The Benefits of Building a Company in the Bay Area

move your tech startup to the Bay Area

In 2010, I moved myself and the company from Minnesota to San Francisco. There’s no way we would have been able to build this company in Minnesota.

Every week or so, I hear about a new city that’s trying to become the ‘next Silicon Valley’ or someone explaining to me that Minnesota is a great place to build a tech company.

You certainly can create a good company anywhere. You can also sprint at 20,000 feet. It’s just significantly harder and you’ll be giving yourself a handicap.

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Here are seven reasons I moved:

1. Capital

There is a unique ecosystem of angel investors and venture capitalists in the Bay Area. It’s unparalleled for tech companies anywhere in the world.

Over the past 40+ years, the large exits and IPOs (Facebook, Google, Yahoo, eBay and more) have fueled and justified the next funds at VC firms. And they've produced a new batch of rich individuals who’ve become angel investors.

It’s this group’s unique understanding and affinity for tech that has helped produce incredible returns on investments -- which in turn has justified more capital entering the ecosystem -- which have in turn funded more great companies and so on.

We raised capital in the Bay Area in 2011. While we were fundraising and bloggers were calling the environment ‘frothy,’ the Minnesota Star Tribune wrote a long article about how angel investors in Minnesota were cutting back. These are two very different worlds.

2. High concentration of specialized knowledge

Knowledge is almost just as valuable as capital. Within walking distance of our office, you can talk to the people who built Twitter from the ground up and experts on viral growth. Want to learn about SaaS metrics? Reach out to the companies that set the SaaS standard -- like Dropbox, Box, Evernote and others. Even with their level of success, these people are remarkably open and accessible.

3. Culture of risk

My cofounder quit his full-time job at Tripit to take a risk building this company. In Minnesota, I’d be hard pressed to get anyone to quit their job to join a risky startup. Since there’s a lack of capital in Minnesota, starting a company is significantly harder for anyone with a family or any other life expenses.

3. Valuations

Valuations are significantly better in the Bay Area. Since there is a super high concentration of billion dollar tech companies, the returns justify the higher valuations. As one investor explained to me, it’s the Facebooks, Googles and Dropboxes of the world that make this possible.

Moreover, there is a high concentration of investors competing for the best deals, which produces a better market price on equity. Certainly, a too high valuation can also be harmful, since it risks a down round. With that said, over the course of multiple rounds, you need to maintain enough equity to fuel growth. If you sell too much, too early, it can stunt your future growth potential.

Outside of the Valley, one founder explained to me that it’s not uncommon to sell 50% of a company for a few hundred thousand dollars. If it’s a capital intensive business, it’s unlikely they'll have enough equity left to sell in order to make it into a big company. Investors, getting too much of a good thing, get a bad thing, which prevents their portfolio’s ability to grow.

4. Legal terms

It’s not uncommon to see companies move to the Bay Area and be stuck with crazy investment terms from a previous angel investor.

Let’s say an investor who’s invested $10k has the ability to veto an acquisition. Not only do custom terms cost a lot of money in extra legal costs, it can also scuttle a company’s ability to raise future rounds, since this small investor has an outsized impact on the future of the company.

Because of the sheer number of deals that happen in the Bay Areas, norms on what is reasonable and not reasonable have developed.

5. “Trust-based ecosystem”

Garry Tan explained to me once that Silicon Valley is a trust-based ecosystem.

Just like repeat interactions in the prisoners dilemma produce better behavior, so do repeat interactions in Bay Area. Founders and investors know that if they behave badly, they’ll get cut out of great deals in the future.

6. Community versus isolation

Ben Horowitz explains that the most difficult job as a founder is managing one's own psychology.

In Minnesota, no one understood what I was doing or why it was worth it. I constantly felt like a foreigner. I even remember demoing our product to a family member and the person just walked away. The day I moved out here, I demoed it for a friend - he was so enthusiastic about it that he then started introducing me to his friends. After working on the product for nine months in Minnesota, I never experienced that level of enthusiasm from anyone.

Starting a company is hard and doing it in isolation is even harder. In the Bay Area, you’re surrounded by a community of people who understand. That makes a huge difference when you’re building a company.

7. Business development and integrations (growth)

This is a huge source of growth for us.

