On the podcast: Venturing outside Silicon Valley

·42 min read

PitchBook's lead quantitative research analyst Andy White joins to discuss the trends his team is seeing within the data in our latest US VC Quantitative Perspectives report. Then, Collin Gutman, co-founder and managing partner at SaaS Ventures, shares his thoughts on what it takes to grow venture ecosystems in cities outside traditional tech hubs, and why he's more bullish than ever on the future of tech. This episode of "In Visible Capital" is sponsored by Vanta.

Listen to all of Season 4 and subscribe to get future episodes of "In Visible Capital" on Apple Podcasts, Spotify, Google Podcasts or wherever you listen. For inquiries, please contact us at podcast@pitchbook.com. Transcript

James Thorne: You're part of the Miami Techodus.

Collin Gutman: Yes, exactly. Insofar as I'm middle of the wave, I would say.

James: When did you move down there?

Collin: End of 2020.

James: That was when things were really starting to kick off down there.

Collin: Yes, I think it really started mid-last year when my wife and I were thinking about do we leave DC and do we go somewhere else? Just as we made the Miami decision is when it started really going viral, so to speak. We were relatively early in the wave, I guess, with people moving here.

James: Yes, early adopters. Tell me about what you saw when you moved down there. I'm assuming you're part of the Miami Tech Week. Has that petered out a little bit?

Collin: It's still not normal times. There's still not the normal cadence of meetups, events, gatherings where you can really assess a tech scene. Candidly, I skipped the Miami Crypto Conference and most of Miami Tech Week because I still wasn't sure what the state of the virus was at that time, and we've been on the more cautious side, obviously. It still looks to me like there's a bunch of big tech companies moving in. Coinbase, obviously, Spotify, both opening big new offices. Wix has been here for a while.

It looks like there's an influx of techies and tech talent. There's certainly a bit of organic traffic, if you will, in terms of people just hitting me up like, "Hey, I just came to Miami, we should get to know each other," but it's hard to really assess in size the tech scene right now because you don't have those frequent events where—I used to go to DC Tech Meetup every month, and I could gauge the size and state of the scene. Whereas, that just isn't really a thing yet because I still think we haven't returned to—some of us haven't returned to—gathering thousands of people in one place quite yet.

James: My understanding is it was a pretty maskless scene there in Miami—what was that in February, March?

Collin: Yes, I think it was probably around March. I think the Crypto Conference itself was just too big for my own comforts, even vaccinated. There's so much we don't know. There were some people who got the virus as a result. There were some people who were vaccinated and when they flew back internationally, they had to get tested and they tested positive.

I think it's just out of an abundance of caution, personally, that I'm still not attending any of the massive gatherings, if you will, and keeping it to one, two people at a time. Like I said, I know that a lot of people are coming here temporarily, I know there's a lot of people coming here permanently, I know there's a lot of companies opening up, but it's just hard to get a state of the state when you're really not convening regularly as a group.

James: I've done some reporting on emerging tech ecosystems, and one of the questions I'm really interested in is what it takes for a community of startups, of investors, to really make it from that lower-mid tier to the upper tier, the top 10 cities. What are you seeing in Miami in terms of the efforts that people are putting in to get Miami up to that level of production, say, of a Los Angeles?

Collin: I think the mayor has it right. He's been a pretty public figure. I would say Mayor Suarez and Dave Portnoy are probably the two biggest Miamians on Twitter at the moment. The mayor is really forward-looking, so just trying to attract tech. I think he's right, that the way you do it is by attracting VCs. Keith Rabois was obviously one of the early people, Peter Thiel's bought here, and generally speaking, there's a number of other early-stage venture firms, [like] ANIMO VC, that have had either one partner or the full firm moved to Miami lately. When you have capital that just happens to be there, people tend to invest in the early stage in their backyard, and it's why it's so hard to raise a seed around in a lot of the markets where we invest and why it's ostensibly so easy in San Francisco for so many people, because there's just a lot of capital focused on early-stage tech.

I think the mayor has really taken a proactive approach in terms of attracting capital or venture capitalists, and then those people have in turn ... Keith has this whole initiative to bring founders to Miami and techies to Miami. Then, when you bring big companies like a Coinbase, a Spotify, you also bring tech talent. I think the talent will gravitate toward the capital, and the move to attract VCs has been the right first step. Miami has a very San Francisco-esque area in Wynwood, which is super artsy, very artistic, as well as being nouveau-gentrified, and a lot of nice new architecture there. That's where the new building with Spotify and Coinbase is going to be.

