David Beisel’s Perspective on Digital Change
Why VCs Invest in Startups with Gravity
Given communication tools and an array of online services which foster and empower remote working, many startups are successfully building and creating product with teams all around the world. Here at NextView, we typically invest in companies headquartered along the U.S. East Coast, but a number of them have a significant number of team members outside the country (e.g. Estonia & India) and even other cities here domestically (e.g. Chicago). From an investment perspective, we’re believers in the theme of an increasingly “distributed workforce” in which organizations are more frequently utilizing talent where talent is. (Along those lines, our portfolio companies GrabCAD, SalesCrunch, and even CustomMade empower individuals to create and offer services regardless of their location.)
For VC-backed startups, there is a fine but bright line between a company with individuals in remote (home) office location(s) and a company that is completely virtual & distributed. Fairly often I hear entrepreneurs pitch that their startup doesn’t have a headquarters – everyone works remotely and it works. That situation certainly can work very well early on in a company’s life-cycle when there are a dozen or less employees. Perhaps it can work even in larger organizations in which the nature of the work is inherently distributed by nature.
But VCs want to know where a company is (going to be) located after they fund it. Where is its center of gravity? It’s not about being able to see a hanging on a door to an office or just because that’s the way it’s always been done. Rather, VCs want to know that an entrepreneur is thinking big enough about their idea that the organization which they’re creating will grow to a point where a central location is a requirement. Having a place that a startup calls HQ (even if the majority of employees are physically present elsewhere) is a litmus test for VCs to gauge whether a founder wants to create a small profitable business or a truly transformative one.
Of course with technology-enabled startups, the goal s of a company are not to add employees. In fact, hiring is only done when it’s out of necessity. But the most meaningful of companies which are on the path towards an IPO invest in human capital ahead of the anticipation of enhanced resulting cash-flow. And with additional talent comes leadership and a management team, which direct the activities of an array of people contributing. I’d argue that it’s incumbent on an organization to have a majority of the management team co-located to foster communication and develop a sense of trust that only consistent in-person interaction can provide.
So when entrepreneurs begin a venture capital fundraising process, they don’t need to have a headquarters… yet… but they do need to share a story about the city where they’re going to build the locus of their company in the future. A decision about the one central place where at least most of the management team is going to coalesce demonstrates that there’s a vision about not only where the company is going in the next year, but about what it is to become in the long run.