Roundtable on Entrepreneurship in Secondary Markets
Featuring Seth Levine, Somak Chattopadhyay, and Elizabeth MacBride
We recently had the pleasure of hosting a virtual roundtable on the state of entrepreneurship in secondary markets. The full recording can be viewed above, and we’ve reproduced an abridged transcript below. Preston DeGarmo moderated the discussion, which featured the following participants:
Elizabeth MacBride is a Senior Knowledge and Advocacy Consultant with the World Bank. She is also a business journalist and coauthor, alongside Seth, of a number of books, including The New Builders and Capital Evolution (forthcoming).
Seth Levine is a longtime venture capitalist and cofounder of Boulder-based Foundry, which raised its first fund in 2007 and has since grown to around $3.5B AUM. Seth also writes and consults with VC firms worldwide, particularly in the Middle East and Africa.
Somak Chattopadhyay is the founder and managing partner of Armory Square Ventures, an early-stage venture capital fund that leads B2B software and marketplace investments, primarily in secondary markets across New York state, the Northeast, and the Midwest.
Preston DeGarmo (PD): How does the founder experience differ in secondary cities compared to the Silicon Valleys, Bostons, and NYCs of the world, in terms of the obstacles and headwinds entrepreneurs might face on the one hand versus, on the other hand, some of the luxuries or advantages they might enjoy?
Somak Chattopadhyay (SC): I'll give you the perspective of what we've seen in places like upstate New York and the Midwest. To be an entrepreneur, especially building an early-stage startup business, you are the underdog and a contrarian, doing something that most people would not feel comfortable doing. You're taking a massive risk.
You're leaving your job and you're creating from the ground up. That's difficult enough to do when you're an entrepreneur. Now, when you layer on the aspect of actually building a startup in a secondary city or market, that's even more challenging in some ways, right? Because at the end of the day, human beings have their biases — whether it's talent or customers or actual capital providers — about where traditional companies are built. Today, more and more companies are being built all across the globe, but the reality is that there's still this deep bias that if you're a technology company, you should have some presence in Silicon Valley or maybe today, New York City or Texas or Miami. Some of the challenges are around access to those same dense talent networks, early-stage seed capital, and angel networks that have existed for a much longer time in the more established metro areas, especially in Silicon Valley.
I would say that the opportunities, however, include being able to actually make a huge impact in your community when you build a company that scales and becomes a market leader in a certain industry. When you create a unicorn company or a company that goes public and has a venture-scale outcome in a market like Syracuse or Buffalo or DC, there tends to be a much more profound impact psychologically to the community. And we feel that there's also just a lot more collegiality in these markets. I'm generalizing here, but people are really rooting for you. They want to see you succeed, because a rising tide lifts all boats.
Seth Levine (SL): When I started in venture in 2001, I worked for a Silicon Valley based VC firm. I’ve always been based in Colorado, at least my venture career, but the view at the time was there were a handful of venture firms that were big and powerful, and those were the ones that generated all the return. And when we went to raise our first fund at Foundry (in 2007), that was a narrative that we really had to push against, along with this idea that big-scale companies couldn't be built outside of Silicon Valley or Boston. People really didn't believe that you could build a big company outside of Silicon Valley until people started doing it, right? And then that's what happened. Success begets success. And like the day after Datalogics, which was the one I'm thinking about here locally in Colorado (but there's a version of this for each of the secondary markets that we could talk about), the day after the billion-dollar exit happened, people stopped asking the question.
Which is kind of how human nature works, right? We don't believe it until we believe it. There's a great book called The Rise of Superman that talks about athletic prowess, with a part about the winning trick in the first big air competition, which was in the ‘98 Winter Olympics or something like that: a 720. My son did his first 720 when he was maybe seven years old, right? That was the winning trick and now everyone does it. Tony Hawk did this famous trick — I can't remember how many rotations it was — but he tried and tried and tried, and then he finally did it and the next guy that did it was like a week later, because Tony Hawk proved to everyone that it could be done.
