old adage in the venture capital community has always been: "I only
invest in companies within an hour's drive of my firm." That expanded
during the 1990s to include an hour's flight. But the coming year
likely will see the beginnings of a sea change in traditional
approaches to venture investing that will add a critical new layer for
soon-to-be published research by two Santa Clara University professors,
the locations startup companies choose will begin to shatter myths of
geographic location -- of how close they are to their VC sugar daddies.
What's more, entrepreneurs need to consider global locations for all or
certain parts of their companies if they want to remain competitive in
a global marketplace.
important as management teams, distribution channels, marketing
efforts, pricing and other traditional components of a business plan
are, companies must now consider their "return on location," according
to the research conducted by Terri Griffith, a Breetwor Fellow and
professor in SCU's Leavey School of Business; and Patrick Yam, a Dean's
Executive Professor and founding Sensei of Sensei Partners in Menlo
met with Griffith and Yam over coffee at The Adobe on the campus of SCU
recently and pored over data collected from a random sampling of 20 Bay
Area VC firms. The trend is unmistakable.
research conducted in 1988 indicated that more than 75 percent of
venture capital dollars went to companies in the same region in which
the VC firm resided, such as the Bay Area. But in the intervening
years, the advent of the Internet and a host of other communications
tools has enabled VCs to reach out and touch their portfolio companies
at greater distances. Griffith and Yam's survey indicates that now only
about half of these firms' portfolio companies are located in the Bay
may have wide-ranging implications for entrepreneurs. First and
foremost, if you are thinking about chasing VC investment, the ducks
that must be lined up today should include what locations will provide
the best return. Gone are the days when it made sense to combine all
the functions typically ascribed to a headquarters -- human resources,
finance, research and development -- in the same region. While the
executive offices and marketing may make sense in Menlo Park, it may
make better sense to have all or part of your research and development
way, you should be prepared to answer tough questions about your
choices for location. A "return on location," as Griffith and Yam dub
the new trend, will require top entrepreneurs to develop an argument
within their business plans justifying where they plan to locate key
components of their companies. The question increasingly likely to be
asked, is: "Why isn't your software development unit being established
in India instead of Palo Alto? Few young code-writers can afford to
live here, and you'll be burning precious capital on paying higher
salaries so workers can afford over-priced housing."
course, business is never that black and white. There are a number of
factors that can dramatically affect a return on location. For example,
the research showed that younger VC firms (defined as 10 years old or
younger) tend to adopt more of a mixed approach. Some parts of their
portfolio companies' businesses are in the Bay Area; others are
outside. Older VC firms, with their broader network, tend to be more
comfortable with investing in companies entirely outside the Bay Area.
factor that may play a key role in these location decisions is the
stage of the company. Most VCs still want early-stage companies close
enough so they can easily change their diapers. The more mature
companies are expected to place greater consideration on location.
Welcome to 2004, where setting up shop within an hour's drive of your VC partners may, after all, be a liability.