As far as I can see, it's fairly central. A lot of people live in South Miami, a lot of people live in Miami Beach, a lot of people live up toward Fort Lauderdale, and we can all get to Wynwood in not too bad of a commute. It seems like that's the way to build the density and the tech hub that you need to really have continual activity. There isn't that one set of events or co-working space or hub whereby everybody is being convened and you got forced karma happening and forced randomness where people just end up coming together, but Wynwood is looking like it's starting to become a hub by virtue of just things popping up within a relatively small 16-square-block area.

James: I was down in Wynwood for Art Basel like maybe a decade ago. It's very walkable. It's a beautiful area, a lot of just creative minds. I think it's definitely a great spot to set up a tech office. I was talking to Ana Gonzalez from SoftBank, they've set up, I think it's [a] $100 million fund focused in really investing in Miami. They see it as sort of the place that you access all of the opportunities in Latin America, in the way that it's become a banking hub for that part of the world. It would be really interesting to see what comes to that in the next couple of years. Do you think we'll still be talking about it in a year, or do you think you'll still be there in a year?

Collin: I think so. I actually hate the "this is your jumping-off point to Latin America" label for Miami. Because I think for the past 25 years, Miami has been, well, there's old people in Florida, so there's a lot of healthcare, and it's your entry point into Latin America, Latin American finance. For the last 25 years since the end of the "Scarface" era of Miami, if you will, and the start of the business boom, the primary jobs in Miami were those about accessing Latin America and healthcare. It had not been an attractive city to someone like myself who's a techie. Sure, I speak Spanish. Sure, I love Latin American culture, and I like living here, but there weren't really jobs here for me, and there weren't really tech startups for me. We're a purely US-focused fund. There wasn't really anything for me in Miami during those years.

Now, I keep bringing up the same three companies because they are banner companies that have huge presences here. Spotify, Wix, Coinbase—those are jobs that are accessible to really anybody, and they're not Latin America [focused]. I think while there's certainly a lot of LatAm tech here, I think the conversation is likely to be much more about, where are we just building good generalist tech in Miami and just good generalist startups. There's actually a lot of robotics down here. There's a lot of other interesting stuff. There's a lot of good consumer brands, and I think LA is a good comp. Or probably Miami may not be the best enterprise tech town. I think there are certain built-in advantages there in Austin and Boston per se, but I do think that a lot of great consumer brands can be built here and a lot of great robotics companies—a weird mix of like Pittsburgh and LA strengths, if you will.

James: Collin, I'm curious, obviously, you've talked a fair bit about Miami. What are some of the other US cities that you're particularly bullish on?

Collin: I think everybody knows about what I would call the top-tier cities that are second-tier venture markets, where we do a lot of our investing, the DCs, the Chicagos, the Southern Californias, etc. I think the more interesting ones are the ones that people view as second-tier American cities and perhaps third-tier venture markets where we're seeing a ton of interest. Pittsburgh obviously is one. Duolingo recently went public and that got a lot of press, but really, Pittsburgh is one of the preeminent transportation trucking cities in the country, and we have two phenomenal trucking investments that are both doing great out of Pittsburgh in particular.

I would also call attention specifically to the state of Missouri via Kansas City or St. Louis. One of our portfolio companies recently raised the biggest Series A in the history of St. Louis, and then I think we've got three investments in Kansas City. I would attribute the Kansas City, Missouri, to there's a bunch of great funds who are out there. KCRise, Royal Street, Cultivation. I don't want to leave anyone out, but those are just three of the top of mine, who were focused on building a startup ecosystem in Missouri. They've got some really good partners, good people who work there, and they've done a really nice job of not just identifying companies, but helping to build them.

I think those are two places that don't come off at first blush. Everybody, if you say, "We do a lot of cyber in the DC area and a lot of logistics in the Chicago area," they'll say, "Great. It's not the most innovative thing," but we've invested so far in 27 states, I believe. I wouldn't know and wouldn't be able to compare, but I think that makes us in terms of seed funds, nonaccelerator ... probably the most geographically diverse of any fund in the country.

We see opportunity everywhere with SaaS. SaaS can be built anywhere. You don't need $5 million of servers, but certainly, you do see more in certain areas. We have one investment in Green Bay, two in Phoenix, and we're seeing a whole bunch in Pittsburgh, a whole bunch in the state of Missouri. There are certainly more-active and less-active areas within that.

