-sector accelerators like Techstars, Gener8tor and StartupBootcamp have fueled some of this expansion. There’s a variety of ways to plug into accelerators to find potential deals. The simplest is to attend a demo day and meet with the companies that most interest you. If you have particular skills of value to startups, you can also look to become a mentor for an accelerator. While requiring you to invest your time, you’ll get a look into how different founders think and operate.

Related: If You’ve Been Asked to Be An Angel Investor, Consider These 3 Tips

Second, don’t go solo. Learn by doing, and alongside experienced investors.

• Join an angel group. The Angel Capital Association (ACA) lists more than 400 angel groups in its database. These groups are located across the United States and usually tap into geographic or alumni-network specific deal flow. Whether it’s the Frontier Angels of Montana, the Miami Angels of South Florida, Wolverine Angels for University of Michigan alums or the hundreds of other options, there’s ample variety to choose from. Many groups focus on regular in person meetings and close collaboration to vet deals, pool capital and support companies after investment. Some groups have structured “angel funds” that allow investors to build a diverse portfolio of startups with less of a time commitment. Be aware that not all angel groups are created equal; they vary widely in terms of culture, check size, how they treat founders and how they approach due diligence.

• Explore curated deals via online startup investment platforms. If you lean towards digital interaction, consider investing through an online startup investment platform. They may list startups across a range of geographies and often have sector-specializations — i.e., CircleUp (consumer packaged goods), AgFunder (agtech) or Ourcrowd (heavy emphasis on Israeli deals). Platform membership is usually free and can offer investment opportunities at lower check sizes.

• Invest in a venture capital fund. Investing as a Limited Partner (LP) in a venture capital (VC) fund can be a time-efficient way to deploy money towards startups. While some VC funds are quite large and have substantial minimum investment requirements, the majority of funds in the U.S. (at least 70 percent) are smaller, sub $100M funds with minimum investments equivalent to doing a single angel deal per year (example: median minimum investment of $250k into a fund, called over a typical 5 years translates to $50k per year). Venture funds are located across the U.S., with more funds forming in specific geographies and sectors to address the capital needs of different segments of entrepreneurs. VC funds can be hard to find when they’re fundraising, as you may not know a fund exists or have connections to its managers. Different is a platform where accredited investors can find, research and invest in venture capital funds.

Related: 5 Business Trends That Will Continue to Rise in 2019

Whether you’re looking to invest in startups in a specific sector, geography, business model or type of founder, there are a wide range of resources to help you look beyond Silicon Valley. As technology transforms more industries and influences more cultures globally, we will see an increasing number of talented founders and funds across the U.S. and around the world. Bear in mind that startup investing isn’t for everyone — it carries risks, such as lack of liquidity, long investment horizons and the potential to lose your capital. Equip yourself with the knowledge, partners and resources to help you decide whether and where you fit in.