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Raising a Series A Away From Home
This is a post about raising a Series A from an investor that is not based in your home city.
Let me preface this by saying that if all things were equal, you would probably prefer to have a local series A investor. Proximity helps, and you are more likely to get more time and attention from a series A investor that is in nearby.
But, all things are not equal for many reasons. There may be many fewer series A investors in your home market than elsewhere. The quality, network, or experience of your local investors is likely fairly different from those in other markets. The risk tolerance or expected pricing of investors in your home market may be markedly different from investors in other markets. And finally, the best place to build your business may not also be the place where the most venture capital is readily available.
The good news is that just as companies are getting more and more comfortable with remote communications, I find that investors are also getting more and more comfortable supporting companies from a distance. Although you still hear stories of investors that require founders to move to SF, it’s more likely these days that investors see a winning business outside of the Bay Area as a positive, given the costs and competitive pressure in that local market. Also, as the overall venture market as gotten more competitive, we’ve seen more investors hustle and get on planes to chase the opportunities they are most excited about, vs. sitting back and waiting for things to sprout up around the corner.
All this said, raising a Series A led by an investor outside of a company’s home geography is still more of an exception than the rule. I’d argue that apart from the Bay Area, every other market has a shortage of strong series A capital, and most founders would benefit from generating some investor interest outside of their home geography.
But doing this takes extra work. How should a founder go about it? Some thoughts:
First realize that this is not just a fundraising issue, it’s a credibility issue that has a much broader impact on your business.
Unless you are in the Bay Area, and to a lesser degree New York, your company is at an initial disadvantage in terms of awareness and mass market credibility. Your company is likely both one step removed from many brand name B2B customers and a step removed from reporters and press that are excited to tell your story.
This is a bummer, but you just need to accept this and figure out a way to combat it. One approach that we’ve seen work with a number of B2B businesses is to spend a disproportionate amount of effort in telling a momentum story about your company. A lot of founders I find are reticent to do this, which just means that the opportunity to benefit from this strategy is that much greater. I was reminded of this recently during a Twitter conversation I had recently with my friend Mike Volpe at Lola Travel, who executed this playbook masterfully several times. See his tweet below, but the entire thread is worth a read.
The main benefits of this strategy is mainly around closing sales. In a competitive selection process, customers like the thought of buying from a company with positive momentum that everyone seems to be talking about it. The payoff of getting more potential customers over the hump, and the fundraising benefits as a very nice second-order effect.
Second, embrace that early stage fundraising is always a search for true believers.
Even with outstanding results, the best fundraises are ones where founders have built a personal rapport with investors and have found folks who genuinely care about the problem they are solving. But this typically takes a fair bit of time to marinate. Another founder in our portfolio recently remarked at how her business is one that investors initially don’t immediately “get”, but tend to appreciate over time as they talk to more and more people about this market problem. Because some of the most innovative companies are counter-intuitive, founders need to be out there engaging with investors and influencers in their ecosystem early and often. This means that a founder will need to cover a LOT of ground and will probably get on a lot of planes and trains. I find it’s helpful when an early team is comprised of two or three co-founders who are able to evangelize the business or if there is a very strong, senior leader within the company that can drive internal initiatives successfully while the CEO is able to promote the company externally.
The third tactic is to expand one’s network of influence.
When constructing your seed round or your company’s early advisors, try to bring on board a broad range of allies across several geographies. Then, keep those allies engaged so that your company is top of mind if they end up encountering people that might be relevant for your business. You can’t be everywhere at once, but if you can get your angels and advisors to be whispering to folks about how great you are, that helps create excitement and familiarity around your business for when it is time to fundraise.
The fourth tactic is to think about which megatrends your business is being built on top of, and try to carve out a strong position as an authority in that subsegment.
You want to try to figure out a way to create organic amplifiers of your brand so that there is a good chance your company is mentioned anytime anyone talks about your space. Our portfolio company Troops accomplished this very well by being a real thought leader around messaging based startups and companies building on top of the Slack ecosystem, which helped them raise their Series A and Series B from outside their home geography.
I know this all sounds like a lot of work, and it is. Companies like HubSpot, Lola, or our portfolio companies Drift and Troops invest disproportionately against these efforts because they believe that there will be a significant return. They probably wouldn’t have to do this to the same degree if they were based in San Francisco. But at the same time, they also enjoy a bunch of other benefits by being located in their respective markets that SF companies don’t enjoy.
I’d be curious to hear any other idea you have around raising rounds outside of your home geography. And later in August, I’m hosting a dinner in Boston around this topic, so if you are a seed stage funded company in this area and want to attend, drop me a line and I’ll see if there is an open slot.