James: Are there any things you're seeing in those second-tier cities that those places are doing that's particularly interesting? I guess things that other cities could learn from them.

Collin: It's all about capital, it's all about local venture. Kansas City, like I said, has a TechStarts program. That's not a guarantor of success. I don't think that we particularly value an accelerator. We're looking for the best of the best. Then they've got three or four seed funds that are actively working with those companies. Some of the states that we have not invested in, I think we've only seen one investment opportunity from the state of Oklahoma in the four years of our fund. It was a good one. We came close on it. I think we've only seen two from the state of Arkansas.

The reason is, we just don't know seed funds investing at those stages. I think it really just comes down to, if you have seed funds, most seed funds are regionally focused. It's no coincidence that in Pittsburgh, there's Birchmere and a couple of others. We invest alongside them pretty frequently, and we love the companies that they find. There just aren't as developed ones. Even we have one investment in Lincoln, Nebraska, because there's Invest Nebraska that we work with closely. We're looking a lot in Indianapolis because of Elevate.

Really, I think a lot of these state-run venture funds, they get knocked because they're state-funded. The CT Innovations, the Maryland Venture Funds, the Elevates, if they are focused on the seed stage, they do a really good job of surfacing the best of the best and attracting outside investment from people like us. I think other states, they lack either the density, the funding, the early-stage investor, whoever it may be, that makes, say, Nebraska far more successful at building entrepreneurial success than Oklahoma, when objectively, I've been to Omaha, I've been to Lincoln, I've been to Oklahoma City, and objectively there's the same entrepreneurial talent I would say. There's the same desire.

Flyover Capital in Kansas is great, but they're just not doing $250,000 see, pre-seed checks, they're doing Series As. It just creates a more formidable barrier for people who are in, let's say, Des Moines or Omaha, than in, let's just say, Nebraska or Indiana.

James: You think some of these state-run funds can provide that baseline level of capital that might allow other seed investors to come in over time?

Collin: Yes, I think your ideal mix is if you have two or three seed funds and a state fund, you end up having a critical density. That's what you have in Indianapolis right now, that's what you have in Kansas City and St. Louis right now, where you've got non-state oriented funds coupled with state-oriented funds, and it just creates a lot of capital for these smaller ecosystems. Then where you find only private capital, that's fine. Where you find only government capital, that's fine, but it's really when you have both that you have a really strong ecosystem. Like I said, it's where you're missing both because there's a lot of economic activity in Oklahoma City, in Tulsa, just relatively little early-stage capital and therefore, relatively few successful startups.

James: The early-stage funding is certainly a part of that. I just want to share a stat from a recent PitchBook report. More than 33% of angel and seed deals occurred outside of the 10 most active combined statistical areas, CSAs basically, the 10 most active cities. When you get to the later stage, that figure drops below 19%. You have this pretty stark drop-off in terms of activity as you go later in these emerging markets. How do we get the necessary late-stage capital to pay attention to companies in this area, or do you think there may be something else going on there that's causing that drop-off?

Collin: I'd say it's a leading indicator problem actually. Ten years ago, when I started my venture career, I think that number was probably above 90% and it was three markets. If you look at just the Valley, New York and Boston, there was probably 90+% of deals. I think that the fact that now 33% are then outside the top 10, and if you take out the top five—the Boston, New York, San Francisco, Seattle and Austin—you're talking about probably, I don't know, it's probably 40%-40+%, I think that's up from 10%. It just takes companies time to mature, especially in the enterprise tech world where most of the opportunities are in these markets.

You'll find that stat get closer to even over the years as you find more companies like ExactTarget in Indianapolis, let's say, or Fan-Attics here in Miami. We're just early in the cycle, I think. I think if you were to compare that same data to 10 years ago, you would see a trendline where, inherently, seed funding leads and later-stage lags. I talk to a lot of the growth-stage investors out there that are some of the best ones; none of them anymore are saying, "Don't bring us stuff outside of San Francisco or New York." They're all telling me, "We don't have the resources to hit every state of the country. You've invested in 27, send us the best of the best when we're writing a 10, 20, 50, 100 million dollar check. We don't really care where the board meeting is."

I've seen no consternation from the big guns, so to speak, about investing outside of the traditional hubs, I just think we're early in that cycle. I think the next five years, we'll see the growth-round indicator catching up to the earlier stage indicator.

