This post originally appeared on Entrepreneur.com - #StartingABusiness
Forget Silicon Valley. A growing number of entrepreneurs are returning to their roots to build a business.
13 min read
Nobody really wanted to fund us,” recalls Alex Kubicek, a soft-spoken Midwesterner with a shrewd scientific mind.
He’s thinking back to 2013. He was 25 and had already banked dual degrees in physics and electrical engineering from the University of Wisconsin–Whitewater, as well as a master’s in atmospheric science from top-tier UW–Madison. Then he’d created a hyperlocal weather observation company called Understory and landed it in the first-ever cohort of an accelerator in his hometown of Madison, which in turn sent him off on nearly a year’s worth of pitching to Wisconsin-based investors. But nobody put in money.
Was his company the problem … or was it the stock of local investors? He decided it was the latter, and moved to Boston — where his fortunes changed. A local hardware venture firm called Bolt invested first. San Francisco’s True Ventures went on to lead a $1.9 million seed round. Understory was on its way.
But back home in Wisconsin, something was changing. That Madison-based accelerator, Gener8tor, helped launch another 42 startups in the region while Kubicek was gone. After a ton of work by a group of local entrepreneurs called StartingBlock Madison, American Family Insurance helped open a $55 million, nine-story building, with space set aside for entrepreneurial groups. Other venture capitalists started popping up around town, including Greg Robinson, a Bay Area investor who launched a Madison-based firm called 4490 Ventures. Then Robinson got the idea to lure one of Madison’s homegrown startups back to town.
He asked Kubicek if he’d ever move Understory back to Madison. And Kubicek was intrigued. He was newly wed at the time and hungry for a better work-life balance — or, as he calls it, “tech and babies.” There was plenty of talent to hire in Madison, and for far cheaper than he’d get in Boston. And the economics just made sense. “Our rent was going to be one-tenth what we’d get in Boston for a comparable space,” he says. “We saw we could dramatically increase our runway, basically increase the life of the company by a year, by moving to Wisconsin.”
So in February 2016, Understory came home. And across the nation, many others just like Understory have followed.
There’s no place like home. Dorothy knew it. So do entrepreneurs — but for a long time, there was no place to get funded like in California, Massachusetts, and New York, where companies receive 80 percent of the nation’s total venture capital. So the great startup migration was born. Founders would move to the coasts, enduring high operating costs in exchange for access to investors and top talent.
But in the past few years, smaller cities across the country have gone through the same transformation that Madison did. “There’s typically a small band of really highly influential and dedicated people who push through this groundswell of attention around startups in their community, and it starts to fall like dominoes,” says David Hall, partner at Revolution’s Rise of the Rest, a seed fund that focuses on startups in smaller markets. It could be a politician, a university, an accelerator, an incubator, a corporation, a private investor, or an influential founder. In each city, some combination of these parties comes together to foster the growth of its own ecosystem — investors, founders, and talented employees interested in the startup world.
And that, Hall says, has begun to reverse the migration. Some startups that left town are coming back home. And the next generation of founders aren’t all leaving in the first place. Last year, VC investment rose in 33 states and Washington, D.C.
Hall is a big fan of this change. “If you’re going to start a company, and given the strong and harsh demands of entrepreneurship, you want to start it in the easiest, most flexible, and cheapest place possible. And I think going home enables you to do that,” he says. When founders move to the Valley or New York, they often think they’re going to build a great network — but, Hall says, it’s often extremely difficult to connect in these areas, where scores of entrepreneurs are clamoring for access to the same people. Back home, however? Founders are already deeply networked. And networks, he says, are one of the most overlooked tools in building a business.
That’s why Maxeme “Max” Tuchman kept her company in Miami. She’s the cofounder and CEO of Caribu, a video-sharing platform that allows caregivers and kids to read books together remotely. When she began fund-raising, she went to San Francisco to meet investors — and each one of them required her to move to the Bay Area. She was tempted; she really wanted the money. But then she considered what she’d be giving up.
“I knew the woman who was writing about tech at the Miami Herald. I knew the woman who was running the Cambridge Innovation Center in Miami,” she says. And it went on: She knew the heads of local incubators and conferences; she was connected to local immigrant and female entrepreneur communities with fierce hustle, which she knew she wouldn’t find in the notoriously white, male Silicon Valley. “They were all part of my network from growing up,” says Tuchman. “And I was like, ‘We need to build and grow here. We have so many resources at our fingertips.’ ”
So she stayed — becoming, as she says in her very South Floridian way, “a big dolphin in a small pond.” It’s meant getting less investment money, but she sees the trade-off as well worth it. “Why would I give that up to live in cities I can’t afford to live in, where the talent is too expensive and leaves me the second a better job comes along, where half the money I raised goes to office space?”
Detroit native Nathan Labenz went through a similar realization. He left town for Harvard in 2002, with no intention of moving back. (Detroit, after all, wasn’t looking good back then.) He eventually made his way to San Francisco, where in 2012 he founded Waymark, an online “make your own commercial” video template company, with a quarter million dollars of Silicon Valley legend Tim Draper’s money. Four employees later and halfway through a $2 million seed fund-raising goal, Labenz was shocked to read that Twitter was opening an office in, of all places, Detroit. He dug deeper and found that Quicken Loans was also creating an entrepreneurial center in his hometown through its venture arm, Detroit Venture Partners. Labenz had a connection there. He gave the guy a call. “I basically said, ‘If you guys are there and you’re making an investment, maybe it would make sense for us to make a move.’ ”
Detroit Venture Partners put together an offer, but when Labenz floated it past his Bay Area investors, most said they wouldn’t fund him if he moved. They just didn’t feel they could help guide his company from across the country, and they didn’t think he’d find top talent to work for him — understandable, says Labenz. He moved home anyway.
