9 ms·

> It's just really hard to get serious VCs to pay attention to Pittsburgh. I'm an angel investor in a few dozen tech startups, about half in the Bay Area and h

by nugget 9y ago

> It's just really hard to get serious VCs to pay attention to Pittsburgh. I'm an angel investor in a few dozen tech startups, about half in the Bay Area and half spread elsewhere around the country. The biggest problem with those outside of the Bay Area is that for lack of a better term "they don't think big enough". A lot of the promising ones turn into lifestyle-type businesses (e.g. a focus on services revenue instead of software revenue) when, in my opinion, they could have achieved much greater exits. Whether justified or not, I know many other investors with a similar bias based on similar experiences.

draw_down 9y ago
On balance, maybe not such a bad thing.
pesenti 9y ago
It's a good point, I have noticed that as well. But it's both a cause and consequence of the lack of easy access to capital. Early stage big ideas that require a lot of initial capital just won't get funded in a place like Pittsburgh. Once they pick up, then they have a chance (see Duolingo for example). But by that time most have had to make ends meet...
tarr11 9y ago
Interesting, can you expand on services business being lifestyle vs product being venture? I had never heard of that distinction before and usually just thought of lifestyle businesses as slower growing vs faster.
- nugget 9y ago
  Sure, here's an example - a small startup which occupies an attractive niche, definite market need, product-market fit, and decent traction. The founder developed a software platform in response to market need, but the market also told her that there were opportunities to sell extensive services. Now that the software platform is done and there is a small services team in place, the founder can choose to sell either: a) the software platform, which might make $20k/year, but you can sell thousands of them without much incremental overhead needed; once integrated, it's also extremely sticky; low customer churn and high customer satisfaction b) a services package, which might make $50k/year, but for every 3-4 you sell, you need to hire a new employee @ $75k/year fully-loaded overhead cost Before you say "sell both!" - unfortunately the nature of things is such that, more or less, the founder needs to prioritize selling one or the other. Consciously or not, she is prioritizing the services revenue, and as a result about 90% of new sales are services contracts. I (and the other investors) would prefer that she prioritize software. Even if it makes them unprofitable, it would make for a much better risk-adjusted bet. And this isn't like "it's a much better bet for the investors, because they can diversify risk out in a portfolio, but the poor founder would probably be left with nothing". She understands both sides and says she wants to build up the software revenue, but the culture around her (south-eastern city) is so strongly opposed to it, that the execution has been impossible. This is a classic case of where a smaller PE firm will come in and buy it out for a few million, purposefully cut the services revenue, go hog wild selling software, and flip it a few years later for 10-20x what they paid.
  - tarr11 9y ago
    This article from 2011 is relevant: https://techcrunch.com/2011/04/24/what-should-you-do-with-your-crappy-little-services-business/ https://techcrunch.com/2011/04/24/what-should-you-do-with-yo...
  - reneherse 9y ago
    Thank you; it's very interesting to hear the details on this. One question: >she wants to build up the software revenue, but the culture around her (south-eastern city) is so strongly opposed to it, that the execution has been impossible Do you mean the existing company culture, e.g. employees only having service-oriented skills, or the southeastern city culture, somehow being inhospitable for developing software? I'm curious because I currently live in a southeastern city (Nashville), am about to move to another (Atlanta), and am in the beginning stages of building a B2B SAAS startup.
    - nugget 9y ago
      All of the above, including her own subliminal bias which is reinforced by being around a lot of peers who run services businesses.
      - reneherse 9y ago
        Thanks!
  - bane 9y ago
    > This is a classic case of where a smaller PE firm will come in and buy it out for a few million, purposefully cut the services revenue, go hog wild selling software, and flip it a few years later for 10-20x what they paid. Or the classic case where PE buys it, cuts services and all the staff who know anything about the product, go hog wild trying to sell software and realize that that the market isn't there and never was and the services path actually was the only the way to make inroads. The investment craters and everybody loses money.
    - 9y ago
Hydraulix989 9y ago
Which is more of an issue with those VCs than the founders; there are a number of self-driving car startups here and they have a unique advantage: they aren't biased by the immaculate freeways and roads in California -- Pittsburgh has a much wider variety of challenging driving situations, weather, and conditions than California so it is a great test bed for developing autonomous vehicles (indeed, CMU won 1st place in the DARPA Grand Urban challenge, readily beating the likes of Stanford and Berkeley). Some California VCs are mistakenly under the impression that anywhere outside the Bay Area must be Siberia. It's going to eventually bite them in terms of missed future opportunities and ROI on their funds.
- thearn4 9y ago
  It's an interesting point that robust autonomous systems may be more likely to emerge in organizations from places that have distinct seasons (including a perennial 'orange construction barrel' season).
- whopa 9y ago
  > they aren't biased by the immaculate freeways and roads in California -- Pittsburgh has a much wider variety of challenging driving situations, weather, and conditions than California so it is a great test bed for developing autonomous vehicles Careful, don't compare Pittsburgh to an entire state. Pennsylvania doesn't have any real mountains, whereas California does. Google tests their self driving vehicles in the Lake Tahoe area, which in the winter can be much more challenging than anywhere in within 500 miles of Pittsburgh. Navigating serious grade changes, both uphill and downhill, presents more of a challenge for trucks too, even for humans right now. The only places to really test that in the US are pretty much west of Denver.
  - Hydraulix989 9y ago
    As an SF transplant, my only thoughts after seeing California drivers struggling with the artificial snow and hills at Tahoe were "these people have never been to Pittsburgh." Also, eastern Pennsylvania has the Appalachian mountains, and last time I checked, they were "real."
Avshalom 9y ago
>> lifestyle-type businesses e.g. profitable.
- Avshalom 9y ago
  Also parallelism aside pretty sure we both mean i.e. not e.g.
- closeparen 9y ago
  Which is great for the people living off that income, and not great for investors unless it's also valuable. VCs would need to take fewer, smaller risks if they're expecting smaller rewards per success story.
  - Avshalom 9y ago
    I feel like it's a pretty recent development that investors don't expect their investments to turn a profit.
    - closeparen 9y ago
      The investment needs to turn a profit for the investor by appreciating in value, which is different from turning a profit in general.
    - pjlegato 9y ago
      VCs by definition are looking for the Next Big Thing, not to finance someone's lifestyle business. The returns are too low to justify the huge risk. There are many other lower risk ways to get lifestyle-business sized returns for an investor. VC limited partners invest because it has low correlation to other investments and the potential for 100% returns. If they're just getting a potential 7% (or whatever), they can buy stocks or real estate etc. at much lower risk.
ssharp 9y ago
It seems like the midwest much prefers B2B software and health industry-focused startups. I'm assuming because they become profitable much faster and don't need the explosive growth and capital needs of moonshot SV companies. Fewer unicorn exits drops the EV of an investment, so you can't take as many risky bets. I'd guess the medical startups are largely because of Cleveland Clinic and UPMC.
joehosteny 9y ago
I understand your position, but I think these companies do exist here. I know, because I've been at a few of them (Avere Systems and Bossa Nova Robotics, for example). I think our biggest challenge is getting sufficient capital in the region. The airport situation has been a serious impediment - great airport, few direct flights to the west coast - but that is changing.