James: When you're making investments in cities, states you've never been before or you don't spend a lot of time, were you doing Zoom meetings with founders before it got popular?

Collin: Yes, almost all of our investments, we have never met the founder in person. We've only met them over Zoom or the phone. What's so important is we co-invest with local leads in almost, almost, every single case. We don't believe we can possibly know every entrepreneur again, from San Diego, to Ann Arbor and Miami, and everywhere in between, but we know that there are great VCs in all of those places. It's by working withseed rounds are different from A's and B's. There are great funds who are leading rounds with 1 million out of 2 million, 1 million out of 1.5 million, whatever it may be. They're looking for value-added capital we're bringing alongside them. Ideally, capital that's connected outside of that local ecosystem.

That's where we say, "We may not know every entrepreneur in Raleigh-Durham, but we know that between Cofounders Capital, and IDEA Fund and Bull City Venture Partners, and the people we're friends with there, they know everyone there. If they're making an investment, that means there is some kind of a personal relationship built, that we only have due diligence what we think of the company, what we think of the business model, etc.

We know that things like founder integrity, and reputation of the community and all of those things that you get from personal relationships, someone we trust has all that information. We couldn't do it alone, we do it by virtue ofseed investing is a party game, where we and some really great funds around the country are working together to get people to the sharp-elbowed competitive Series A where funds are knocking each other out.

James: There's a lot of ways to think about diversification. I guess geography could be one of them. Do you think that that is something that asset managers currently think about or should be thinking about?

Collin: I don't think they do. Obviously, I think they should. I think when we talk to institutional LPs, they all say, "We invest primarily in Series A, Series B," that's where they're big enough to move the needle. "We tend to look in San Francisco, New York because they're well-known areas." They tend to be conservative and go with what's known. They would rather go for a fourth-tier fund in a major market, just because it's known, than do something new and so be creative. It's kind of a, no one got fired for buying IMB. I think when you do look at how to take something as risky as venture and de-risk it, everybody looks at diversification from, "Do I do several venture funds and not just one?"

If you're doing three or four Series A venture funds in San Francisco and New York, you're actually building no diversification. Whereas our whole pitch is, across 27 states, there's a real portfolio aspect you get with us.

James: When the pandemic hit, I think a lot of folks were freed from the way they had been doing things. They at least had the option to think about who they were meeting with in a totally different way. Do you find there were a lot of folks reaching out to you and being like, "How do you do this remote funding thing?" or, "How do we reach entrepreneurs or other investors in these markets?"

Collin: Not really. It's interesting. I think VCs were probably some of the least shut-in people during COVID. We saw a dramatic pullback—and I'm sure you have stats that would still agree with this—we saw a dramatic pullback in seed investing from mid-March 2020 to about mid-June where everybody strategized with their portfolio companies, retrenched, blah, blah, blah. Then we just saw an explosion of investing starting in July. The market has run hot for the past 12 months almost consistently. First, it was with known relationship where these deals had been in the pipeline for months and then stopped for three months. That was July, and August and September.

Come October, VCs just said, "Let's just get back out there and start taking meetings." I know VCs who were doing pitch meetings where they would be in different conference rooms of their own offices. I know VCs who had four people in the same office, just in different corners. Founders Fund down here, when I met with Keith back in early January, he said they were doing tests for every entrepreneur and every team member when they came in to do the pitch. You can do that if you're Founders Fund, I guess.

VCs for people who are technologists were not eager to adopt the Zoom lifestyle. I've actually seen relatively little change in our industry. I say, if you're an entrepreneur now, you're still mostly pitching in person, and just the way work is done did not change for most funds. For us, it didn't change at all. We're comfortable with this, but funds who rely on, we have to get to know you personally because this is a long-term relationship, I think they just felt there was no way to replicate that over Zoom. Therefore, it was a three-month halt, a three-month only invest in people we've already known, and then let's cautiously get back to business, even if it's just outdoor meetings or spaced out, or whatever it may be like, let's try to get together in person.

James: How do you think the new startups that you're saying, startups that might've been founded either shortly before or during the pandemic, are handling the question of the office culture? Are they interested in building in an office culture? Are they thinking, we are remote-first company, and that's what we're likely to be for the foreseeable future?