That's what's happening now outside of the coasts, where people are saying, Hey, there are other great venture markets. And I want to touch on this notion of rising tides and community involvement: we're recording this in the middle of what is Boulder Startup Week. I've been to a couple of events, and that really does differentiate many of the markets that aren't Silicon Valley and Boston: this notion of give first. One company's success is everyone's success. We were all rooting for that first billion-dollar outcome, because then everyone would stop asking us the question about, well, can there be a billion-dollar outcome? That has led these communities to be much more supportive in a way that is really powerful.
PD: You both touched on the perception shift around where unicorn or outlier successes can occur. Elizabeth, I'm curious if you could speak to the changing perception around who will ultimately found these types of unicorn companies. Defiance Capital released a report called the Unicorn Founder DNA Report, which surveyed over 2,000 unicorn founders. One takeaway — and this jives with what you were saying, Somak — is that unicorn founders tend to be underdogs, in this case defined as being immigrants, women, and/or people of color. Elizabeth, I was struck by how that characterization rhymed with the argument you've made a number of times in your work. Do you think that's a recent trend, or has that long been the DNA of unicorn founders?
Elizabeth MacBride (EM): That's a complicated question, but the way I think about it is that to grow a successful company, you basically need three ingredients. (1) You need a good idea, which can change, but you need a source of feedback, a fount of good ideas to draw on. And I think secondary market founders actually have an advantage in that because they're getting different stimuli. They're in different environments, they're closer to the outdoors. They're getting inputs that do not look the same as the people who live in the big cities. And they're also part of communities that historically have different industries like manufacturing, or take New Mexico, where I gave a speech in September: they're talking about the space industry, right? So they have different inputs. Their ideas tend to look different in secondary markets.
The second ingredient is your talent network and there, in the secondary markets, founders have a much harder time. But that is changing. That's getting easier because of technology and the pandemic opening people's eyes to remote work. And then the third thing people really need is money, which is what gets discounted a lot, right? We have this myth that all you need is the good idea and a lot of work, which is the underdog idea. So I would probably take some issue with that research, because it seems to be playing into that myth, right?
It's a myth rooted in reality. Persistence, grit, being the underdog — I agree with all those things. And yet, if you look at the history of Silicon Valley and what really made it rise, it tends to be that money, right? It's a network of money and that network of money tends to go to one pattern of founder and fund that founder. It's usually white male and, for a while, it was usually based in these five or six dominant markets. The geography is starting to shift. I hope that the white male part of it is starting to shift, but I have some doubts. That’s a story that people are always saying is changing, and then two years later, much more quietly, another report will come out that says it didn't really change at all. I'm always hopeful, I continue doing the work, but you have to be realistic and keep following the story.
SC: That makes a lot of sense. And I wanted to note, Elizabeth, your point about talent: the challenge we've been facing in our secondary markets is declining populations, which you and Seth covered in your book The New Builders. There's been decades of pessimism, of people leaving, and ultimately that's not a great story. That's a very uphill battle when you're trying to convince people ‘Hey, I'm going to build a great company,’ but half the population of Buffalo left in the last fifty years, right? Fortunately, that trend is reversing. When we look at some of the things that are happening on the ground, like Micron’s investment in our region, it speaks to Seth's point about 720s and how before you founded Foundry with Brad Feld and your team, nobody in Colorado ever thought that you could build a world-class venture fund with billions of dollars of assets. I mean, that's amazing. I want to make sure I really give credit where credit's due. I was inspired by the work that Foundry did, creating the whole concept of startup communities and Giving First. That's something I saw Brad and Seth talk about for years.
But what's interesting is that with these Micron investments or TSMC or Samsung in Austin, there's tens of thousands of people who are now coming into these markets that will be great sources of talent for our regions. I was actually at a conference this week called Beyond Silicon Valley, where people were talking about all the turnover in the tech industry, Google and Meta laying off tons of people, and I'm seeing friends of mine who are CTOs of some of the most largest companies in the world who are now between jobs. And I know a lot of the people who are talking about jobs are asking about AI/ML engineers that understand how Anthropic or Claude or OpenAI work. But there's still plenty of industries that could benefit from that talent that is now looking for their next thing.