by nugget 9y ago

draw_down 9y ago

On balance, maybe not such a bad thing.

pesenti 9y ago

It's a good point, I have noticed that as well. But it's both a cause and consequence of the lack of easy access to capital. Early stage big ideas that require a lot of initial capital just won't get funded in a place like Pittsburgh. Once they pick up, then they have a chance (see Duolingo for example). But by that time most have had to make ends meet...

tarr11 9y ago

Interesting, can you expand on services business being lifestyle vs product being venture? I had never heard of that distinction before and usually just thought of lifestyle businesses as slower growing vs faster.

nugget 9y ago
Sure, here's an example - a small startup which occupies an attractive niche, definite market need, product-market fit, and decent traction. The founder developed a software platform in response to market need, but the market also told her that there were opportunities to sell extensive services. Now that the software platform is done and there is a small services team in place, the founder can choose to sell either: a) the software platform, which might make $20k/year, but you can sell thousands of them without much incremental overhead needed; once integrated, it's also extremely sticky; low customer churn and high customer satisfaction b) a services package, which might make $50k/year, but for every 3-4 you sell, you need to hire a new employee @ $75k/year fully-loaded overhead cost Before you say "sell both!" - unfortunately the nature of things is such that, more or less, the founder needs to prioritize selling one or the other. Consciously or not, she is prioritizing the services revenue, and as a result about 90% of new sales are services contracts. I (and the other investors) would prefer that she prioritize software. Even if it makes them unprofitable, it would make for a much better risk-adjusted bet. And this isn't like "it's a much better bet for the investors, because they can diversify risk out in a portfolio, but the poor founder would probably be left with nothing". She understands both sides and says she wants to build up the software revenue, but the culture around her (south-eastern city) is so strongly opposed to it, that the execution has been impossible. This is a classic case of where a smaller PE firm will come in and buy it out for a few million, purposefully cut the services revenue, go hog wild selling software, and flip it a few years later for 10-20x what they paid.
- tarr11 9y ago
  This article from 2011 is relevant: https://techcrunch.com/2011/04/24/what-should-you-do-with-your-crappy-little-services-business/ https://techcrunch.com/2011/04/24/what-should-you-do-with-yo...
- reneherse 9y ago
  Thank you; it's very interesting to hear the details on this. One question: >she wants to build up the software revenue, but the culture around her (south-eastern city) is so strongly opposed to it, that the execution has been impossible Do you mean the existing company culture, e.g. employees only having service-oriented skills, or the southeastern city culture, somehow being inhospitable for developing software? I'm curious because I currently live in a southeastern city (Nashville), am about to move to another (Atlanta), and am in the beginning stages of building a B2B SAAS startup.
  - nugget 9y ago
    All of the above, including her own subliminal bias which is reinforced by being around a lot of peers who run services businesses.
    - reneherse 9y ago
      Thanks!
- bane 9y ago
  > This is a classic case of where a smaller PE firm will come in and buy it out for a few million, purposefully cut the services revenue, go hog wild selling software, and flip it a few years later for 10-20x what they paid. Or the classic case where PE buys it, cuts services and all the staff who know anything about the product, go hog wild trying to sell software and realize that that the market isn't there and never was and the services path actually was the only the way to make inroads. The investment craters and everybody loses money.
  - 9y ago

