Six Reasons We Love Investing in Founders in Small Cities
By: Patrick Riley
Tags: Investing, Startup, Cities, Founders

No matter where you run a company, you’re probably making trade-offs. There are pros and cons to operating anywhere, for sure. But, I know that operating your company in a smaller city can feel really, really hard. You face a lot of challenges — anything from your commute time, to finding great talent, to landing big investments, to connecting with your target customers (fashion and beauty companies come to mind, for instance).

And, if you’re an investor, funding companies in smaller cities can feel riskier than you’d like, for essentially the same reasons I mention above. Staying in business in a small city or an emerging market can be truly difficult, so what if you invest in a company that doesn’t make it?

Here’s the thing, though: We know that an uneven amount of dollars go to founders in major tech hubs — the Londons and San Franciscos of the world. We also know that much of this capital flows to major tech hubs simply because there’s an inherent belief that companies coming out of them are naturally “better” than the companies starting up in places like Providence, Boston, Dublin, Albuquerque, Madrid, Montreal, and Telluride.

And, three years into running our fund at GAN Ventures, with over 25 investments (almost exclusively in founders operating in cities like the ones I just mentioned), we’ve seen investment markups on a full third of our portfolio. What does that mean? When a company raises another round of financing, it comes at a higher valuation than when we invested in it. Which means that the companies are becoming more valuable to the market. And, in three years, we have seen only two companies in our entire portfolio go out of business.

So, I personally believe that we should, as a startup community, continue to shift resources to founders in markets outside of major tech hubs (and, to underrepresented founders across the board).

Going Small(er)

Here are a few reasons we often choose to look at “everywhere else” founders, though, and why you should, too —

They’re scrappy.

Raising money is a lot harder in smaller cities, so you see founders watching every dollar and being smart about how they invest their time and precious capital. Plus, being in places where there are typically fewer resources means that teams in smaller cities are necessarily super creative. I know that’s a generalization but, in our experience, founders in smaller cities really do know how to make a dollar last, get really inventive with what they’re up to, and pretty ingenious with how they market to the world.

Nothing costs as much.

When we think about our investments in places like Nairobi and Indianapolis, the costs aren’t nearly as high as San Francisco and NYC. So, when we give a $100K investment, we know it goes much further in smaller cities than it would elsewhere. That, in turn, means that startups can hire more, have bigger offices, pay their staff more, and not have to give up more equity in their companies to reach their ultimate goals.

The CEOs know how to lead.

Most founders in smaller cities are already leaders in their communities. (It’s the idea of a big fish in a small pond.) Because there tend to be fewer fights for fame — no one’s trying to peek out from the shadow of Google or Apple or Facebook — and because there are simply fewer people, founders in smaller cities become some of the strongest leaders in their home communities. And, this kind of practiced leadership means these founders then take those skills and are applying them to leadership inside of their own companies.

They’re poised to make a giant impact in their communities.

One of the biggest reasons we choose to invest in startups is because we really believe startups have the ability to positively impact our world — now and into the future. They’re solving problems, giving people wages that allow their employees to save money and feed their families, and they’re leading the way with what we value and think about (meaning, they make some of the biggest impacts on culture). And, just like founders at companies in smaller cities become some of their cities’ strongest leaders, their companies become some of the strongest allies to their home towns. As I said, they not only employee a ton of people (often hiring from within the community), they also invest a lot of their revenue back into their communities, and they advocate for local business that continues to bolster the local economy.

Their teams can enjoy more balanced lives.

Recently, I spent some time with friends in NYC. One of our friends, though, was up against some deadlines and couldn’t get out of work to hang out until around 8pm that night. Does this happen in smaller cities? Absolutely. But it seems like more of an irregularity than the norm. Workload for any founder is usually pretty intense, but founders in smaller cities often don’t seem to feel the pressure that founders in larger places have. They’re not dealing with crazy overhead costs and watching their money so closely, so they can relax at least a little bit more. Plus, I know so many founders that choose to live in “smaller” cities because of both the access to nature but also a stronger cultural value alignment with actually spending time in it. They take the challenges that come with operating in Telluride because they’d rather trade everything else for skiing before their workdays even start.

And finally, they’re resilient.

Often, founders in smaller cities don’t have silver spoons handed to them. They’ve had to fight for every dollar generated in revenue and investment. So they know how to stay in business for the long-term. I remember when we invested in our first company. The managing director at their accelerator program shared that the startup’s founder was like Matt Foley, the sketch character on Saturday Night Live that slept “in a van down by the river.” He’d stay in that van until his idea came to fruition. Was he? Probably not. But, the managing director told us everything we needed to know to understand that the founder was willing do anything and everything to make the company work.

Further Proof

If you want to read more about the value of companies coming out of these places, I highly recommend reading this article, put out in August. It shows data on 200 exits across 17 cities in the U.S. As they say, “…outside of New York and LA, discussion about startup geographies quickly tends to degrade into civic boosterism. [So, to] help nudge the discourse onto more empirical footing, [they] wanted to quantify the various startup hubs using exit value as the key metric.” It’s a great look at real data behind considering starting up in smaller cities — and why you should consider investing in them.