The vast majority of the companies we work with are within driving distance. In the event there’s an opportunity, we can meet in person. I’m very confident that business development wouldn’t have been a source of growth from Minnesota. Here's a talk I gave last year at 500 Startups unSEXY conference about business development.

It’s hard to evaluate odds. Especially with outliers and a desire not to move. Groupon was based in the midwest (Chicago). Startups are generally binary. So, anything you can do to stack the odds in your favor, you should do. If it takes moving to the Bay Area to increase the chance that you’ll succeed, I would (and did) do that.

There are 33 more reasons to move, I just ran out of time. Vote for the panel and share your comments on SXSW Interactive's panel picker and I'll share more reasons to move! 


Photo credit

Setting your angel round up to fail

I emailed this to one of our investors in 2011. Fundraising felt like I was playing t-ball with pros. (photo from wikipedia)


I met up with a founder that was raising an angel round. He was actively raising, but was only having a few investor meetings a week.

I mentally ran the math (# of potential investors, amount they could invest, potential conversion rate and time allocated) and there was no way he was going to close the ~$1 million round he intended.

Indefinite raising is also a negative signal. Just like a house that stays on the market too long, deals get old and become increasingly less likely to close.

Here are some checks to make sure you don’t set up your angel round to fail:

1. Do the math

  • Number of investors you’re pitching
  • Range they'd invest (i.e., $25k - $50k, $100k - $200k)
  • How many people you could close - run several conversion scenarios

If you need a 100% close rate to fill 75% of your round, it won’t be enough. It’s highly unlikely you’ll be able to get a 100% close rate. Many investors passed on Dropbox and Airbnb.

Need to talk to more investors? I wrote a post awhile back that could help: 10 Places to Source Investor Meetings

2. Target a 1-2 month raise. No traction? Stop raising

You want to find out as fast as possible if your company is fundable or not. Consolidate all of your learnings into as short of a time period as possible, so if you’re not getting traction, you get back to work. Remember, it’s the work you do on your company that makes you more fundable - and permanently fundraising can prevent you from creating any value.

If it’s obvious you’re not getting traction, stop. It’s not only a waste of time and a company that raises indefinitely is a negative signal.

4. Have > 6 months runway when you raise

Make sure you have 6 months of runway left before you start fundraising. The number of founders I meet that don't know their runway is terrifying. (Don’t be the startup that accidentally runs out of money)

With > 6 months, you have a few months to raise, while also running a backup plan, which may be profitability or an acquisition. If you wait until you have 1 month left in the bank, you run a huge risk that your company will fold; if you do find investors, the terms will likely be bad because your BATNA is going under.

5. Set your minimum target carefully

Many founders give a range of how much they’d like to raise. For example, targeting $300 - $500k, $750k - $1m or some other target range.

What founders don’t realize is that some investors consider getting to the minimum as part of the investment deal. Investors may commit, but if you’re raising $300k and only get to $200k, they might not transfer the money. If you think about it, that logic sort of makes sense, since your company will need the capital to execute on the plan you pitched. They may want the money to be held in escrow or wait until for confirmation that the minimum amount has been transferred.  

Other investors won’t ask and will transfer the money immediately. For those that asked us, we sent a screenshot of our bank account to confirm that we hit our minimum.

6. Don't be sneaky

Sometimes I meet founders that try to game the fundraising process. One of our advisors explained that investors are pros at fundraising. They do this all the time. Founders rarely do fundraise. I always felt I was playing t-ball against pros - I sent that t-ball photo to one of our investors to show how it felt :).

It's unlikely that you'll out game or out maneuver anyone.  By trying, you may just end up burning bridges and scuttle a relationship that should be built on trust.

The solution is simple: don’t try to game anyone. Just be nice, honest and straightforward about what you're doing and try to find good partners.  (Treat investors well when fundraising)

7. The valley remembers

I heard Garry Tan say something that stuck with me - Silicon Valley is a trust based ecosystem. That’s great for people that are trustworthy, not good for people that aren’t. So, be the former.

If it seems like you’re setting your round up to fail, the good news is that you can fix those issues or just focus on building out your business. You can still build relationships with investors, but explain that you’re not fundraising - you’re just looking for advice (Meeting with Busy People). In the end, it’s a combination of good relationships and a good business that will help you get funded. [1]

--

[1] There’s always the pre- launch, post launch debate on fundraising. If you're a new founder, raising pre- launch is more difficult. You can pull it off, I just think it's harder. Just know when to stop raising if it’s not working (see #2 above).


