Geography
Each month we see something like thirty to fifty new investment opportunities that generally fit our investment strategy. They come from all over the place. Just in the past month, we've seen opportunities in Israel, Australia, China, London, San Diego, Boulder, Atlanta, Boston and the Bay Area. It seems like our deal flow gets more geographically diverse every month. Web delivered technology startups are sprouting up all over the world.
But if you look at the eight investments we've made so far in our current fund, seven have been in the New York area and one has been in Chicago. We have not yet made an investment in the Bay Area even though we have seen many high quality deals from there over the past couple years.
And therein lies the quandry we face. We want to know entrepreneurs from all over the world. We want to know about all the interesting startups, no matter where they are located. We want to stay on top of new developments. And the Internet allows us to do that pretty easily. This is a map of the geographic location of the visitors to my blog in the past week. It shows the geographic diversity of our reach.
So we have developed a brand and a presence that has national and even international reach. That allows us to stay on top of the most interesting developments and entrepreneurs, no matter where they are coming from.
So why have we concentrated our investments in New York City? Well it has to do with our focus on early stage investing, our desire to be a lead investor, and our desire to be actively engaged with the entrepreneurs we fund.
If you look at the things we do for our portfolio companies, they generally fall into the following areas; help in recruiting management teams, help in financial planing and fundraising, help in business development and strategic partnerships, and mentoring, coaching, and advising the founders and their team.
The first item, helping to recruit teams, is one where geography matters a lot. We know a ton of people in NYC who either work in the web industry or in related industries like media, marketing, entertainment, financial services, and telecom. We have a great network here in NYC to help companies build management teams. We don't have that kind of network in Atlanta, Seattle, or London. So we can't be nearly as helpful in recruiting in those geographies.
The last item, mentoring, coaching, and advising, is better done face to face. Sure you can advise over the phone, IM, or email. But it pales in comparison to the value of a face to face breakfast once or twice a month. A few of our companies, like Delicious and Bug Labs, are even located in our building so we are/were able to work with them on a daily basis.
The middle two items, financial planning/fundraising and strategy/business development, don't require as much face to face time, but even so being local is a big help. Passing spreadsheets over email is one thing. Sitting down face to face with the CEO and the CFO is another. We prefer the latter approach and have found that it just works better.
If you look at my personal track record, the facts are hard to ignore. Prior to raising Union Square Ventures, we prepared a detailed due diligence book for potential investors. We looked at our personal track records, all the investments we had sourced and managed prior to starting Union Square Ventures, and looked at it a bunch of different ways, including by geography.
Prior to starting Union Square Ventures, I had "led" twenty four investments, representing $230mm of invested capital and, at the time, just over $1bn of value. Those numbers have gone up a bit since then but I am not going to update the analysis just for this post. The gross return multiple (before fees and carry) was 4.6x cost.
There were thirteen investments (just over half of the total) in the NY metro area which represented $144mm of investment at cost and $832mm of value. The gross return multiple was 5.8x cost.
All of the other investments combined represented $86mm at cost and $219mm of value and a gross return multiple of 2.5x.
It's hard to argue with those numbers. I am simply better at making local investments. 5.8 times your money is a lot better than 2.5x.
I explain that difference largely on the basis of the leverage we can apply to companies when we are local and can engage with the entrepreneur, as I explained above. But I also believe that we have the benefit of seeing a much higher percentage of the best deals in the NYC area than we do elsewhere.
I am not entirely sure that is always going to be the case. As we move more and more toward thesis driven investing, entrepreneurs are getting to know us from afar and when the things they are working on fit nicely into our investment themes, they are showing us their deals.
And we have been very intrigued recently by a number of things we've seen that are not located in NYC. We tried to convince one small team to relocate to NYC and build their business here. We got close, but in the end they decided to sell the company instead.
We are spending some time on an opportunity in London, the second we've seen there in the past year that we really like. We are spending some time on an opportunity in Israel that wants to locate its headquarters in NYC. We continue to look at deals in Boston, Boulder, and the Bay Area.
My guess is that when we are all said and done with our current fund, with something like 18-20 companies in our portfolio, we will have three to six companies that are located outside the NYC area and at least one that is located outside the United States.
There is simply too much innovation going on elsewhere to focus exclusively on NYC. But even so, the majority of our investments will be here in the NYC area, the place we know best and where we can do our best work for our portfolio companies.
When we do make investments outside of our local geography, we will look for certain things to make us more comfortable. We will want to work with an entrepreneur we know well and a co-investor who is local and has a similar style and worldview. We are likely to be attracted to slightly more mature companies, where the the key members of the team are in place, and the strategy settled. And we'll look for something that is dead center in our sweet spot.
