Why VC’s should pay attention to secondary geographies

Why VC’s should pay attention to secondary geographies

October 6, 2010

U.S. VC’s are almost all located in very specific locations. Silicon Valley, San Francisco, Seattle, Boston, New York, RTP, etc. I call these VC primary geographies. They do almost all their investing inside those primary geographies.

Sequoia Capital is famous for explicitly preferring to invest in companies that were within a 20 minute radius of its office. Of course, Sequoia is located on Sand Hill Road. That pretty much limits their investing to Silicon Valley and San Francisco.

But…does that make sense?

Did you know that the biggest M&A event of a privately held VC-backed company happened to a pre-revenue startup in a secondary geography?

Were you aware that arguably the two biggest financial successes of the 20th century started in what investors at the time would consider tertiary and 4^th or 5^th rate geographies?

Of course, I am talking about Cerent, Microsoft, and WalMart.

Cerent was acquired by Cisco for $7.2 billion. Cerent was located in my hometown of Petaluma in Sonoma County, CA. Well outside Sequoia’s 20 minute radius.

Microsoft was started in Albuquerque. Definitely at least a tertiary geography at the time. It soon moved to Seattle…which at that time would have been considered a secondary geography.

WalMart began (and remains) in Bentonville, Arkansas. ARKANSAS. Can you imagine Sequoia going to Arkansas?

So…clearly, VCs ignore companies outside their primary geographies at their risk.

J. Roy Martinez

http://www.linkedin.com/in/jroymartinez

North Bay Job Creation

North Bay Job Creation

Recently, Brenda Gilchrist of the HR Matrix asked a few North Bay business people the following questions:

In your opinion, what do you think it will take to create [and/or retain] jobs? 
 - Any barriers to creating jobs?

 - Any changes needed for job creation?

 - Are you concerned about jobs?

 - Are there barriers for companies to be successful or to start up, which impacts the ability to create jobs?

Here is my answer:

I am VERY concerned about jobs in the North Bay. We have 12% unemployment. There are many, many people without jobs. (Full disclosure: me included)

I think it is very difficult for businesses to start, operate, and expand in our communities. Small business and startup businesses are the engine that feeds our economy and creates jobs. If businesses have challenges starting up, operating, and expanding, they cannot create jobs.

There are many barriers to business expansion and job creation here in the North Bay. Most people tend to blame the state and local government regulations. They are right. But…I would suggest that we, the people of the North Bay, play just as big of a part in the situation.

1) Many North Bay people have gone beyond NIMBY (not in my backyard) straight to BANANA (build absolutely nothing anywhere near anything). The badly needed asphalt plant in Petaluma is a good example. Despite being in a great (and historically appropriate) location for this kind of industry (close to freeway, river access for raw material delivery), people oppose it because it is NEAR a park. Not in a park. Just near a park. Build absolutely nothing anywhere near anything.

2) The North Bay electorate swings wildly…electing pro-growth representatives one year, anti-growth representatives the next year. How can businesses that operate on a multi-year horizon do any planning? It has taken Target 10 years to get permits to build in Petaluma. Since the planning process takes more time than a city council term, they have been subject to the wild swings in sentiment in the city council.

3) There is always somebody opposed to anything. So…doing anything is a huge fight. This makes trying to do anything just not worth it for many existing businesses and new entrepreneurs.

Finally, there is an issue of focus. Our cities and chambers of commerce recently have tended to focus on driving tourism and retail. This makes sense as tourism and retail drive sales tax and ToT (transient occupancy tax) revenue. 10 years ago, I remember a local mayor trumpeting Telecom Valley and the $100K jobs it brought. Today I hear that same official banging the drum for tourism and retail. Tourism and retail will bring $10/hr jobs. What an amazing change in focus.

We need to work together to grow the North Bay economy and create jobs. State and local government can play a part. They can work harder to facilitate business creation and expansion. The citizens of the North Bay need to play a part. We have to stop opposing everything. But, most of all, we all need to agree to focus on not just job creation but good job creation. In addition to tourism we need to focus on enabling the creation of more technology companies that will export goods and services from the North Bay region (phrase proudly plagiarized from Michael Adler). Those companies will create $100K jobs that will drive our economy. Incidentally, if we do that, the retail jobs will follow.

