Access to Capital for Entrepreneurs: Does Location Matter?
Finding investors for startups is one of the key necessities any entrepreneur faces. Upstate New York is a great place to start and grow a business, thanks to affordable real estate, a high quality of life, and top research universities – but what about access to capital? In this ongoing series, we’ll explore investment trends that affect startups in our region, and how changing strategies mean startups have better access, no matter their location.
How does geographic location impact the trajectory of a startup business?
Many entrepreneurs are under the impression that they need to locate their startups in large metropolitan areas to secure external sources of investment.
That’s not necessarily the case, says Brad Treat, Entrepreneur in Residence at Rev: Ithaca Startup Works and the Southern Tier Startup Alliance, and a mentor to dozens of startups throughout the region. Rather, Treat emphasizes the importance of locating a new business near a key resource, such as a university, which can provide human and intellectual capital, or physical infrastructure.
“If you look at Silicon Valley’s origins, you had a key resource, which was smart people coming out of top universities, particularly software computer people,” says Treat. “And then you had Hewlett-Packard and all these other computer companies that were there making the chips.”
For many retail businesses, it is critical, of course, to be in close proximity to their customer base.
“The analogy I always use is, if you’re going to open a dry cleaner, you would probably put it near where business people commute or live, so it’s convenient for them,” says Treat. “You wouldn’t put it next to a bank because they lent you the money.”
However, for other types of business, several factors have combined over the last few decades to minimize the importance of locating a startup close to its customers. First, the revolution in communications technology, which has made it easier to connect with customers from far away. For this reason, Treat recommends that entrepreneurs purchase high-quality cameras and speaker phones—or link-up with an incubator, like Rev: Ithaca Startup Works, which can offer those services—in order to make the most of meetings conducted long-distance.
“Those little things can make a big difference in the quality of a meeting,” he says.
Another factor is the proliferation of trade shows in recent years, which has allowed entrepreneurs to efficiently interface with prospective customers, by scheduling multiple meeting in the same location, in a context in which the customers are amenable to being pitched.
For a local example, Treat points to Emmy’s Organics, an Ithaca-based manufacturer of gluten-free, organic, vegan and non-GMO snacks, whom he has advised. The company began in 2009, selling their products at the Ithaca Farmer’s Market and GreenStar Co-op. A few years ago, the founders met a representative from Starbucks at a trade show, and, after staying in touch, were able to secure a deal this spring to supply to the coffee-chain’s North American stores.
A third factor is that companies are selling to a global customer base, so there is no longer an ideal spot for most startups to be situated.
“I came out of the auto industry,” says Treat. “It used to be that if you wanted to sell to the auto industry you had your operations in Michigan. Now where’s the auto industry? Everywhere.”
Treats again highlights Emmy’s Organics as a local company that is selling its products far outside of the immediate region.
“Across the street from GreenStar is a non-descript building —most people drive by and don’t know it’s a multi-million-dollar cookie factory that ships globally from downtown Ithaca to seventy-five hundred Starbucks, multiple regions of Whole Foods Market, and every Sprouts and Hannaford location,” says Treat.
When investing in startups, most Venture Capitalists (VC’s) work within a specific vertical in which they have expertise, rather than a geographic location. The most important factor to many VC’s in deciding whether to invest in a startup is the management talent of emerging entrepreneurs.
“They’ll invest in a great team,” advises Treat. “Then, they’ll look at the issue of competitive advantage, and whether there is a large and growing market.”
Ultimately, to grow a company, it’s most important to be in-tune with the marketplace, not the sources of capital. Investors, he notes, will sometimes offer suggestions based on their own preferences — which don’t always overlap with those of the company’s clientele.
“The flavor of entrepreneurship that we teach is: listen to your customers,” says .
Even when investors are located nearby, interactions with them are often conducted electronically.
“I had a local investor once whose offices were so close to mine, I could look out my window and see them,” recalls Treat. “I rarely met them personally. I primarily interacted with them by email. Most of the time when I had to have a document signed and returned to them, they wanted me to scan it and send it over electronically, when I could just as easily have walked it over.”
This can benefit entrepreneurs; an advantage to electronic communications is that it’s easy to maintain a record of correspondence.
“That can come in handy if someone says, ‘Hey, you never sent me that document,’ or ‘When did you sign that thing?’ or so on,” he points out. “That’s why, even for an investor who’s literally line of sight for me, I was scanning and emailing documents.”
According to Treat’s record of investment in the Southern Tier of New York state since the 2008-09 recession, local startups have received funding from more than 75 investors located throughout the United States and internationally. The list includes major domestic hubs of capital, such as the Bay Area, Los Angeles, New York, Boston, and Houston, as well as foreign countries as diverse as Ireland, Saudi Arabia, Canada, Russia, and Switzerland.
So, what are the key resources available to startups in Ithaca, NY and the Southern Tier region of New York state? Stay tuned for more, next week on our blog!