Too much funding, not enough action

People often advise raising more than you think you need. Years ago, we raised double what we intended and it had a hugely positive impact on the company. (Investors and advisors: the crowd, the ringside, and your corner)

Yet, I’m starting to see a downside of too much capital: new founders with years of runway and no external pressure to perform. Imagine a team that:
  • Raises a lot of money (3+ years of runway)
  • Doesn’t focus on revenue and / or engagement
  • Hires haphazardly
  • Doesn’t have a board or external pressure [1]
  • Doesn’t run projections (Don’t be the startup that accidentally runs out of money)
  • Doesn’t execute on a plan or build deliberately
The common outcome: unnecessarily long development cycles both pre-launch and post launch - often building without any strategic vision.

This is startup purgatory, which is working forever, building for users that might not exist. Then, if they do exist, they may represent a vertical too small to support your company. (Don't build a Galapagos product)

It’s only when the founders discover that their runway is finite that there's a race to the fundamentals, like active users or revenue. They plan better and iterate like crazy. There's nothing like finite runway, diminishing cash and uninterested investors to focus on core business fundamentals.

Extra capital can significantly de-risk a company. It helps to take it. But, it can also lull you into a sense of complacency. If you have the capital, think hard about how you can put it to work.


[1] There’s a lot of aversion to having a board because there are a lot of stories of bad boards. I found it really helpful. We have a meeting every 2 months and discuss company goals, objectives and accomplishments. There’s nothing like announcing commitments to make sure you keep them.

Join team to solve the VA's tech problems

Stephen Levy recently wrote about a team of YC alumni, Google and others to help fix HealthCare.gov. They've made a huge impact. 

Dan Portillo, from Greylock, is now helping put together a tech team to help the Veteran Administration (VA). My brother is a veteran and he ran into a lot of issues at the VA. It was so frustrating, he ended up buying private insurance instead. If anyone is buying private health insurance instead of using the VA, which would be free for veterans, something is fundamentally wrong with the system. 

Picture of my brother in Afghanistan a few years ago. 

Here’s the details that Dan recently sent out. 
Over the last couple of weeks I've been talking to Todd Park and Jennifer Pahlka, White House CTO, and Deputy CTO respectively, about putting together a team to help address the technical issues around the Veteran's Administration, I'm sure you've read the news about how people have been dying waiting for treatment. Program would look a lot like the healthcare.gov rescue. I was trying to see if I could take 3-4 months off from Greylock to work on it, but it's just not possible right now. There are a couple things I would ask the group to try and help.

1. They need a talent leader who can help bring 20 or so folks, mix of professional services, design, engineering, data scientists and SREs. They'd also be working with companies like Facebook & Google who are looking at donating developer time to. Person should be pretty senior and be able to identify the right ICs and leaders.

2. Helping the come up with the 20 people who will actually be doing the work. Positions are paid, but they're in the 100-150 range, so the right person will probably already have made some money and want to work on something meaningful.

Happy to talk to anyone who's interested in learning more. Dan 

Let me know if I can put you in touch. This is a problem worth solving.

Spooking potential hires

“I refuse to join a club that would have me for a member” - Groucho Marx


We were interviewing for a role and had already talked to 30+ candidates. If we talk to 30 people, you can imagine how many resumes we looked through and phone screens we did to get there. 

We finally found someone who was a great fit. 

Instead of going through the entire process, like we normally do, we skipped one of the final interviews and moved to make an offer. Ironically, we just ended up spooking this great candidate. 

The candidate didn't see our huge filtering process and level of due diligence. They didn’t see how much effort we put into every single hire. They didn’t see how many people we talked to that we didn’t bring on board. 

All they saw was a company that seemed to make quick decisions, without enough reflection. If we had continued our normal interview process, they would have seen our high level of diligence. 

Great candidates want to join great teams. They don’t want to join companies without a strong filter, since they’ll end up with subpar coworkers and a subpar company.

This candidate didn’t end up working out. But, we fixed our process. No matter how good a candidate, we stick to the process, so they can see how much effort we put into making sure every hire is a great fit.