The North Bay Growth and Innovation Forum vs The North Bay Investors Summit?

The North Bay Growth and Innovation Forum vs The North Bay Investors Summit?

This fall the North Bay will host two great events --the 9th North Bay Growth & Innovation Forum (NBGIF) and the 2010 North Bay Investors Summit (NBIS).

The NBGIF is put on by the Santa Rosa Chamber of Commerce with leadership from the City of Santa Rosa Economic Development team. The North Bay Angels are an event partner. This fall the NBGIF happens on October 20. The keynote speaker is Doug Clark, the CEO of Métier. Métier recently opened its second office in Santa Rosa. The Métier Santa Rosa story is amazing. In just 12 months Métier had brought on over 20 employees (with 11 open positions) in Santa Rosa. Métier chose Santa Rosa after an exhaustive evaluation of different cities.

The target participants for the NBGIF are growing small-to-mid-sized businesses in the North Bay. The NBGIF includes the standard company pitches. But the forum also has an educational component. The NBGIF has round table discussions where entrepreneurs can talk with an expert at no charge. Past round table topics have included financing, due diligence, social media, and email marketing. Attendance is open to anyone. This is a great event for any North Bay small-to-medium-sized business owner to promote their business. It is also a great forum for aspiring entrepreneurs.

On the other hand, the NBIS is hosted by the Sonoma Mountain Business Cluster (SMBC) with a focus on angel or VC-backable startups. The SMBC is partnering with the North Bay Angels and the Keiretsu Forum. Attendance is limited to accredited investors and VC's. This year's event theme is Cars, Cabernet, & Cash. Cash of course refers to the VC-pitches. And cabernet is obvious -- Napa and Sonoma counties make the North Bay the premier wine region in the country -- so the wine at the event mixer will be great. As for Cars, the event will include a small exotic and performance car expo and an opportunity to test drive a Tesla. The NBIS keynote speaker will be Barry Schuler, the CEO of Raydiance and the former CEO of AOL. The 2010 NBIS will be on November 10.

The NBIS is THE North Bay event for early stage startups to pitch to angels and VC's. Up to 200 investors are expected to attend.

So...clearly the NBGIF and the NBIS are complementary events. The NBGIF should appeal to any growing business in the North Bay. The NBIS makes sense for angel investors, aspiring angel investors, and VC attendees along with startup company presenters. This fall will be a good time for small businesses and startups in the North Bay to pitch their companies.

Full disclosure...I am on the organizing committee for both events representing the North Bay Angels.

2010 North Bay Growth and Innovation Forum

October 20, 2010

Hyatt Vineyard Creek Hotel

More info:  http://bit.ly/UP4MB

9th North Bay Investors Summit

November 10, 2010

Sonoma Mountain Village Event Center

More info:  http://conta.cc/anKkFX

Getting Voted off the Island?

Getting Voted off the Island?

Most people in the North Bay have lived somewhere else. So…they will know what I mean. I remember when we lived in Silicon Valley. We thought nothing about driving 15 or twenty miles to go shopping, go to dinner, etc.

But in the North Bay…people in Napa don’t like to drive to Sonoma. People in Sonoma avoid going to Napa. Petalumans hate driving to Target in Rohnert Park or Novato let alone making the trek to Santa Rosa or San Rafael. Santa Rosans don’t go to the great restaurants in Petaluma. San Rafael denizens won’t deign to go to Novato. And then there is the biggest barrier of all – crossing the Golden Gate Bridge to San Francisco.

My wife and I call this the North Bay island mentality. Nobody likes to leave their island.

I believe this island mentality comes from the greenbelts and agricultural land separating the towns in the North Bay. In the Silicon Valley and the East Bay…there is little to distinguish between cities. Cupertino melts into San Jose which is mostly indistinguishable from Santa Clara. Who knows where the boundary is between Berkeley and Oakland? Up here, the towns are not only separated by green space, but also by “narrows” or “gulches” or other distinct geographical boundaries. Psychologically, I believe this drives an island mentality.

The island mentality is good and bad.