Collin: Yes, the answer is yes. There's no one answer. I would say, most companies fall into the middle where they say, "We're not going to be purely office-bound, but we would like to have a critical mass of people in one place, but we will be opportunistic with hiring elsewhere." That's where a lot of companies were pre-pandemic, and I think it's accelerated post-pandemic. You find some people on one end saying, "We're going to build purely remote." Then you see some people on the other end saying, "We need everyone back in office." I don't see it correlated to age, I don't see it correlated to geography. It's not like people in New York are all back in office, and people in Austin are all remote. It's really just a cross-current of, I think, pre-pandemic; there was a move toward a more hybrid to virtual office.

I think that's accelerated, but I still see people in all three camps. We certainly ask all the companies we're investing in, what their philosophy is, and it's an interesting data point. We certainly also understanding the successes and challenges that our companies are seeing, but there is no one answer that we've seen. We consistently see all three answers of we'll have a base but hire remote, we'll have everyone together and we'll have everyone remote.

James: I did this conversation in reverse because you mentioned Miami from the start, so I jumped to the end of my notes. I'd like to go back and just talk about you and SaaS ventures. Why don't you give me a little bit of your background? What were you doing before SaaS?

Collin: Before SaaS, I founded something called Acceleprise, which you may or may not have heard of. It's rebranding as Forum Ventures. Acceleprise, when we founded it back in 2012, was the first enterprise tech accelerator in the country. We looked around back in 2012, so there's YC, there's Techstars, there's 500, and they're all great, but they're all mostly focused on build product, raise money, better fit for consumer tech, generalist tech, etc. Nobody's really focused on enterprise tech.

I found that out with two partners in 2012, and now we at least have something for enterprise tech, focused solely on enterprise tech. Built a really good brand around that, had some early successes. All three of us ran SaaS companies at the same time that we were running Acceleprise. There's three CEOs who were all investing together.

Took my company through a small merger in '16 and looked around and said, "Hey, I think the accelerator space is getting increasingly noisy, crowded, difficult. I don't think I want to do any more accelerator stuff, but I see this really interesting gap that's opened up where if you look at a seed round in the second-tier geography, the prices are phenomenal compared to the San Francisco prices that I was seeing, the New York prices I was seeing. The lead funds in those markets are great. And they're looking for good partners who are connected across the country, and who know a thing or two, to join them in these deals where they're not sharp-elbowed, they're leading and they're looking for partners."

That's where this whole like, let's do enterprise tech, let's do it in second-tier markets and let's do it by partnering rather than competing came from. [In] 2016, took the idea and started fundraising that I closed in 2017 and have built—because we're following, not leading, we're writing smaller checks—we built a nice 56 company portfolio in fund one, and we've got 19 so far in fund two that the survival rate, the graduation rate—I think 19 of our first 20 companies have gone on to raise an A. I think of our 56 investments, we've got five exits for more than we put in, two for less, and then 49 still kicking. The results seem to be really strong and really affirming of the thesis that there are great companies, these second-tier markets, great founders, reasonable valuations, great local VCs, and there's a lot of innovation to come from outside of the traditional markets.

James: You've talked about how you guys invested enterprise SaaS, you mentioned trucking, I think, earlier on the call. I'm wondering because SaaS has gone through so many iterations over the years, it's really just swallowed everything. There seems to be still some industries that are pretty fertile ground and we're seeing a ton of action. Right now, logistics and trucking is a great example of that. What are some of the industries that you think there might still be low-hanging fruit out there for entrepreneurs?

Collin: I certainly think everything moves in cycles, and that's to be known. For a while, fintech was dead, and now fintech is—every company is fintech, right? That's the only place it's hot. I do think that there are some industries we like right now, but I do generally just believe that all things become new again. Sales enablement technology was so out for four or five years, and now it's so back in.

The areas we specifically look at, map nicely to our geography. Things that we think are going to change and where that innovation is going to be driven by second-tier venture markets rather than SF, New York, etc. One, transportation logistics. Most great trucking companies are going to come from the Pittsburgh, to Chicago, to Omaha, Nashville corridor.

Cybersecurity, most of that comes between Fort Meade and Langley. Somewhere between the CIA and the NSA in the mid-Atlantic. ECommerce enablement, which primarily comes from the Southwest in the Southern California region, where we wouldn't invest in a consumer brand, but people who help you sell online and help people go online. Then, environmental and sustainability, we think it's not just a do-good double bottom line. We actually think that's where you make money is by selling two VPs of sustainability, VPs of supply chain. Traditionally those have come from the Mountain West, where most green movement has come from, at least in what we've seen. Those are the areas we've been forareas where we've made a lot of our investments have been focused.