Hire every position at least one month early

HelloSign had a big spike in support needs awhile back. The growth was great, but at the time, we didn’t have enough support people to meet that growth. Since we’re committed to closing out every ticket each day, the support team worked long hours to meet demand.  [1]

People often advise only hiring when you absolutely need to hire. There’s some wisdom here - it helps prevent a bloated team and keeps process efficient. But, I think this this is fundamentally incorrect. We’ve created a new framework for hiring:

Plan to hire every position 1 month earlier than needed

Here’s why I like this approach better:
1. The team will be more effective
When people are at capacity, they can’t think of efficiencies and improvements. They can only solve issues on a case by case basis, instead of having the space and time to think holistically. Holistic thinking, not working until exhaustion, is what produces efficiency.

2. People stay at the company longer
Many of the resumes we see have people staying at companies a transient 1-2 years. Many of them were overwhelmed at their previous positions (see Your company should never be frantic). Finding the right people to join your company is a huge effort. Having a consistent group of people solving an important problem over a long period of time is what produces great companies, not a revolving door of burnt out people.

3. Team morale will be better
If a startup is doing well, it will hit capacity often. Startups are built for growth (see Startups = Growth). Growth creates issues, which is why people join startups - it’s fun and challenging. That doesn’t mean you accept all growth issues. It means it’s important to solve as many growth issues in advance that are under your control. That way, the team can more easily handle capacity moments when they come.

4. Customers will be happier
Imagine: you build a product, spend money on growth and when new customers email you -  their first interaction with a person at your company is a negative one. The team doesn’t have time to properly think through a customer question or replies several days later. Phenomenal, expedient support is a startup’s major advantage - an advantage that should never be ceded to competitors. We have an incredible team, but even the most dedicated people can only do so much over long periods of time.

Lastly, it takes a lot longer to find great candidates than you imagine. Even if you want to wait until the very last possible moment to hire someone, it’ll take at least 1 month from the beginning of your search to their start date. Then, it’s important to account for the ramp up period as well.

There’s an image of startups being in a constant state of hitting capacity; since that’s what startups are supposed to be like, it’s not worth problem solving in advance. I think that’s wrong. It’s because startups will often grow fast that you absolutely need to remove as many of the full capacity moments before they happen that are under your control. We still have a lot to learn, but, as one solution, we’re going to start hiring people one month early.



[1] The support team kicks ass, btw. We’ve since made additional hires and we’re still hiring. If you’re interested in joining, feel free to apply:

Collect your naysayers

I remember showing HelloSign to a family member. He barely took a look before getting distracted and walking away. Of all people, you’d imagine that family would be the easiest sell. Yet, working on a company comes with a lot of rejection, whether it’s apathy, passing on an investment, or a user not signing up (The rejection book). I see a lot of founders resent these people. 

I’ve grown to think of rejection differently: I collect my naysayers.  For some reason, I love these people. The bigger the group, the more I’m energized to prove them wrong.

I treat them well, stay in touch and often become friends (Treat investors well when fundraising). Over the years, some of them have even become investors or signed up as HelloSign users. My favorite naysayers are the ones that articulate why they don't believe. They take the time to call or write an email with their feedback. I often learn the most from these people. Then, if we raise, they’re often the first we talk to. 

The risk of the charismatic founder

I remember hearing about a company with an extremely charismatic CEO. The company wasn't doing well, but he was a compelling individual. He'd give a talk and the team couldn't help but believe in the vision. Investors believed too. Everyone got a jolt of energy. 

But, as soon as everyone got back in the trenches, people realized that none of the things the CEO said mattered. The company wasn't doing well. The tactics weren't working. And, the energy from his talk would fade quickly, like a crashing sugar high, because the content wasn't based in reality.  Everyone became demoralized.

I'm sure we've all heard, or experienced, that kind of story. 

The Spartans had a word for this kind of mental state, where a speaker or a moment can inspire a departure from reality. It creates “katelpsis,"  possession [1]. It may sound like a motivating force and for a moment, even a crashing company can feel great. 

The Spartans saw katelsis as a "derangement of senses," which is a dangerous mental state. It's was something to be avoided, since possessed, knee jerk decisions without reflections could be dangerous, especially in a battlefield. Calm minds and solid fundamentals would prevail, not a thoughtless frenzy.  (Your company should never be frantic)  


It’s not the charisma that’s unhelpful, it’s the motivation without enduring substance. It asks an audience for trust, since the substance isn’t there to back it up. That approach only works a few times, until that trust is lost and people become demoralized.  