On the good side – all of the towns have distinct personalities. Petaluma has its ag and rivertown history, telecom valley office buildings, and all the cute old houses. Sebastopol has its hippies and tie die. Napa legitimately trumpets itself as the center of the wine universe. Sonoma’s personality revolves around its plaza and its equally find wine. You get what I mean.

On the negative side…the North Bay ends up being parochial. The towns compete rather than cooperate. At one time Petaluma and Novato even tried to secede from their respective counties. How crazy is that? During the Civil War armed Petalumans started to head up to Santa Rosa*. Wacky!

I think the North Bay is the best place to live in the world. We need to work to keep it that way. We need to build a diverse regional economy. With technology and tourism. Wine making and manufacturing. Telecom and agriculture.

In 2004, my wife, daughter and I moved to Sacramento for me to work at a venture capital firm. When we left, we felt like we were being voted off the island. Of course, we could only stay away for one year.

As I look for my next gig, I hope we don’t get voted off again.

*  they only made it to the Washoe House where they got drunk and headed home…but that is another story.

Will you be a net exporter of goods or services from the North Bay region?

Will you be a net exporter of goods or services from the North Bay region?


The Sonoma Mountain Business Cluster (SMBC) adopted this question as one of their criteria for inclusion in their incubator. Full disclosure: I understand the SMBC borrowed this mantra from Ohio Economic Development transplant Michael Adler. I am not sure where Michael stole it.


Why is being a net exporter important? First of all, a company that exports goods or services creates jobs. Often $100K jobs. But, more importantly, It brings new dollars into the region. New dollars creates incremental demand. Incremental demand drives economic growth. Economic growth drives even more jobs. The multiplier effect.


What doesn't a net exporter do? A net exporter doesn't necessarily drive primary sales tax revenue. So...cash-strapped cities and counties, with their immediate need for revenue, are more likely to focus Economic Development efforts on retail, tourism, etc. which drive sales tax revenue. Don't get me wrong...tourism and retail are great. Tourism does bring money into the region. And both tourism and retail create jobs. But they create $10/hr jobs...not $100K/yr jobs. 


The irony is that the incremental economic growth driven by net exporters likely drives more sales tax dollars overall. But those sales tax dollars accrue to the region, not one city. So,  cities are generally driven to focus their Economic Development dollars on retail and tourism. I guess it is a prisoner's dilemma. If everybody cooperates, everybody wins. But if one city "cheats", they win more than the others.


More on North Bay regional economic development in a future post.

Why the Accidental CFO?

Why the Accidental CFO?

People ask me why I jokingly refer to myself as the accidental CFO.

If you look at most CFO job descriptions, they say “CPA required” or at least “CPA desired”. The textbook CFO career path is:

• graduate with a bachelor’s degree in accounting
• go work for the big 6 (or is it 4 now, I cannot keep track)
• work in audit
• take (and of course pass) the CPA exam
• continue to work in an accounting firm for years and years
• get an MBA in finance at night from a top school
• leave the accounting firm for a private company as a controller
• get promoted to CFO as part of normal succession planning

Does anybody know anyone whose career path was this smooth and predictable? Not anymore. But companies and recruiters persistently look for this holy grail.

Do you get the feeling that I don’t fit the mold?

• I have an engineering bachelor’s degree.
• I tried taking an introductory accounting class in college. I got an A+ but was bored out of my gourd. I guess that accounting class in high school helped. That is when I switched to engineering.
• I have never worked as an accountant and I don’t have a CPA
• I have an MBA from a top school – but it is a general management degree

So…how did I become a CFO?

In 2005, after 6 years in the Venture Capital/Private Equity industry, I found myself in career transition. A friend of mine was the CEO of a company that had almost won a $7M contract. He needed help. I had been on the board of directors of his company for several years. So…I agreed to help. We won the contract. It ended up being a >$10M project. But now I needed a title. We decided on CFO…the rest is history.

The Accidental CFO.

The world rewards confidence, not competence.

The world rewards confidence, not competence.

Friends and colleagues know this is a “Roy-ism”. I say it all the time. Last week I got reminded of it big time.

My daughter was scheduled to sing in church. She practiced all week. Nobody in her class knew those songs and dances better than her. Yet…when it was time to go forward, she balked. She wouldn’t go up there! Despite being incredibly competent, she just didn’t have the confidence (this time) to sing in front of a crowd.