James: You've obviously invested in number of cybersecurity firms, that's a sector that already this year is surpassing records that were set last year when things really started to take off in terms of VC funding. I'm wondering what you think is catalyzing, or to catalyze, these kinds of cyclical events, and whether or not VCs should even be trying to predict those or if they need to be thinking acyclically?

Collin: That's a really good question. I don't know how you can get ahead of the cycles. I think you just need towell, some of the top VCs taught me when I was 23 and just starting outthe reason that very few people are focused on a specific sector, geography, etc., is that they want to be dynamic allocators of capital. For that reason, I can't predict if three years from now there's going to be four completely new industries. I don't think there'll be four, but are we going to swap out one of our themes per fund? Sure. Are we going to have a very different geographic waiting in this fund than we did the last fund? Absolutely.

I think we have four more Mountain West-emphasis already. What I like to say is you can't anticipate the future, as much as venture is a game of doing that, you just have to be a really good reader of the cards that are already on the table and see where things are moving. Like I said, I think we need to be able to predict that in five years, there's going to be a unicorn and environmental and sustainability tech, even though there may be zero to one right now. Again, that's not based off what we think the world should be, that's based off of the buying actions of corporate buyers, where they are looking for these types of products at the early stage and where the crossing the chasm happens in the near term.

James: Yes. We actually, here at PitchBook, just hired our first climate tech analyst.

Collin: There you go.

James: I think people everywhere are feeling the need to make that move. And obviously, the really strong exit market for electric vehicle makers and other folks, and hydrogen, battery storage, charging, all across the board has really helped to validate some of these theses that people have had for years, but didn't really have the data to act on. I think you touched on this idea of being specialists or generalists. We recently came out with a report on VCs' managers' style drift. One of the big takeaways from it was that venture firms over the years have gotten either more generalist or more focused in their approach, but you're seeing less of the in the middle where they have a little bit of a focus. Is it a matter of competition that's forcing these firms and some of them, especially at the earlier stages and in younger funds, to become more specialized? Is that a good thing for the industry, for startups?

Collin: Let me give you a bit of a twist on that as an answer. I don't think anyone is a generalist or is becoming more generalist. I think when you look at the big firms who invest in everything, it's actually because they operate more like a confederacy than a unit. I spent a little time when I was in college at NEA, which is a massive venture firm. They do everything from healthcare to technology, cross-state to cross this, cross that at one giant multibillion-dollar fund, but there are certain partners there who know fintech. There are certain partners there who know what I would call a generalist enterprise SaaS. There are certain partners there that know med devices.

NEA is not necessarily a fund. And I know the same of an emergenceor any other fund that you would say is multidisciplinaryis that's what I would say is they're multidisciplinary, because they have black belts in several disciplines within one roof, but I would still say that it's an agglomeration of specialists. I think nobody in the world can be so brilliant and so knowledgeable as to be a world expert on every subject, so venture funds that want to be multidisciplinary and want to be generalists, essentially cobbled together world leaders in a lot of different subjects.

It's like "Trivial Pursuit." If you have an expert in every slice of the pie, you're going to have the winning answer for every question, but I would not say that there's any firms where all six partners or something like that are great at all six pieces of the pie. That's how I think about it is, the funds that are generalists are, in fact, just communities of really great specialists.

James: I'd like to go back to something we kind of talked about. I don't know that we really touched on this directly. At the beginning of the pandemic, and really through most of last year, a lot of people were writing a lot, talking a lot about VCs leaving the Bay Area. We've looked at the data, we're not super convinced that there was any massive shift in how funding was moving geographically. A lot of that is clouded over by the fact that money moved to the late stage. Whenever that happens, you're going to get the startups in the Bay Area who are taking in most of that capital. I wonder if, from your perspective, do you think that there will be a lasting impact from the pandemic on the geographic distribution of venture capital, or is it going to be a blip in terms of what we see in the data?

Collin: Like a lot of questions, it's a yes and a no. Will there be entrepreneurs, and investors and capital who leave San Francisco for other ecosystems? Absolutely. I think it's incontrovertible that Austin and Seattle have been two huge beneficiaries, but then a lot of places have been beneficiaries. Yes, that is true, there are a lot of people who have left, a good number. When that does leave, it has a huge impact on the other ecosystems. Again, if Founders Fund moves here to Miami from San Francisco, that's a massive impact that we're talking about, in terms of one major fund leaving the Valley and moving to Miami is a massive sea change from Miami.

