3 min read

Why Seed Funding Isn't a Regional Business


Everyone wants a Y Combinator in their town.  I’d love to see one in Miami or other cities not known for being startup hubs, like Chicago.  I see a huge demand here for it in Miami, but I have heavy doubts whether it could work.  I ran a poll about it to gauge interest.  New York City won, which I actually think is outside of the thoughts and commentary of this post.  They could be able to pull it off.  Paul Graham, founder of Y Combinator, often argues that seed funding is not a regional business as well.

First off, most investors who want to start a YC for their geographical area want to do so to help entrepreneurs and that city as a whole.  Most startups can get off the ground with $15-20k and a good group of advisors.  It wouldn’t be as standing as YC, but that’s fine.  For the first year, raising money isn’t a difficult achievement.  It costs less than most larger angel rounds (I’ve estimated around $500-600k depending on the amount of companies funded and other infrastructure, i.e. — is there an office? do the partners get ANY pay? interviews, etc.)  So if the money is there for most cities to do it and there’s an increasing group of entrepreneurs, then why the hell not do it, right?  Seems like an awesome idea!

Well, that’s a short sighted vision.  It’s a question of: can the companies “grow up” in that city? In most, they couldn’t.  It’s just not possible.  I love Miami, and people like Brian Breslin have done a great job with the community here.  Sadly, most companies would leave for Silicon Valley or the Northeast (like I did with Publictivity) or just flat out die since they can not grow up in the city.  That sucks.  Why is this?

Two Main Reasons

First,there isn’t the VC or Angel Infrastructure to potentially fund 50 more companies.  Let’s assume the program does well and funds 100 companies over 5 years.  50 will die just because of the nature of the game and 50 will be doing well enough to have to grow up.  (I could be high or low, but let’s just stick with 50)  In Miami, the one angel group, which 2-3 close friends belong to, rarely does investments.  Most other angels aren’t savvy as what you’d find out west, so companies simply become frustrated. Angels are more important than VCs when it comes to staying local.

Unfortunately, there aren’t many angel investment groups in Miami, and other smaller startup hubs in a large enough number with the savvy needed for the startups that come out of a YC program.  On the flip side, there are some great VCs in Florida.  My good friend Nathaniel McNamara used to be a VC (now CEO of SocialFeet), and my other good friend Dan Rua is still one.  Ask Ted or any other entrepreneur, and they’ll tell you that Dan gets it better than the guys out west.  We’re really lucky to have him.

Sadly, there aren’t 30-40 Dans in Florida.  All 50 companies aren’t going to be funded by the same VC, so you need a large pool of VCs to pitch to.  You also have the VC rule of thumb with flights and distance.  Miami is a nice spot to visit, but with 5-10 other companies they’re on the board of—it’s a difficult trip.

Second, the key to any winning startup is talent, especially engineering talent.  Yes, there are some great schools in other areas of the country, but that’s only part of it.  If you’re a startup looking to grow up, assume that at minimum you’ll need a fair amount of rockstar/ninja/[insert buzzword] team members.  Maybe 20 of those will be engineers.  Over 5 years, that means finding 250 new employees and 100 top notch engineers who are at the top of their game.  Most are out in Silicon Valley or the northeast and won’t leave.  It’s not about the money either, so if you happened to get funding, that won’t be able to bring enough into the ecosystem.

So what’s the solution?  I don’t think buying a Silicon Valley works, but it might be a start.  The one thing that you can’t buy, however, is time.  The key might be to work backwards.  Build angel funds and work with universities or other groups to churn out developers who get it.  On the other hand, there may also be no solution.  I don’t think it’s about “beating Silicon Valley.”  That’s like trying to beat Hollywood—a futile effort.  You can give better resources to your local entrepreneurs and make sure they don’t fly the nest.  That’s a great goal, and I hope more of the smaller startup hubs find the answer to it.

//Thanks to Mark Bao for proofreading.