- SaaS Venture Capital specializes in early-stage investments outside the big tech centers.
- The VC firm has invested in startups located in two dozen cities and towns, including Camp Hill, Pennsylvania, and Mechanicsville, Virginia.
- Investing outside the big tech centers helps his firm get in on young startups earlier, cheaper, and achieve greater valuation, says SaaS' Collin Gutman.
- It's becoming even easier to find amazing companies outside hubs as highly skilled workers flee expensive cities for America's heartland, he says.
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Early-stage investment fund SaaS Venture Capital has invested in promising startups in more than two-dozen cities. But in some cases, "city" might be an overstatement.
SaaS has found startups in Camp Hill, Pennsylvania; Pleasant Grove, Utah; and Mechanicsville, Virginia – which is actually an unincorporated area 10 miles outside Richmond.
If those places sound a long way from San Francisco, New York, Seattle, Boston, or Austin, that is intentional. SaaS looks for investments outside the big tech centers and gets in early on startups overlooked by VC firms unduly focused on companies in a handful of cities, says Collin Gutman, cofounder and managing partner of SaaS. As highly skilled workers flee expensive tech centers for America's heartland, great investment opportunities are coming with them, he says. That is particularly true in the cybersecurity industry, which has boomed during the coronavirus crisis, with no slowdown in sight.
There is one drawback to investing in startups outside the typical Silicon Valley, Austin, Boston, New York City, and Seattle, Gutman says: You have to talk the founders into spending their venture capital.
"These aren't markets where a bunch of angel investors throw around hundred thousand dollar checks," Gutman says. "They don't take for granted that they can just raise money and figure things out later. They found a way to bootstrap, and one of the hardest things we have to do is tell them to stop worrying about profit. Let's spend a little money to think a little bigger."
Frugality? "You don't find that much in San Francisco," he cracks.
An example of a cybersecurity startup thriving outside a big tech center is Huntress Labs, which SaaS Venture Capital got in on as a seed investor. Huntress — which searches through networks for active threats that got past perimeter defenses — is based in Ellicott City, Maryland, 20 miles west of Baltimore. "They're killing it," Gutman says, noting that Huntress recently picked up $18 million Series A round led by a more traditional Silicon Valley firm, ForgePoint.
Another SaaS investment, Whistic, is based in Pleasant Grove, 40 miles south of Salt Lake City. The startup automates the vendor security review process for buyers and sellers, helping companies evaluate the cybersecurity risk of firms they are considering doing business. Whistic decided "to move their fundraising up six months because they saw demand booming," Gutman says.
Nick Sorensen, the CEO of Whistic, said he liked SaaS' approach of looking outside the big tech centers for investments. "It was clear they were looking for talent here in Utah. That was attractive to us. They weren't like other firms."
Investing outside the big tech centers has three main advantages, Gutman says.
"You typically find people who are better grounded in the industry they are serving," he says. "Nobody is starting a consumer app in Oklahoma. They're working on problems they understand, in communities they understand."
The second advantage is "salaries for most of the jobs in these cities are 50% to 60% of what they are in San Francisco. In markets like Nashville or Kansas City, salaries are much less." In Silicon Valley, salaries and office space are so high that "you've got this game of finding a way to monetize before you run out of money. In smaller cities, your chances of making things happen on that amount of capital are better because the capital goes farther."
And the third advantage to investing in small markets is that there's less competition for VCs.
"Very few San Francisco Bay Area seed funds are writing seed round checks in Kansas City, or taking board seats for St. Louis companies," Gutman says, "That means investors get really accessible valuations because the competition if you are a capital provider is so much lower."
And tech talent in the heartland? Gutman says it is not hard to find. "Our companies get resumes from people working at Facebook and Google. People are returning to their roots in Nebraska or Houston or wherever that may be. Some just want to live someplace cheaper where you can get a bigger house. That was happening before COVID, but like so many things, it has been accelerated."
Gutman is careful not to demean the tech centers. "I'm not saying you can't succeed in Silicon Valley and San Francisco. But there is something very nice about being the hottest company in town."
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