I'm optimistic that there's going to be even more opportunities to pick up that talent. Not everyone's going to hop on a plane and move their family and uproot them to these regions. But I think some people have such a passion for technology and I feel like they're being ignored because all the oxygen is being sucked out by the AI industry. And I think there are so many other industries, to Elizabeth’s point, in our backyard — manufacturing, transportation, agriculture — that need that talent. So I'm optimistic about that.
SL: Silicon Valley certainly has a long and storied history of sucking lots of oxygen for various industries. I mean, we'd live bubble to bubble, right? And AI is probably a mini bubble. What's the adage? We as humans, we tend to overestimate short-term change and underestimate long-term change, which is to say, AI will have an immense long-term impact, and we're probably overestimating what that short-term opportunity is. But that's what VCs tend to do, which is one of the frustrating things about the industry. One of the advantages of running a venture firm that's not based in the Valley is that you can be outside of some of those hype bubbles, which doesn't mean that we don't pay attention to AI, right — every VC’s thinking about it.
Every company is thinking about it in one way or another. But we're not in the middle of this echo chamber where everyone we've ever known is only talking about AI. And I think that that can be really helpful, a little bit of outside perspective. Now there's great advantage to the density that occurs in some of these markets. And I think there was a moment over Covid when a lot of people were leaving San Francisco and the Valley for a bunch of lifestyle reasons. And I think that there was sort of this question: has Silicon Valley’s turn come and gone?
And I never really subscribed to that, just because there continues to be so much talent there. It's not exclusive talent, right? It's not to the exclusion of other markets, but I think both of these things can exist. And that's one of the things that Silicon Valley itself has struggled with, is that Silicon Valley can retain some level of primacy in the startup ecosystem and yet other markets, whether that's upstate New York or Minneapolis, can also gain in prominence. A Silicon Valley entrepreneur who runs a multibillion dollar company moved out out here to Colorado over Covid. And I was recently introduced to him, and he had a bunch of his friends from Silicon Valley, primarily, out for three days of cycling, which was very fun. On one of the rides, I was talking to one of his friends who lives in Seattle, and we were talking about markets that were not Silicon Valley. And one of the things he said to me — and I sort of knew this to be true, but he had the data — was, you know, in Seattle, the average tenure of an employee is three years. In Silicon Valley, it's 18 months. And so there are some benefits to that, right? You get lots of different ideas and so there's some amount of employee turnover is probably good.
He was a long time employee, like employee 900 at Amazon or something like that. He'd been there for a long time and then had been at a couple of other businesses that he either started or came into to run. And he was saying, what a great advantage it is to have a workforce that's not always sort of looking over your shoulder at the next best thing. There are other reasons why these other markets can be really positive places to build to build a business. And I think that's increasingly true now that we are again much more mobile.
PD: Brad Feld collaborated with Ian Hathaway on a blog post that conducted a sort of systems analysis of entrepreneurial hubs. In that post, they emphasize the importance of “love of place” and a sense of rootedness in building new ecosystems. I'm curious, what are all your thoughts on that? In this era of digital nomadism and distributed teams, how important is it to have that kind of love of place and actual roots for a young startup?
EM: I think actually it's crucial. I mean, it's one of the things that I love. It's one of the things that drew me to all of my work covering entrepreneurship in out-of-the-way places, right? I started that work going to the Middle East, then I brought it home to the U.S and with Armory Square Ventures’ support, I explored ecosystems in upstate New York and the Midwest and in the South.
To have a thriving startup community, you need an element of passion, and that usually in a secondary market comes from this love of community, right? It's people. I met a founder in Appalachia who had moved back home from Boston, and was running a startup competition in this tiny town in the hills of Appalachia. I mean, he was like the only sustaining business in the whole town. I think the town would have gone under if he had gone away. And that was really his driving motivation.
