Why IT Must Steal VCs From Silicon Valley

And why it's worth your time to spur a startup vibe in your community.

If asked to pinpoint the geographic center of venture capital activity, knowledgeable people get rather specific: the legendary Sand Hill Road in Menlo Park, Calif. Ray Rothrock, former chairman of the National Venture Capital Association, leaves no room for doubt about the area's importance: "Entrepreneurs are everywhere, but most of the venture capital is on Sand Hill Road." 

The tight relationship between Silicon Valley VCs and startups in the region shows no sign of waning: 37% of all US-based VC funding (and 27% of worldwide VC funding) goes to Silicon Valley startups, far more than any other region, finds our latest research on the VC industry.

Silicon Valley's innovation ecosystem means a fledgling business can quickly get the resources and expertise it needs to grow. And there's the rub: Even when VCs fund a startup outside of the Bay area, they often insist that entrepreneurs relocate so that the startup CEO lives less than an hour's drive from those Sand Hill Road offices.

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But in an increasingly competitive world, VCs are beginning to expand their horizons to seek important innovations and entrepreneurial opportunities beyond the Bay Area. They recognize a salient fact: the deep industry knowledge increasingly needed to solve some of the world's most pressing problems, especially in B2B industries, frequently doesn't live next door -- it's spread out across the US, and the world. This presents other regions with a window of opportunity to capture VCs' most precious assets: their time and attention.

For corporate IT executives, nurturing a vibrant startup ecosystem in their community is critical for at least two reasons.

First, technology innovation is contagious. There's no substitute to regularly interacting with tech innovators to accelerate technology transfer. Bay Area CIOs outside the tech industry (e.g. Clorox, Well Fargo, and the Gap) tell us that their IT organizations are more agile and innovative than their industry counterparts precisely because their people at all levels are engaged in the spirit of innovation that is fostered by the startup community.

Second, network effects aren't just for computers; the presence of startups fosters healthy competition and growth. There's a reason that pharmaceutical companies cluster around Philadelphia and healthcare businesses in Boston. Local industry vitality begets even more activity -- and the presence of all that talent will attract more top talent to your company, too.

To help bring about a shift in focus, public officials, IT executives, and entrepreneurs in other cities and regions, need to take on this big question: "How do we get the venture capitalists to come here, and then let startups stay here?" When my colleague Jeanne Harris and I researched the VC industry, we identified six steps toward answering that question. These steps are best undertaken by a combination of local government, business, and technology leaders.

1. Emphasize unique strengths of your area.
VCs are attracted to world-class research institutions and to smart, ambitious people with big ideas and the expertise to carry them out, regardless of where those people are located. The key is to leverage something unique about the location that Silicon Valley doesn't have, like Chicago's Argonne Labs or New York's financial markets. Cities such as Manchester, England, are investing in basic research and business "accelerators" as well as partnering with government officials, universities, research institutions, and the financial community to bring more attention to local startups.

2. Have your money talk.
Limited partners -- the wealthy individuals, pension funds, and endowments who invest in VC funds -- are not without clout. For example, a university endowment fund might insist the VC firm it invests in has quarterly meetings at the campus business accelerator, mentor university-based entrepreneurs, or consider local startups. Look at how states such as Utah provide financial incentives to VCs to come to the state and periodically meet with local entrepreneurs.

3. Make it easy.
Something as simple as providing free office space and logistics support can help attract a VC for periodic visits. Making it easy for VCs to let startups remain in an area will take much more effort. It requires cultivating an ecosystem of resources entrepreneurs need, including cheap office space, tech incubators, strong technical talent, financial credit, and business expertise. Get government out of the way -- give startups a single point of contact to bulldoze bureaucratic roadblocks, and show VCs you're serious about growth companies.

4. Don't waste the VC's time.
First, ensure local entrepreneurs understand when and how to work with a VC. Then, at the right time, prepare them to pitch sound business ideas that a VC can nurture into a large-scale business. Give priority to those who, in the words of Tom Williams, a long-time Silicon Valley investor, meet the "DIPS" criteria for a startup: a business that is disruptive, innovative, protected, and sustainable.

5. Take advantage of Silicon Valley from beyond the Valley.
Several VC firms have spread out far beyond Sand Hill Road. Draper Fisher Jurvetson has affiliate offices around the globe, and anyone in the world can pitch their startup via a handy form on its website. Another way the Valley helps bootstrap entrepreneurs worldwide is through organizations such as TiE Global. TiE, founded by a group of South Asian Indians living in Silicon Valley, is a nonprofit global network that mentors and educates entrepreneurs with chapters in 17 countries.

6. Join the innovation ecosystem.
For local IT leaders, having a growing tech ecosystem is much more about opportunities than competitive threats. You should get involved, in ways large and small. One simple starting point: Open your doors and lend your facilities to after-hours meetings. More generally, give startups the benefit of your attention and expertise. Consider being an early adopter of their new products. Work with them to help maximize their potential value to customers far and wide.

Regions that have talent, ideas, and initiative to act on these suggestions can see results. But there's a seventh vital element that is also the hardest to create. And that's the culture of Silicon Valley, which is built around tech smarts, entrepreneurial spirit, and risk taking. One aspect of risk taking is critical: investor forgiveness of failure is the defining characteristic of a successful startup culture. It's true that VCs expect fast results, and they are quick to shut down a failed business concept. But unless a business fails spectacularly and stupidly, Silicon Valley investors rarely stigmatize individual innovators. Instead they view them as inventors who will likely suffer through several failed experiments before achieving eventual success. Until your culture truly allows people the freedom to experiment and celebrates failure as a steppingstone to ultimate success, you won't fully be able to capture the magic of Silicon Valley.

It doesn't matter where you live; being part of the tech ecosystem isn't optional, and it isn't just for Silicon Valley companies. Injecting some startup energy into your own community will attract more and better talent as well as foster a more entrepreneurial, innovative environment in your own business. There's plenty of room to grow, both for the VC industry and for the many entrepreneurs who live well beyond Sand Hill Road.

Christopher DiGiorgiois an executive research fellow at the Accenture Institute for High Performance, focused on Silicon Valley's unique culture and innovation ecosystem. Jeanne Harris also contributed to this article. Harris, based in Chicago, is the managing director of information technology research at the Accenture Institute for High Performance.

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