philadelphia
 

Outside of the Valley, Alternative Markets Attract Investors

Posted by | February 7, 2017

Nearly 60 percent of all U.S. venture capital activity is concentrated in the Bay Area, Boston metro, and New York City’s orbit.[1]

For some entrepreneurs, this is seen as an obstacle. Groundbreaking ideas can be marginalized if they are not located in one of these “preferred” regions. But investors are beginning to take a harder look at alternative markets, those with access to affordable talent and prospective customers.

While Silicon Valley can be an extremely competitive place to get a deal done, overlooked states such as Wisconsin, Minnesota and Pennsylvania, to name a few, are home to innovative companies with highly skilled entrepreneurs.

This paradigm shift has been building for years, with technology breaking down logistical barriers to doing business. Employees, investors, and customers alike can be in different time zones while still seamlessly communicating.

Take, for example, our home city of Philadelphia, where the combination of a lower cost of living and a fertile medical and higher education ecosystem has yielded an uptick in startup capital. Last year, the Greater Philadelphia region was twelfth overall with $495 million in investment. With a wide array of lifestyle options available, the region has broadened to include the surrounding suburbs in this tech-enabled revival. Local startups CloudMine and Trice Medical, both healthcare-centric businesses, are proving this theory correct with a combined $30.5 million in financing.

Companies can develop and sustain their existence during a proof-of-concept phase much longer than in the Valley, Big Apple or Beantown, because they are not drained by overwhelming real estate costs, property taxes and salary commitments.

In 2014, Drive Capital, LLC, raised a $250 million fund for financing Midwestern U.S. startups.[2] Its success was attributed to investments in Chicago, Illinois, Minneapolis, Minnesota, and Kansas City, Missouri, and led to $300 million more in capital earmarked for future deals. It’s a bold move designed to embrace some of the less competitive markets for startups. Co-founder Mark Kvamme recently said the following:

“Three years ago, most of our buddies in Silicon Valley thought we were completely nuts. They’re starting to come around, that maybe we had a good idea…People are realizing the power of (startups) being close to the customer.”[3]

Just as Philadelphia is attracting healthcare startups with its expansive ecosystem of pharmaceutical companies, hospital systems, payers, providers, higher education institutions and customers, agricultural technology (agtech) companies are being courted in Chicago and Des Moines, Iowa – places at the center of farming and food production.

Also fueling these untapped startup ecosystems is former AOL Founder and CEO Steve Case and his “Rise of the Rest” tour, which celebrates cities from Buffalo, New York to Denver, Colorado and Madison, Wisconsin. He believes in providing capital to less visible startups with promising ideas, ultimately attempting to spur economic growth and jobs in these regions.

This is familiar territory for Safeguard, with partner companies like Apprenda in upstate New York, a computer software company that provides platform-as-a-service software to help companies create, update and manage private and public cloud-based applications. The same goes for Propeller Health, a Madison-based digital platform for respiratory health management. Safeguard partnered with both companies in recent years, against the misconception that they needed close proximity to Silicon Valley or Boston.

Smart engineering of products and the perseverance of entrepreneurship has no boundaries in 2017. This is part of the reason why startups are having success growing in non-traditional markets. While San Francisco will remain the nucleus for venture capital activity, entrepreneurs now have options when it comes to building their teams and technology. The top priorities have become talent and finding a customer base, as opposed to saddling up to where investors reside.

 

[1] The Atlantic’s ‘City Lab’, February 2016

[2] Columbus Business First, February 2014

[3] Columbus Business First, August 2016