On the flip side of the coin, the so what? The journalistic angle tends to be the decline of San Francisco. That I don't believe in, because San Francisco can lose a Founders Fund and still have Benchmark, Accel, Greylock, you name it, Sequoia, all in their own backyard. San Francisco, I think their rent went down, and I think their population went down 25%. If you take 25% of the tech in San Francisco and distribute it among all the other cities in the country, you see a massively raised tide in a lot of other places, but you still don't see much diminished activity because 75% of 2019 San Francisco still beats the pants off any other market in the country in terms of tech activity.

Absolutely, I think people have left San Francisco, absolutely, I think it's going to create a positive momentum for a lot of other places, but I don't think that means the decline of San Francisco. I think it just means that it's the preeminent city still for technology in the Bay Area, but the gap is a little bit smaller and a lot of other places have come up. No, I still think San Francisco is still the dominant place in the ecosystem, for sure, and I don't think that's going to change anytime soon.

James: Any final thoughts?

Collin: Yes. The line I really can't go one interview without talking about is the line by Duell, who was the head of the Patent Office in 1899. He said, "Everything great that will be invented has been invented." This was the head of the US Patent and Trademark Office. When people talk about what are the innovation sectors? Are we reaching a saturation point in sector X, or in industry Y or overall? Is there a point of too much?

I look at two things. I look at the number of Fortune 100 companies today versus 25 years ago that are tech companies and that went through a venture capital funding cycle. Compare the, what I like to say is Airbnb to a Marriott, or the Uber to Ford, and look at how those companies were built. We are shifting toward a world where companies are built by venture capital, and we are living in a world where Duell's statement is set every year and never less true.

I believe that we're living in a world where venture capital and technology are going to drive more of the large business creation, are going to drive more of the innovation and more of the economic value share than ever before. And where, despite how much we've invented and despite how far we've come, every invention that we havethe computer, the internet, the cellphoneevery one of these things spawns an entire set of next set of innovations, such that the pyramid is inverse. It's not that everything that could be invented was invented by 1899. It's that every invention from the car, to the plane, to the computer, to the internet creates an ever-broadening set of potential inventions. I'm more bullish than ever on the future of technology.

James: Yes. I think a lot of what you were talking about, VC really driving the new economy, we're seeing in the fund returns; this is definitively the top-performing asset class. Obviously, other asset allocators are starting to realize that, or have realized that, and are moving really, really swiftly, especially into those late-stage rounds, capturing more and more of the hockey stick. That's forcing a lot of traditional VCs to maybe lean earlier stage. Do you see that extra attention as something that the early stage can keep up with? Do you think seed and Series A investors can continue to create the kinds of companies that the Tiger Globals of the world are going to want to buy huge stakes in, in another seven years?

Collin: No, I think that's a great point because I don't think there's similar kind of money being pumped into the early stages of venture capital, because you find lots of large institutional LPs who want to put $50 million to $500 million into it. That requires going to a Tiger Global who's going to write a $100 million check. I think that the amount of capital going into the late stage at this point from LPs is disproportionate to the early stage.

I think what that means is you're going to have fierce and bitter competition for the companies that do make it to that point, and you're going to have a bidding war and valuations continue to escalate and all the pressures you're seeing that late-stage investors complain about. I think, because there's just not nearly that much money being pumped into the early-stage ecosystem, you're going to continue to be at somewhat of calmer waters, saner valuations, etc.

If institutional LPs were to say for every $50 million check we write into late stage, we're going to write 10 $5 million checks, then I think we could see a balanced ecosystem. We could see a really vibrant seed ecosystem. We could see a lot more opportunities for late-stage funds to evaluate. Instead, you've got a really sharply narrowing pyramid where you've got a very few companies that make it to the Tiger Global or Coatue stage. Then you've got them having to pay 40, 60, 80 times revenues because there's so much capital bidding on that.

I think whether it's because there's a perception that early stage is riskiereven though every investment has its boom and bust potential no matter how late stage, no matter how public marketor because it's simply not worth it to write and track $5 million checks, you're just going to continue to see this excess of capital flow into late-stage rounds. I think it just means that when you look at some of the funding cycles for series D, E, F, G companies, they're happening in 12 months or less, so I think as a seed fund, we don't necessarily mind it. It means we have less competition and it means that when we do get to that stage, we're just going to see our companies start ratcheting up in valuation relatively quickly.