I've met so many people who are like that. And in fact, it's a great sign, when you shared how much JumpStart does for its community in Cleveland, right? When you see organizations like that pulling people together, I think it's one of the signs that you're going to shortly see a big company coming out of that market. Because that excitement really gets people to work in the morning, the connections and the shared honor of what you're doing and sustaining a community helps you be more generous with people. So I think it's just critical and I do think it's something that sets the secondary markets apart.
PD: At this point, maybe we can pivot and talk a bit more about the state of the VC industry at large. It's been pretty shocking to see over even the last decade, say from 2013 to 2022, that the amount of VC capital per startup in the US more than quintupled. To what extent is that a consequence of more innovation, more ideas, and a real acceleration, versus a consequence of the spray and pray profligacy we saw particularly in 2021?
SL: I mean, yes. Right. Both. VCs, we sometimes like to play seven-year-old soccer, where everyone runs around the ball and stuff like that. That sometimes is how the industry moves. And that's unfortunate. Because I think that that's why we end up creating these sort of mini asset class bubbles or sub asset class bubbles. That just seems to be our natural way of doing things. There's been a lot more money that's gone into venture. That money has needed to find a home. Software has become much more horizontal, so it touches much, much, much more of our economy.
The venture business has gone through phases where the number of venture firms has increased before, and if you look at the data, it was only back in 2021 that we finally got back to sort of peak venture. Not maybe not on a per-company basis, but on a total basis, from 2000 again. This is just reflective of how these cycles work. 2000 was the last time when there were just a lot of venture firms (there are more now, but a lot of venture firms back then), and the life of a venture firm is long. I mean, the entire beginning of my venture career was sort of the slow decline in terms of the number of venture firms.
That sort of happened between 2003-04 (somewhere in there), but didn't really bottom out until like 2010, 2012, 2013. Because if you raised funds in 2000, you had a ten-year life, you had two one-year extensions, and then probably a couple of others behind that. So even if you weren't making new investments, the venture firm didn't run its course until 2012, 2013, 2014. That's just kind of the nature of our business. Instead of fighting it or bemoaning it, I've come to accept that that's how it works. The venture business is actually really hard.
And so, you know, one needs to do their work and do it diligently. I like to use the phrase, deliberate and deliberative, right? We want to be thoughtful about it. And I think the “tourists,” if you will, who got in because it seemed like an easy way to make money, or it seemed like a fun thing to talk about at cocktail parties, that'll run its course because it turns out it's actually really hard.
Those challenges tend to come out in down cycles, doing due diligence, when you're doing a reference check on a founder or something like that. Like, I don't need to hear about the business that was a rocket ship from the start. I want to hear about when things got hard and failed. Because that reveals you.
SC: When you talk about venture dollars quintupling, I think a large amount of those dollars were either crossover funds, like, the Fidelity's, the T. Rowe's, or the Insights and Andreessen's, leading these massive, massive rounds. They weren’t just going into fueling a lot more innovation. Some of those were also these massive pre-IPO rounds. I think when you lump all of those things as venture, it doesn't tell you the whole story. Now with AI, you are seeing hundred-million-dollar seed rounds at crazy prices with technologies that are very nascent.
On Seth's comment about the long latency period of funds, I also remember this actually. I started my career in New York city in 2005, when there were only five VC funds, besides my fund Tribeca. There was a website at the time, that I don't think exists anymore, called The Funded, which was basically to figure out who actually had dry powder. Who was actually investing, and who was worth taking money from.
SL: This was very much true when I started in venture: the power dynamic was really in the hands of VCs. And one of the things that I really appreciate about my partner Brad Feld is that he really worked hard to create transparency. He wrote a book, Venture Deals, that basically described exactly everything that relates to term sheets. And, you know, our philosophy at Foundry has always been been that the better educated founders are, the better decision that they'll make about who to partner with.