I imagine two companies with the same progress. Maybe both have been struggling, building a product without traction. Yet, one team is driven by possession, the other is driven by a honesty, energy and a plan. The first one will energize momentarily and crash - the second team will problem solve and make progress. When I hear people pitch, I always think about what category they fall under.

[1] Great book, called Gates of Fire, about the battle of Thermopylae. It’s hard to evaluate the historical accuracy of these things, but I think the sentiment is something we can learn from. 

Don’t be the startup that accidentally runs out of money

A few years ago, I met a founder with only two months of runway left. In two months, his company would shut down because he didn’t have any cash to support it. He wanted to discuss whether he should start fundraising for his second round. That’s some scary shit. We should have had that talk when he had 6 months of runway left.

Here are the two scenarios you should never run into:
  • You don’t know how much runway you have left (i.e., you could run out of money in 1 month, 3 months or 9 months. Your startup death day is unclear)
  • You know your runway, have less than 6 months of cash and you’re not executing a plan to fix the situation.  

When you have less than 6 months of cash in the bank, what do you do? The options are pretty simple:

  1. Get profitable (increase revenue, decrease burn or do both)
  2. Raise more money
  3. Get acquired
  4. Get blindsided when you run out of money because you didn’t have enough time to execute on 1, 2, or 3.

I’d recommend hustling like crazy to do 1, 2, or 3. If you run out of money, at least you’ll have done everything under your control.

Running out of money should never happen because you didn’t leave yourself enough time to execute. When that happens to companies, it’s unnecessary and tragic. Who knows what would have happened if you had given yourself enough time?

The sense of startup self-preservation is an amazing thing. When runway is low, founders often execute better and focus more. But, the only way to trigger that self-preservation is to know well in advance that the end is coming and to put a plan in motion. That’s why it’s always important to track your runway and think of 6 months as a red line.

Don't let yourself be blindsided. And, if you have less than 6 months of runway, no plan and want to meet - please don’t mention it until I’m at least one beer in.

Validating potential investors

I remember meeting up with a new founder who was stressed about the fundraising process. Fundraising can certainly feel stressful, but I realized that most of the issues could have been solved by asking the right questions. When you’re less confused about the process, it makes the process more predictable.

Here are some questions I found helpful to ask when meeting investors:

1. What kind of companies do you invest in? 

If the investor focuses on biotech, it's unlikely she'll invest in your SaaS company. If you get a pass, you'll now know that it had nothing to do with you. 

2. Who else have you invested in? 

If she hasn't invested before, she may not be well suited to the ups and downs of startups.  The stress may make them want to become extremely involved; instead of being helpful, the investor may be harmful. There are few things I avoid more than having the wrong people permanently involved in the company.

3. How much do you normally invest? Is there a range? 

It helps you mentally map out your round. If everyone invests $10,000, it’ll take a long time to fill your $1m round. This also helps you determine if you are talking to enough investors.

If there is a range, you can always the take smaller amount if there is not enough room left in your round. 

4. How does your decision process work? 

If you understand the process, it’s less likely to feel like a jarring experience, since the investor will be doing what she said she would do. Even if she deviates, you will still know the general path. 

Angel investors often decide on the spot or will want to sleep on it. For VCs, it depends on the firm. Seed investments can be fast and often close in one meeting. Larger rounds are slower and often involve multiple partners. 

5. How much time do you spend with your portfolio companies?

It's helpful to know their expected involvement in advance, to see if an investor will be in the crowd, the ringside, or your corner.

You want to be careful of people who could distract you without adding value. 

6. How many boards are you on? (for VCs) 

This is important to know, because if the investor is currently sitting on a lot of boards, she may not be able to invest a lot of time in your company or may be unlikely to make an investment at all. It’s not necessarily a deal breaker, but just good to know.

7. Now that you know more about what we're doing, are there any other investors I should be talking to?

The investor might provide an intro or might not. Regardless, some great investors keep a low profile. Just knowing a name helps, since you can ask for an intro from someone else. 

These questions reframe the conversation from trying to get someone to part with their money (hard and potentially bad for your company) to finding out whether there is a fit (less hard, more helpful and more long term). Plus, by getting to know each other, this sets you up for a longer term relationship. So, it always perplexes me when I hear founders not ask questions. 

Let me know if I'm missing any.