At first, he says, “it was kind of like living in the ruins of a fallen civilization. You could see straight through these buildings because the windows were blown out.” But soon things took off. Not only did Labenz learn Detroit was rife with top candidates for hire, but his hometown’s revitalization efforts are creating the kind of place that people want to be. Quicken Loans continues to support startups and serves as a talent magnet in itself. Of Waymark’s now 25 employees, a third relocated from other parts of the country, including a former Squarespace and Apple product designer. Another Detroit native who was working in film production in Los Angeles came home and joined Waymark. The business culture is more open than in his previous big cities, vacant buildings are filled, and the restaurant scene is booming. “It’s not the biggest city in the world,” he says, “but it has a critical density now that makes it feel alive.”
Image Credit: Amy Lombard
“Great entrepreneurs can start great businesses anywhere,” says Hall. It’s an encouraging message, but of course, that doesn’t mean it’ll be easy. Hall’s fund, Rise of the Rest, has become famous for its bus tour. It pulls into a city, hosts a pitch competition, and funds the winners as well as others it meets before or after the appearance. Past stops have included Albuquerque, Dallas, Indianapolis, Minneapolis, and dozens of others. But its bus doesn’t pull up just anywhere. Rise of the Rest conducts six months of groundwork ahead of time, making sure the cities it chooses have reached a certain point in their entrepreneurial evolution. To be frank: Not all cities are there yet.
But there are always exceptions. For example, Morehead, Ky. (population 7,634), is hardly a bustling entrepreneurial hot spot. But after a decade working in New York and Washington D.C. on various sustainable energy projects, University of Kentucky grad Jonathan Webb felt that this place, in the heart of unemployment-ravaged coal country, was uniquely positioned to tackle three whoppers of problems — jobs, food insecurity, and climate change.
In 2017, Webb founded a sustainable indoor farming company called AppHarvest. (That’s App as in “Appalachia.”) Currently, Webb says, most of us eat produce that’s trucked nearly a week. But it’s possible to get to 70 percent of the United States in a day’s drive from Kentucky, which makes it the perfect place to centralize production and cut costs of distribution. Now his company is building a nearly 3,000,000-square-foot greenhouse that he says will create 285 full-time, permanent jobs and 100 construction jobs.
“I’ve spoken at Georgetown Law School twice since founding AppHarvest, and I’ve tried to encourage folks, ‘Go back to your communities,’ ” says Webb. “You’re gonna have your mayor, who’s reaching out to the governor, who’s reaching out to your congressman. If you’re starting a company in San Francisco, no one cares what happens to you in one or two years. But if you go back home, people care. They’re going to be there, working to solve problems with you.”
Webb isn’t the only one who came back home to Kentucky. He lured his CFO back home from New York, his COO back home from Beijing, and his VP of development back home from Washington, D.C. Then he lured money: Rise of the Rest provided seed and follow-on funding, as did ValueAct Capital, whose Jeff Ubben joined the AppHarvest board. The biggest boost of all came from Equilibrium Capital this May, in the form of an $82 million, all-cash equity investment to fund construction of the greenhouse.
“I have 15 of the most talented people in this industry from around the world in the other room, and I’m in a rural town in Appalachia,” says Webb, phoning in from a stakeholder meeting. “It’s absolutely remarkable. It really does almost bring tears to my eyes.”
Back in Madison, Understory’s Kubicek is feeling a lot of local pride. He’s moved his 20 employees to a larger building with four times more space and 100 percent more windows to make way for the 20 additional staff he expects to hire by year’s end. He’s now officially living the “tech with babies” life, with two children at home. This spring, he closed his $5.25 million Series B round, which included Wisconsin investors (as well as Rise of the Rest, which also invested in his growth round). And Kubicek is looking to mentor other local founders. “The area is so successful because you have people who’ve had a startup and succeeded, and they can give back,” he says.
That last part will be especially important to small cities. Because as many founders move home, a financial irony still remains. “Too often we see this dynamic where Midwest investors are buying the one-way plane tickets that finance our brain drain,” says Joe Kirgues, one of the cofounders of Gener8tor, the accelerator that gave Understory its start.
The problem is multilayered. The Midwest is gaining investors, but it’s sending lots of its money outside the region — in fact, 47 percent of investment commitments for coastal venture firms come from Midwestern investors, but only 12 percent of their capital is directed back to the Midwest in return. Also, the Midwest still exports most of its work. According to a June 2019 Brookings Institute report, the region produces almost a third of the nation’s research and development, new patents, and top talent, but it sees only a tiny fraction of venture capital.
If a company does stay in the Midwest, it often attracts coastal investors. For example, this year Madison-based Propeller Health was acquired by San Diego’s ResMed for $225 million, but it had almost no local angel investments and zero local investors. That meant no Madison-based investors got a big return, which they could invest in the next local startup. The hometown hero hit it big, but its hometown missed out.
This is why Kirgues and his cofounders feel such a mission with their accelerator. They’ve spread it to 15 regional cities, including Minneapolis, Detroit, Indianapolis, and Cincinnati. And while they’re proud to see their founders succeed, it’s bittersweet when one of them leaves town, like Understory once did. “We have a real opportunity, and a real challenge, to make sure our communities are giving themselves the best chance to participate in tomorrow’s economy,” says Kirgues.
In other words, the community needs to build something worth coming home to.