106. Underserved Startup Ecosystems, Part 2 (Stuart Larkins & Ezra Galston)

Download_v2Nick Moran Angel List

Today we cover Part 2 of Underserved Startup Ecosystems with Stuart Larkins & Ezra Galston of Chicago Ventures. In this segment we address:

  • Their opinion on why the majority of HNW accredited investors have never invested in venture.
  • How Chicago ventures has been so successful yielding follow-on funding for their portcos… having been ranked the 2nd seed fund in the country for follow-on funding by CB Insights.
  • Stuart & Ezra’s take on how the role of VCs will change in the coming decade as these ecosystems evovle.
  • Advice they have for entrepreneurs and investors working in these ecosytems.
  • ezraand we’ll wrap of w/ their final thoughts, my takeaways and a tip of the week.

Guest Links:

Key Takeaways:

1- Key Ingredients of the Ecosystem
-Time… As Ezra mentioned, many emerging ecosystems are less than a decade old w/ any sort of formality. Time is required for startups to mature, for operational capabilities to develop and for the marketing flywheel of successes to start driving more successes
2- Advantages of Underserved Ecosystems
-VCs, like Chicago Ventures, must really work on behalf of their portfolio companies… to help them build customers, develop partnerships and raise follow-on capital
-Stuart mentioned that it’s less about competition and more about coopetition between funds. This engenders a collaborative atmosphere within the startup ecosystem.
-Whether you see this as an advantage or disadvantage… There’s a difference in fund thesis between underserved vs. well-served… and in these emerging areas VCs can be more generalist and opportunistic whereas in well-served there needs to be more laser focus and differentiation
-Less of a reactionary response to a variety of funding sources… So a startup may be able to raise capital from different types of sources before, after or alongside VC capital. In an established ecosystem, this may raise a red flag and companies may suffer some signaling risk. In developing ecosystems it is much more common and acceptable.
3- Disadvantages of Underserved Ecosystems
-1st is related to Fred Wilson’s point that we discussed, which is that there’s a need for coastal VCs to come in and leads at the A round or later. Stuart discussed the single biggest weakness of underserved ecosystems, which was follow-on capital.
-There are identity issues early-on in an ecosystems development where there are limited success stories. For better or for worse, prior successes in a geography tend to drive the identity of the ecosystem. A “tech mafia” may exist in nearly every city and those founders know how to support similar businesses better than others. Ezra mentioned the ExactTarget mafia in Indy. Which is an overall positive for the city but also may cause investor to look only for startups that are similar.
-In an emerging region, with less success stories, there are a lower number of successful founders becoming advisors and mentors. Clearly, the community takes time to develop and those early entrepreneurs will not get nearly the support and guidance of those that come later.
4- Suggestions for those in Emerging Ecosystems
A suggestion from Ezra for Investors: If you’re entering a new ecosystem… you must be active, make investments, connect w/ the other active early-stage investors located there and, last but not least, have a regular presence in the region.
A suggestion from Stuart for Entrepreneurs: He strongly urged early founders to find a mentor… especially one with domain expertise in the target market.

Tip of the Week:    The Ecosystem Network Effect