In technology we may call this a circular reference or perhaps an infinite loop, but the chicken and the egg is the proverbial causality dilemma. In Iowa (and likely in other similar states) we face our own causality dilemma in the startup community. Which comes first, startups or investors? To begin, let me narrow my definition of both.
The Chickens and The Eggs
When I am talking “startup” I am talking about recently formed, high-growth potential, tech startups. Not agriculture, not bioscience, not manufacturing, not traditional small business. Sorry to all those I excluded, but I don’t have any expertise to talk about your verticals.
Now, let’s define investors. I am talking Angels, Super-Angels and Series A investors. To make it easier going forward, let me call these early stage investors (ESI). These entities actively search out and invest in concepts, wireframes, v1 software, pre-revenue, slightly after revenue, companies, teams and ideas. ESI’s believe in the team, the concept and the market. They take the most risk. For sake of this post I am excluding those that make infrequent investments or are not actively pursuing investment opportunities.
“ESI’s believe in the team, the concept and the market. They take the most risk.”
With both groups defined, it’s vitally important to discuss the large disconnect over investors who say, “There is money here” and startups who say, “There is no money here.”
The startups that express the above sentiment are inclusive in my definition of a “startup”. The investors, I feel, are not. Sorry if anyone takes this the wrong way, but I don’t feel the investors in Iowa are truly startup tech ESI’s. For example, Plains Angels recently released the four companies that their members have invested in. The one pure technology play on that list, ezNetPay is, themselves, unsure whether they are really a “startup”. I spoke with ezNetPay’s CEO and while the entity was recently formed, the business, technology and management have been in existence for around 8 years. The capital raised in this round occurred after revenue, market fit and traction. The other companies funded just don’t play in the tech space. So could the Plains Angels fall into my definition of ESI’s someday? Sure. Do they today? No. Hopefully someday.
As technology entrepreneurs, we got all excited about Next Level Ventures — until we read their website which states they invest in “later-stage venture situations” and look at companies that “have at least $1 million in annual sales.” This clearly does qualify.
Now, please don’t take my exclusion of these two entities as a complaint, dig or insult. We need these types of investors in Iowa; it’s just that they are not what Iowa tech startups need. I have always believed it’s more important to know what you are not than to know what you are. And these are not the droids we are looking for (no Jedi mind trick needed).
Now that we have our terms defined, let’s get back to our chicken and egg dilemma. And as before, let’s look at the startup’s side of the equation first. We will call them the “chickens”.
Iowa has some really promising up-and-coming startups in various stages of existence. Companies like Goodsmiths, Offspring, Men’s Style Lab, and ClusterFlunk all have a great product, great market, and/or a great team that I believe would really be able to accelerate with $500k to $1M in seed capital.
And there certainly more Iowa startups that qualify, but even if you add five, ten, or twenty more to the list, it is a very small list indeed. And herein lies the problem. We, as a startup population, are not dense enough. Now, this may be a poor analogy based on the negative connotation some investors get, but it works to illustrate how density impacts an ecosystem. If you think of the ecosystem of a predator, could be a shark, lion, whatever, you rarely ever see those animals maintain a location where food is sparse. If they did, they would die. Thus, they aggregate around the food.
Such is the case with startup tech investors in Iowa. Our community of startups going “full bore” is simply not concentrated enough to support a First Round Capital or a Chris Sacca (LOWERCASE Capital). Not enough food for the investors to eat, so to speak. They couldn’t diversify their portfolio so that when nine of the ten startups fail, the one that succeeds more than compensates for the money lost.
But why is that? Des Moines, Iowa City/Cedar Rapids and Iowa as a whole, top many lists as a great place to live, work and play. Great for businesses and young professionals. And Des Moines was tagged the “wealthiest” city in the US by the Today Show.
“The reason there are not enough startups to support the investors is that there are not enough investors to support the startups.”
That question brings us to the egg of our equation. The reason there are not enough startups to support the investors is that there are not enough investors to support the startups. Confusing, I know, but hear me out.
As someone thinking about making the leap of faith on a new startup, what is the most critical component that allows you to quit your job and make a go at it (and still be able to eat and support your family)? Money. I am a proponent for bootstrapping, but there are many limitations with bootstrapping. For instance, bootstrapping requires planning. Planning does not often coincide with opportunity. Opportunities move quickly and close frequently. As a result, in Iowa bootstrapping means keeping your fulltime job and trying to work on your startup on the side. Approaching a startup this way is very difficult to execute on.
Founders in Iowa with a proof of concept, working application, or even revenue producing business have a tough time finding anyone to take a chance on them. Thus, Iowa entrepreneurs don’t have the mindset to quit their jobs and give a new business a go. Why? Go back a few paragraphs and just keep the loop going.
“...entrepreneurs would love Midwest investors who think and act like investors on the coasts.”
I think we all know what we would like for Iowa. To be verbose, entrepreneurs would love Midwest investors who think and act like investors on the coasts. And there is some reason for excitement. Drive Capital out of Ohio is specifically looking for startups in the Midwest and Iowa is in their territory. Now, will any Iowa startups be funded by Drive Capital? That remains to be seen, but the more of these types of investors that focus on our area, the more startups we will see. And as the number of startups rise, so will the quality of those startups. They, in turn, will attract more capital and the process repeats.
So Iowa startups, keep plugging away. Do what you can with what you have and be relentless in your pursuit. Release products. Determine market fit. Adjust. Release again. The best way to bring capital to Iowa is by proving we deserve it.
John Jackovin has been starting technology companies since 2000. Over the years John and his business partner Tom Love and developed many businesses, the latest being Bawte. A way for consumers to more easily own the products they own. Think of all the hassels you encountering buying things, setting them up, registering, trouble-shooting, fixing and more. All this goes away with Bawte, your personal product concierge service.
Photo Credit: Header image from artizone on Flickr. Author photo via Twitter.