One of the many things that has been a really positive change in the venture industry since I started 23 years ago, is this more even balance of power between founders and VCs. VCs have the money, and so there's always a little bit of that. But founders now have way more resources, and VCs appreciate that. There's not a ‘hide the ball’ game going on, where you get unfair advantage by trying to create ignorance in founders or something like that, which was kind of how the industry worked back in the day. Instead, we compete based on our ideas, our ability to help companies, and our shared vision of the future with them.
EM: When I was reporting and talking to founders in the middle of the U.S, I used to always encourage them to be really picky about which venture capitalists they went with. There's a dynamic I think where founders, they get sort of beaten down. They're walking around hearing “no no no,” and you start to take that personally. I think it's one of the issues that really affects founders who are not white men, and you have to find a way to reverse that as a founder so that you can deal successfully and raise the money that you need. And one of the ways you do that is by recognizing that, in fact, you're the person who's going to put in the time to build a company. You're the person with the idea, right?
And you do need to be picky about finding the right partner, the right venture capitalists, and I think it's a great thing in the secondary markets especially, to find the new emerging angel networks and to really get a good backing of funders before you go and talk to a professional VC. I agree with everything Seth and Somak have been saying about the changing nature of the VC industry. VCs are getting more and more professional as time goes on, and there's a whole other world of funding alternatives out there that founders need to get comfortable with to grow their company to a certain point before they hit the market.
SL: We don't know yet the effect that AI might have on company creation, but there is a version of the future where founders will have a lot more choice in terms of the magnitude of capital that they need to raise. Back in the late nineties, before everything became a web service, if you wanted to start an e-commerce site, you had to literally build your e-commerce engine. Think of all the things that you had to put money into for every business. Then that changed. We modularized all that and the difficulty went down by at least an order of magnitude, probably more. And when Meta open-sourced Llama 3, that’s like the AI equivalent.
As it relates to, say, a B2B software company that you might invest in, Somak, it's entirely possible that the cost to do that is going to come down pretty rapidly because three engineers can now do the work of many more. I think that's really good for the markets we're talking about. And it's really good for some of these smaller venture funds too, where there will be the ability to carry a company further and not necessarily get diluted. Now there's an extreme version of that, where it costs so little that the only value in the market is the scale capital for scaling sales and marketing. If that happened, that might change the landscape in a different way, but it's interesting to think about in terms of what the future of venture and what the future of entrepreneurship might look like.
SC: The challenge, frankly, we're seeing is that a lot of the innovation in AI is still happening as it's often happened in Silicon Valley. I think the interesting opportunity is in the arbitrage, marrying all the incredible stuff that's happening from a tech-innovation perspective with use cases in old line industries. I feel a lot of Silicon Valley AI and venture innovation is trying to create different versions of the next Anthropic or the next OpenAI, but without any specific commercial application, whereas when you talk to the CEOs of trucking companies or manufacturing companies, they might know that their kids are using ChatGPT, but there's still a massive disconnect.
So hopefully there's a way to bridge that. But I think one thing that is still a disadvantage for us in some of these secondary markets is that we're not in the flow as much about all the interesting things that are happening on a daily, weekly basis where all these engineers are getting together.
SL: Not surprisingly, with new industries, first we build the base of the platform, right? Which is what Anthropic and OpenAI and all those companies are. That has clearly happened in Silicon Valley, and that's going to be the place to do that. But there'll be a whole application layer above that. A lot of that will also happen in the Valley, but a bunch of that's going to happen elsewhere. And again, I think the fact that we have Llama 3, and other resources that are starting to get modularized in AI, is going to open up the ability for teams to do that in markets that aren't necessarily the Valley.
EM: It also goes to that point both of you were making about the brain expansion that happens once there's an example to follow. Because if you look at a map of who actually owns the databases that are needed to develop the large language models, it's nonprofits and universities by and large, right? And a couple of big Silicon Valley companies, and that is really public information. There is no reason that a team from a secondary market of smart engineers could not pull down those same resources and develop an AI. I think it'll probably happen sooner than we expect.