I hope we can teach my daughter this lesson early because this “Roy-ism” doesn’t just apply to church choirs, it really applies to school, to business, and to life in general.

Of course, it is best to be confident and competent. But that almost goes without saying.

Is there a role for local HR firms with a PEO?

Is there a role for local HR firms with a PEO?

I am sure my last post has successfully pissed-off all my HR consultant friends. But…I stand by it…for VC-backed startups.

However, there are some things to remember. First of all…most small businesses are not VC-backed startups. Second, most small businesses have less than 10 employees. By-the-way…this obviously includes startups at the very beginning.

In general, PEOs will not work with companies with less than 7-10 employees. This leaves a significant portion of small businesses un-served. However, the owners of these smaller businesses need HR advice and services also. This is where HR consultants have their advantage. Once they are in, if they do a good job, they can grow with the company.

However, if a company (especially a startup) does choose to work with a PEO, there does remain a role for HR consultants. PEOs are great in providing payroll, medical benefits, forms, advice, etc. But…by their very nature, they operate through centralization and scale. They are unlikely to be hyper-local like an HR consultant. They cannot be on site very often. But employees need someone to talk to. Often…an 800 number is not good enough.

When a company works with a PEO, they need to assign an on-site coordinator -- somebody to be the liaison between the company and the PEO. Usually this is the person employees approach first with HR issues. Often it is the CFO. But…even this diminished HR role is not a good use of the CFO’s time. This is where an outsourced HR consultant can still help when a PEO is involved. Being the employee contact, working on projects with the PEO (like an employee manual), and helping manage the PEO-company relationship.

Now I have probably succeeded in upsetting my PEO friends as well. OK…so if everybody is upset with me, I have probably been fair and balanced.

Why all VC backed companies should use PEO’s.

Why all VC backed companies should use PEO’s.

Recently, I became absolutely convinced that VC backed companies should use PEO’s (Professional Employee Organizations). The failure of a prominent, well funded, local VC backed company proved my point. But I will talk about that later.

When a VC backs a company, they back an entrepreneur, a team, a business model, and possibly some technology. The VC wants this team to be laser-like focused on the business model and the technology. Not bogged down by HR.

But, while venture backed companies, by their very nature, are designed to become big companies, at the start, they are small companies. The have all the HR issues that a new small business entrepreneur has – no systems, no policies and procedures, no payroll processor, no benefit packages, etc. A PEO solves all of these issues.

Most small businesses make lots of rookie HR mistakes. Startups want to avoid them. A PEO can help (but not guarantee) that startups will avoid them.

Startups are growing fast. They hire people quickly…and there is often a lot of employee churn. This brings a significant amount of HR burden. Even with good systems, processes, and procedures this is challenging. Without them, I guarantee it will be a mess.

Usually it will be the CFO or COO that bears this burden. They are rarely HR experts. They won’t like doing it and probably won’t do a great job. Also it distracts them from the business and what they were hired for – managing the company’s financials, raising money, and partnering with the rest of the executive team to drive success.

But, back to my story. The clincher is Cobra. I ran into an ex-employee of the failed company I mentioned. This company was well funded, they had term sheets to fund the next round, and nobody expected it to shut its doors. But it did. Certainly the employees didn’t expect this. Anyway I ran into an ex-employee of that company. Tha employee lamented that because the company failed, she did not have Cobra.

VC’s expect a significant percentage of their companies to fail. But, when a company fails, there isn’t Cobra. Nobody thinks about this when starting or joining a company. Many startup employees would not join startups if they knew this. A gap in insurance coverage can be disastrous for an employee and their family.

Startup CEO’s won’t necessarily care about this issue. All CEO’s are absolutely convinced that their company will be successful – failure won’t happen to their company so Cobra is not an issue. But…every CFO should care. And any HR manager WILL care. And finally, VC’s should care. VC’s want to build good relationships with the employees of startups…even for their companies that fail. Those employees might move on to the next great company. Leaving an employee without medical coverage is not a good way to foster and maintain those relationships. So VC’s should care. Every VC backed company should use a PEO.