The Chicken or the Egg

I started practicing law in Silicon Valley during the late 1990’s with a firm called Cooley Godward, now Cooley Godward Kronish.  I remember sitting in a meeting during the Internet boom with some lawyers who were visiting from the UK.  One of them asked what made the Bay Area so special and such a hub of the technology economy.  Steve Neal, who was then the head of Cooley, gave an incredibly eloquent response which I will not do justice if I attempt to recreate verbatim.  The gist of it was that Silicon Valley had enjoyed a perfect storm of factors that conspired to make it into the world center for technological innovation and company development: (a) outstanding institutions including Stanford and Berkeley, (b) great weather, (c) the initial founding of Hewlett-Packard and the resulting spin off companies, (d) the first venture capitalists in the technology space, and (e) an attractiveness that brings together and binds the very brightest minds in management, innovation, entrepreneurship, sales, marketing and development.  Some of these factors were catalysts and some were results but they all co-existed in the late 1990s.  They created a self-perpetuating model where entrepreneurs and developers innovate, are funded by angel investors and venture capitalists, bring in top tier management teams and then enjoy a successful exit that provides the cash and incentive for everyone to do it all again.  Ok, maybe that it a bit too simplistic of a description, but I think my point is made.

In the eight years I’ve been in Portland, I’ve heard countless discussions about why Portland can’t become a bigger player in the tech community.  First, let me say that I think that comparisons to Silicon Valley are just unfair.  The Bay Area is still a world leader in the technology space.  So it is an apples to oranges (or better yet a “75° and sunny” to “55° and damp”) comparison.  But comparing us to Seattle, Raleigh-Durham, and Boulder is fair on many levels.  These are cities (or big towns) that are generally Portland’s size but for some reason have established themselves while we continue to do so.  What gives?

I think we simply do not have the factors that create the self-perpetuating Bay Area model that I describe above.  I’ve heard many explanations for this including: (a) climate, (b) lack of world class engineering and business schools (although I do think Portland State, Oregon State, and University of Oregon are trying), and (c) an unfriendly business climate.  But to me, it comes down to two factors: MONEY and EXPERIENCED MANAGEMENT TEAMS.  I think Portland does well in the technology development and innovation arena.  With companies such as Intel, FEI and Pixelworks having design and/or development brain power located here, there is no shortage on good ideas.

Where I think we fall short is taking that raw idea or the small company around which that idea was built and scaling it to establish a national or international footprint.  This takes two things:  MONEY and EXPERIENCED MANAGEMENT TEAMS.

First, on money, Portland does have a very active and supportive angel community.  The Oregon Angel FundMount Hood Equity Partners, and Capybara Ventures among other institutional and individual investors have done a good job of seeding many start ups with some funding.  However, I’ve watched entrepreneurs struggle here for sometimes over a year to raise $500,000 when a single meeting in places like Boston or Austin would result in a check being written.  Additionally, ShopIgniter’s recent funding round of $3 million by Seattle-based Madrona Ventures drove home another truism of Portland – trying to pull more than about $1.5 million from local funding sources is virtually impossible.  So let’s assume there is a lack of capital.

Second, with respect to the need for experienced management teams, I am talking about serial entrepreneurs who have taken companies through an exit and then move on to the next opportunity to do it all again.  Many times this happens as a group – a CEO, CFO, COO, and/or other C-level managers migrate as a team thereby creating a natural chemistry regardless of the enterprise in which they are involved.  Again, I don’t want to sell Portland too short on this front either.  There are several great leaders and teams that have achieved success multiple times (Chris Marsh, Richard Lazar and others).  However, I don’t think they populate the terrain in the same proportion as they do in other tech hubs.

This leads me to ask the question:  What comes first – the chicken (i.e. management teams) or the egg (i.e. money)?  When pitching to VCs and investors, the lack of an experienced management team can be a significant if not impossible hurdle to overcome.  This limits the flow of capital into smaller start-ups.  Similarly, experienced C-level managers may be reluctant to join a company if there has not been a funding event already as it means they are essentially working for equity only.  This is particularly true for the non-founder types of managers – the second wave that typically come aboard after a company has gained some initial traction (e.g. CMOs, VPs of Sales, etc.) – and in situations where a physical move to a new city would be required.  I don’t know of too many qualified managers who would move themselves (and possibly a family) to a city like Portland from a place like Seattle or San Francisco without some guarantee of a meaningful salary.

So if the money guys will not commit without qualified management aboard and qualified management will not commit without having the money committed or funded, how do you break the cycle?  I think this will be a problem that continues to plague cities like Portland.  There will be the occasional Jive Software that breaks the mold or situations where the money and management team come in together but that does not happen enough to rely upon them as a foundational characteristic upon which a thriving and mature tech community will be built.  Instead there will continue to be good ideas that are not executed to their full potential and therefore result in smaller exits meaning less money to pump into the next generation of growth companies.

I am not criticizing Portland or cities that face similar situations – I just think that we need to recognize the reality and decide if we want to change it or get comfortable with it.