PD: To wrap up, I did want to give a nod, Seth and Elizabeth, to your forthcoming book, which we’re very excited to read. And I do think this topic of the legislative side of the innovation equation is certainly very relevant, especially in light of the CHIPS Act, the Inflation Reduction Act, and so forth. When you compare the present moment to the postwar period in the fifties, like you do in some of your work, how do you see the current stage being set for innovation?
EM: The tack we're taking in our next book, which is about the evolution of capitalism, is that we can create a new Golden Age of capitalism. Basically, what we're talking about is that we're on sort of a knife-edge in America, where we need to reinvent the model of capitalism that we are all embracing. And I think that's what led me to work with Armory Square Ventures, right? It's finding likeminded people who can be both profit-driven, interested in building new things, and interested in real innovations that can scale up, but yet feel a sense of responsibility and want to be part of building a better community for everybody.
The reason we set out to write this book, which is the reason we set out to write The New Builders as well, is that you get out in the world and you see there are so many people who are in fact motivated by both things, right? It’s not mutually exclusive. You do have both feelings in your heart and motivating your actions day-to-day. And the idea that we in the United States can rebuild a cohesive country based on that sense that that's what we all want, that is what's driving our new book.
SL: I would only add that we've sort of taken it as dogma that neoliberal capitalism, Friedman-style capitalism, is the only style that works in the US. Obviously, there are lots of other examples around the world where people have different flavors of capitalism, and I think as Elizabeth and I started thinking about what the evolution of capitalism might look like, we realized that we are on this sort of — as Elizabeth described — knife’s edge, right? We're in a moment of tension because huge parts of our society are starting to question the shareholder premise: is there really no one else that we should be thinking about?
I think the most telling thing for me was in 2019, the Business Roundtable, which is a group of about 200 CEOs of the largest Companies in the U.S, they got together and rewrote what they described as the purpose of a corporation. It had been sort of the neoliberal purpose of corporations, to make money for shareholders, and they rewrote it to include some other stakeholders: employees, community, environment, etc.
And the most interesting thing for me about that was essentially none of them went back to their boards before they signed it, which to me is telling not because they somehow have this incredible power, but because it just shows that they already are thinking about these other constituents when they run their businesses. That's kind of what we're talking about in this new book. What does that mean for our economy and for our society? We describe capitalism less as an economic system, which is how people classically think about it, but instead as more of a political bargain. What do we agree with each other to do?
In the book, we describe this sort of balance between labor and capital that existed in the last Golden Age, which was highlighted by stronger growth than we have now. Now the US economy is still singular in the world in terms of its ability to grow, even if the overall level of growth is less than it was between the end of World War II and the middle of 1970s, when neoliberalism really took over. But that balance is really important, right? And when we're in the middle of witnessing the instability that's been caused by five decades of this neoliberal worldview that has allowed for only this one way of thinking, pitting capital against labor.
That doesn't mean, at least in our view, that rich people shouldn't exist. What we're talking about is raising one group up. And I think sometimes in the neoliberal view, it's a zero-sum game, so if we want someone to do better, i.e. the middle class, then it has to be taken away from somewhere else. And we all we need to do is look at the last couple years with the decline in childhood poverty and increase in overall wages across different sectors of the economy to see that that's not really true.
SC: I'm so excited to hear about this book, and I'm really hoping, Elizabeth and Seth, that we can bring you back to our region to talk about it. The neoliberal attitude towards capitalism didn't always exist in our country. Look at George Eastman in Rochester: he not only built up the educational institutions and healthcare and the towns and the parks, but even in my alma mater at MIT, he funded the Kodak Labs and a lot of the engineering labs. He believed that you have an obligation, when a community has helped you become wealthy, to support those people in the community that made that happen. And I'm making a shameless plug for our region, but Syracuse is actually the only city in the entire country that has a $500 million community investment fund to rebuild health care and education and create more equality and really uplift the community.
We don't just want this to be something which creates jobs for a few people in certain industries. We want to rebuild this city because we have an obligation to our children and grandchildren. And that just is really heartwarming because many people think that doesn't exist in America anymore. But I do believe that there are people like you all and others who care about it. And I hope that continues.