I think as long as you're a seed fund that has a stable LP base and can get your fund raised effectively, you're going to benefit tremendously from the asymmetry of capital. The only negative is that there's a lot of good seed funds out there who are struggling to put together a $30 million, $40 million fund that can produce really strong returns, because LPs just aren't worried about the $1 million to $5 million that it takes to raise those funds. They're basically deploying 50 to 500.

James: Hopefully, we'll see some innovation that can even out some of that allocation. I think some of the things we've seenequity crowdfundingI see a number of ways that folks are trying to get around this accredited investor rule and try to open up VC to more people. Do you think that that kind of innovation, if we do get to a point where more capital is able to access early-stage private companies that that could maybe open the floodgates a bit for really early-stage companies, or do you think it's going to have to come from the existing LPs who fuel contemporary venture capital ecosystem?

Collin: Yes, look, if you look at the original Jobs Act in the $2,000 limit, I think that was onto something. I'm actually against equity crowdfunding because it's completely illiquid. It's got an extremely high-fail rate where you need a large portfolio and information deal flow is completely asymmetric. Your average retail public markets' investor may be in some disadvantages, compared to institutionals and professionals, but the disadvantage is never greater than an early-stage venture capital, where those who spend every day doing this, like myself, versus those who have a day job, are going to see fewer deals, [and] they're going to see them only through selective channels. They're not going to have a big enough portfolio; they're not going to understand the risks. They're going to see a company doing really well, but that they can't get out of.

I actually think that early-stage venture is only for those who can afford to lose the small percentage of their assets that they put into it, and understand the risks and understand the lockups. I think, unfortunately, a lot of the marketswhether it's crypto, public markets, meme stocks, equity crowdfundinghave become something like a casino, and people are putting far too large bets on again, it doesn't matter whether you're talking about bitcoin, GameStop or a startup, people are writing checks that should go into a blue chip that will not decline, but will appreciate by single digits a year. That's your nest egg, and people are putting that into these highly-valued volatile asset classes.

While venture is not unique in that way, I do feel like, again, treating [it]whether it's early-stage venture or other asset classes[like a] casino is a problem ... is particularly bad with early-stage venture because we're not talking about it goes up 20% or down 20%. We're talking about a total loss of principle in 50+% of cases and we're talking about again, even in the great cases, it's seven, eight, nine years to get out. I think people just don't necessarily think about, once you buy chips at the casino for early-stage venture, your likelihood of walking out as well as how long you have to keep the chips in circulation.

I think that's just going to be a sobering lesson for a lot of people who think they're going to throw $5,000 into the next Facebook, and that $5,000 is several months rent, and they're going to be looking 10 years later like, "Am I even going to get my $5,000 back?"

James: Yes, good point. Are you a Warren Buffett fan then?

Collin: Yes. I think everybody has to be to some extent. My investing strategy is the complete opposite. He only invests in things he knows, things that are highly stable. I'm investing in emerging technology, but I still think some of the same principles stand out in terms of invest in what you know, and nobody can really know early-stage venture. Even if you think you're a user of a product, you have no idea what that means in terms of mass adoption. I think everyone that sees "Shark Tank" and thinks, "Oh, I could do that," when the reality is there's so much that goes into success, that it's a pretty bad idea for people to try to be venture capitalists as a side job.

James: Well thank you, Collin. This has been great.

Collin: Absolutely.

In this episode

Collin Gutman
Managing Partner, SaaS Ventures

Prior to founding SaaS Ventures, Collin co-founded Acceleprise, the world's first pure enterprise tech accelerator. Originally based in DC and now with locations in Australia, New York, Toronto and San Francisco, Acceleprise focused on helping to solve the challenges unique to enterprise tech at the earliest stage, and built an extensive network of 120-plus mentors to aid its 45-plus investments.

Collin also has been an entrepreneur, having founded WorkAmerica, a social impact workforce development startup, funded by Kapor Capital, Acumen Fund and others. He saw firsthand the challenges of raising seed rounds in a fractured venture ecosystem, and decided to found SaaS Ventures to help fill this gap.

Collin holds a BA cum laude from Yale University, and is an avid DC sports fan.

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