Hydraulix989 9y ago

Which is more of an issue with those VCs than the founders; there are a number of self-driving car startups here and they have a unique advantage: they aren't biased by the immaculate freeways and roads in California -- Pittsburgh has a much wider variety of challenging driving situations, weather, and conditions than California so it is a great test bed for developing autonomous vehicles (indeed, CMU won 1st place in the DARPA Grand Urban challenge, readily beating the likes of Stanford and Berkeley). Some California VCs are mistakenly under the impression that anywhere outside the Bay Area must be Siberia. It's going to eventually bite them in terms of missed future opportunities and ROI on their funds.

thearn4 9y ago
It's an interesting point that robust autonomous systems may be more likely to emerge in organizations from places that have distinct seasons (including a perennial 'orange construction barrel' season).
whopa 9y ago
> they aren't biased by the immaculate freeways and roads in California -- Pittsburgh has a much wider variety of challenging driving situations, weather, and conditions than California so it is a great test bed for developing autonomous vehicles Careful, don't compare Pittsburgh to an entire state. Pennsylvania doesn't have any real mountains, whereas California does. Google tests their self driving vehicles in the Lake Tahoe area, which in the winter can be much more challenging than anywhere in within 500 miles of Pittsburgh. Navigating serious grade changes, both uphill and downhill, presents more of a challenge for trucks too, even for humans right now. The only places to really test that in the US are pretty much west of Denver.
- Hydraulix989 9y ago
  As an SF transplant, my only thoughts after seeing California drivers struggling with the artificial snow and hills at Tahoe were "these people have never been to Pittsburgh." Also, eastern Pennsylvania has the Appalachian mountains, and last time I checked, they were "real."

Avshalom 9y ago

>> lifestyle-type businesses e.g. profitable.

Avshalom 9y ago
Also parallelism aside pretty sure we both mean i.e. not e.g.
closeparen 9y ago
Which is great for the people living off that income, and not great for investors unless it's also valuable. VCs would need to take fewer, smaller risks if they're expecting smaller rewards per success story.
- Avshalom 9y ago
  I feel like it's a pretty recent development that investors don't expect their investments to turn a profit.
  - closeparen 9y ago
    The investment needs to turn a profit for the investor by appreciating in value, which is different from turning a profit in general.
  - pjlegato 9y ago
    VCs by definition are looking for the Next Big Thing, not to finance someone's lifestyle business. The returns are too low to justify the huge risk. There are many other lower risk ways to get lifestyle-business sized returns for an investor. VC limited partners invest because it has low correlation to other investments and the potential for 100% returns. If they're just getting a potential 7% (or whatever), they can buy stocks or real estate etc. at much lower risk.

ssharp 9y ago

It seems like the midwest much prefers B2B software and health industry-focused startups. I'm assuming because they become profitable much faster and don't need the explosive growth and capital needs of moonshot SV companies. Fewer unicorn exits drops the EV of an investment, so you can't take as many risky bets. I'd guess the medical startups are largely because of Cleveland Clinic and UPMC.

joehosteny 9y ago

I understand your position, but I think these companies do exist here. I know, because I've been at a few of them (Avere Systems and Bossa Nova Robotics, for example). I think our biggest challenge is getting sufficient capital in the region. The airport situation has been a serious impediment - great airport, few direct flights to the west coast - but that is changing.