Nature or Nurture?

For lack of more productive things to do, many scientists, psychologists and sociologists enjoy arguing over which has a greater impact on an individual’s chances for success: their innate abilities (“Nature”) or their environment (“Nurture”).

With each passing decade, the pendulum swings back and forth among the intelligentsia as to which factor has the greatest impact, but for an entrepreneur on The Fringe, the answer is clearly: Yes.

Location, Location, Location

Obviously, both Nature and Nurture matter to an entrepreneur’s success. Given that you cannot do much about your gene pool, the pragmatic entrepreneur will do everything they can to stack the cards in their favor with respect to their environment. If you are attempting to start a biomedical venture, you have a much higher probability of success if you start your venture in an environment which has a track record of sustaining such ventures. Why attempt to swim upstream, when you can expend far less energy, go further, and move more quickly by going with the flow.

You would not plant corn in Antarctica, and you should not start an Internet services company in Alabama. This is not to suggest that Alabama cannot support an Internet company. I am sure the Alabama Chamber of Commerce could proudly point to the handful of such ventures that have ‘made it’ (relatively speaking). However, if you toss enough corn seed onto the tundra, a few stalks might come up during the Arctic’s short summer season. Yet a few sickly seedlings would not be justification for starting a large farming enterprise at the South Pole.

At first glance, an emphasis on the location of your adVenture may seem at odds with the trend toward virtual, decentralized organizations. Take another glance. It is true that you can and should leverage tools that allow your organization to draw upon employee talent across a broad geographic area (like the globe…). However, unless your organization is comprised of a relatively small number of employees, you will likely be forced at some point to hire a concentration of employees from within a comfortable commuting distance.

Transplanting is Not Painless

Entrepreneurs who are not on The Fringe start their venture wherever they happen to be at the time they conceive of their startup. These folks allow the location of their friends and family to dictate the location of their startup. However, just because your great-grandfather decided to settle in the middle of nowhere 100-years ago does not mean that your adVenture must suffer.

Be proactive and launch your startup in the most ideal location. Jeff Bezos, Founder and CEO of Amazon, was a Wall Street banker in New York when he conceived of an online bookstore. He realized that the initial location of his startup was of vital importance to its ultimate success. As such, he selected Seattle, primarily because: (i) it was near Ingram Micro, one of the largest book distributors in the country and (ii) there was an abundance of software developers and high tech managers close by who had been educated on Microsoft’s dime, and had been instilled with Microsoft’s ubercompetitive corporate culture.

Do not fool yourself by thinking that you will eventually relocate your startup “at the appropriate time”. Once your adVenture is launched, there is tremendous inertia that is difficult and expensive to overcome.

With the addition of each new employee, supplier relationship, establishment of office space, etc. it becomes more difficult and more expensive to transition the company to a new location. In addition, in any such transition, you risk losing some of your employees, which translates into the potential loss of valuable institutional knowledge.

Come West Young Man

In the United States, as with most developed nations, certain geographic regions have robust Entrepreneurial ecosystems. These communities all share a number of commonalities which you should look for when deciding where to launch your adVenture. Silicon Valley is the most well known of these entrepreneurial enclaves. However, it has become such a Mecca for startups that the landscape is crowded and the soil has become less fruitful than it was in the past.

In addition to terrible traffic, exorbitant commercial rents, rampant smog, and horrible weather, Silicon Valley also boasts a job-jumping workforce that tends to work on a two-year cycle. For many Valley workers, the mentality has become: join a venture, vest half of your options during the first two years and then head on to the next venture as a means of ‘diversifying’ your options portfolio. This is great when your company is growing and you are hiring new talent, but it can be devastating if your startup’s growth slows. This lack of loyalty can also be an issue as your employees move closer to full vesting of their initial option grant, which may prompt them to look for greener pastures.

You may be better off launching your adVenture in an emerging entrepreneurial ecosystem that offers more reasonable commercial rents, and more loyal workforce. Fortunately, there are a number of communities in the US which embody the factors that are conducive to allowing a venture to prosper.

Entrepreneurial Ecosystems

When you are selecting the location to launch your startup, assess the degree to which the following factors are present.

Inexpensive High-tech Workforce - Most entrepreneurial enclaves are situated near a University that has a strong technical curriculum. These workers are everything you are looking for: young, cheap, hungry, and technologically proficient.

Equity Driven Workforce - Unfortunately, much of the US suffers from a post-unionization mentality that dictates that you should get paid for every hour that you work and that “overtime” is at the employee’s discretion. You do not have the time, and you cannot afford to expend the required energy to fight this ‘old world’ mindset. I am not being a ‘fly over’ snob here. I lived in St. Louis for years, and it is a great city to launch a family. However, it is not a great city to launch a venture. Just the thought of trying to convince a middle-America workforce that ‘options are good’, and that they should work late into the night (night after night) exhausts me. Thus, launch your adVenture where you can draw upon a workforce with a work ethic that appropriately values equity compensation.

Start-up Centric Service Firms – As discussed in “Roping In The Legal Eagles”, you will need a special breed of accountants and lawyers who understand the common issues faced by new ventures; in addition, many of these firms will be willing to exchange some of their services for equity.

Venture Investment Community – Follow the money. Certain areas of the US have an extraordinarily high concentration of startups which are funded by institutional private equity. For instance, according to the Q3 2006 PricewaterhouseCoopers / National Venture Capital Association MoneyTree™ Report, Southern California venture investments totaled over $853M. This is more than the total raised in all of the New England states combined, more than was generated in the NY Metropolitan area, and more than the aggregate VC funds raised in all of the 33-states at the bottom of the list combined.

Even if your adVenture will not require venture capital funding, the lack of a robust institutional private equity infrastructure in your community is likely indicative of an environment that is less than ideal for a startup.

Affordable Housing - One of the biggest challenges in a number of regions that are conducive to startups is the stark lack of affordable housing. Younger workers can generally be accommodated, as they are usually flexible and are willing to live with multiple roommates.

The primary housing challenge tends to be with respect to middle managers who are in the midst of starting a family, and thus, desire a home with a yard, garage, etc. Fortunately, in a number of entrepreneurial enclaves (such as Southern California), the temperate climate allows workers to spend a lot of quality time outdoors, which reduces the claustrophobia they would otherwise feel in their $1 million 1950’s track home – or “Quaint California Cottage”, as it is known in real estate parlance.

Proven Entrepreneurs – A vibrant pool of skilled and willing entrepreneurs who have ‘made it’, and thus have discretionary time to help you avoid common startup mistakes, is a key component of an entrepreneurial enclave. Such Donors (see “Personal Pitch”) make excellent Advisors and Board Members.

Smell of Money in the Air – As described in “Make Stone Soup”, the smell of money is a powerful thing. If you are trying to launch an adVenture in a community that has fostered few startup successes, you will have to ‘sell’ the idea of working ungodly hours in the hopes of a large payday to a group of folks who have no first-hand experience with such success. However, within an entrepreneurial ecosystem, the chances are greater that your workforce will have some association with someone in the community who has reaped the rewards of a successful entrepreneurial venture. Knowing that entrepreneurial success is ‘real’ and that it can happen to otherwise ‘ordinary’ people is a great motivator that you should not underestimate.

In the world of startups, it is clearly nature over nurture. Given this reality, why try to grow corn in the Artic, when you can live in a sunny, pleasant locale in which other entrepreneurs have created a well trod path to entrepreneurial success.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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