So that's how we think about geography in our investment process. I know that entrepreneurs have not had a great sense of how we think about geography. I hope this post helps clarify it.
November 28, 2006 06:11 AM, By Fred Wilson
Tags: geography international nyc
Comments (7)
I think this is a great working example of how a "cluster" works, and why societies, as they progress, tend to form these clusters. In the past, clusters would form around artisanal or manufacturing competencies; now it seems as if the 'competency' is innovation itself, the ability to enable it with supplies of money and talent, and then to profit from it. It also reinforces my sense that, as we advance in technology, the importance of in-person contact (that is, contact not mediated by technology), goes up. I was just re-reading Goldhaber's "Attention Economy" speech, he saw this coming in 1997; IT allows us to 'synthesize' attention-paying, and as synthetic attention becomes easier and cheaper, genuine attention becomes more valuable.
Posted by Tom Hughes , November 30, 2006 11:59 AM
There may be another contributing factor to your statement: "I am simply better at making local investments. 5.8 times your money is a lot better than 2.5x."
The Venture business is driven by hits, and your analysis includes 26 investments. 1/2 by volume were local but the amount invested was 37% not local and 63% local. One deal, like GeoCities at $4B can skew a small set like that. If Geocities was not local, what would the return multiples be like?
That being said, I also agree with your main thesis that if you can be local, getting more face time and access to your network will help entrepreneurs. But that's also not very scalable.
Do venture firms that spread their partners out geographically have different numbers? For example, there are a few who have offices in both Northern and Southern California and aren't their some with outposts in China now? Wouldn't that be a more effective way of creating scale and leverage from your point of view while meeting the needs of your entrepreneur customers than the basic model of alll the partners being in the same place?
I would have more expected the standard for technology and web centric VC’s to be where the money is raised in places like NY and invested through a geographically distributed network of partners, but that’s not the way it is. The standard seems to be like asset based VC’s where they like local deals where the products are physical, assets are present and the businesses are much more mature than start ups. I wonder why the VC standard isn’t more like public stock markets and bond markets that have always been organized around sales and management networks through widespread geographies.
Posted by Lloyd Fassett , December 2, 2006 03:10 PM
From an entrepreneur's stand, I also agree with the importance of geography.
We are currently seeking seed funding, and have had a lot of interest from local investors here in Seattle. We could easily fund our round locally, however, we've been seeking out Bay Area investors.
Why? Simply because of their proximity to other aligned interests. Seattle has the money, and it has a good community of resources for sure, but it is also a small town. We see a bay area investment as our gateway into a much richer pool that we could possible find in our own backyard. I'm more than willing to make the 2.5 hour flight every week or two to make it work.
You, as the VC, likely don't have the bandwidth to lose those hours travelling across the country/globe to each investment. And it'd be a big mistake, I think, to work with a company where you may not get the level of communication that is needed to make things work.
However, as a founder, who's sole interest is in making my company succeed, I would certainly travel cross-country on a regular basis to meet with the right advisor/investor. (And wouldn't even think about making a geographically-distant relationship if I didn't think it had that amount of added value to it.)
Posted by Daryn , December 18, 2006 07:01 AM
I just came across your blog, and found this post really interesting, as its a topic I'm been ruminating over lately, as you can see from this blog entry.
I'm based in Sydney, and am working stupidly hard at a day job so I can finance my startup I work on at nights, and would love to have funding to 1) be able to work on this full-time because I would enjoy that more, and 2) to give my business the best chance it has at succeeding. But the seed capital market in Australia isn't great, so I plan to access international markets when I am ready. However, from what I have been reading, this search for funding will be difficult if I plan to remain based in Sydney.
Its encouraging to read that you don't exclude startups based outside the US... maybe one day soon I shall have to convince you about the merits of investing in Sydney :-)
Posted by Leith @ Birth of a Startup , February 21, 2007 02:01 AM
Oops, I didn't include the link to the blog post I referenced. Here it is:
http://www.birthofastartup.com/2007/02/am-i-disadvantaged-being-based-in.html
Posted by Leith @ Birth of a Startup , February 21, 2007 02:04 AM
now it seems as if the 'competency' is innovation itself, the ability to enable it with supplies of money and talent, and then to profit from it.
Posted by Angela , February 23, 2007 07:32 AM
Great post. Clear and meaningful. Curious about what would drag you all the way over to London... methinks media.....
Posted by PaulSweeney , November 30, 2006 08:27 AM