Steve Blank

Dino Vendetti a VC at Bay Partners, moved up to Bend, Oregon on a mission to engineer Bend into a regional technology cluster.  Over the years Dino and I brainstormed about how Lean entrepreneurship would affect regional development.

I visited Bend last year and caught up with his progress.

Today with every city, state, country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and didn’t.

• Part 1: Bend, Oregon Ecosystem and Entrepreneurs
• Part 2: Early-stage Regional Venture Funds
• Part 3: Engineering a Regional Tech Cluster

Here’s Part 3 of Dino’s story…

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As a transplanted Silicon Valley VC and now a regional investor, I often get asked, “How do we go about building up our local tech ecosystem?”

The short answer is, “One step at a time.”

In the beginning in Bend, “necessity was the mother of invention.” Local entrepreneurs just made it up as they went. But today we are intentionally engineering six distinct activities to support this tech cluster: entrepreneurial density, university, transportation, capital, accelerator, and business community.

Let’s look at each of these six elements in more detail and I’ll explain what we have been doing in Bend to accelerate each of these.

1. Entrepreneurial Density:
Density – the connection of like-minded firms and their support services – is a critical component of a cluster. The most fertile source of entrepreneurs is the population of existing entrepreneurial companies. But for clusters without sufficient firms you first need to attract companies to your region. However, it’s difficult to create density overnight. Entrepreneurs need to understand and believe the reasons why they should want to cluster in your region given there are other alternatives (nationally Silicon Valley or New York; regionally Seattle and Bellevue, Portland and Bend).

In addition to technical and entrepreneurial talent, a region also needs experienced executive talent with industry appropriate backgrounds and personal networks. The goal of this talent is to help mentor startups as they scale and navigate the myriad of issues they will face in growing their business.

Bend’s economic development agency (EDCO) and city leaders (Visit Bend, City of Bend) get it – and have started communicating that Bend welcomes and is friendly to entrepreneurs and startups. Word is spreading and there are lots of people up and down the West Coast who know of and have been to Bend. But it’s easy to get drowned out by the noise from Silicon Valley and other cities in Washington and Oregon. That means that in regional communities like Bend, everyone needs to turn up the volume to consistently sing praises that will not only put the community on the map but also ensure it doesn’t slip.

2. University
Almost every successful tech cluster has a local technical university. This provides a source of technical talent, research, etc. It’s extremely difficult to import enough talent to fuel a rapidly growing tech cluster, so a university is critical to organically generate and retain talent within the region. In particular it’s critical to offer technical degrees that train the talent pool needed to drive the local tech cluster

OSU-Cascades is a new four-year university in Bend that is beginning the build out of its new campus in Bend and offer computer science and user design courses. This effort was over a decade in the making and something that the local community fought hard for.

3. Transportation
Direct flights to the San Francisco Bay Area and other major metro areas (depending on location of the region) are vital to reduce the friction of conducting business, encourage talent to test drive your community, and attract investors and other ecosystem partners to the region.

Bend’s economic development agency (EDCO) has worked very hard to establish direct flights to major West Coast cities including San Francisco, Los Angeles, Seattle, Portland, and Denver. At times this required rallying local business leaders to make advance purchases of flights to ensure enough passenger volume for the airlines.

4. Local Early-Stage Risk Capital
Early stage venture funds are more important than your mother. If this doesn’t exist your regional cluster is dead-on-arrival.  Organize risk-capital in the form of angel funds or venture funds, particularly at the early stage where the largest capital gap exists. This should be a strategic initiative within your state to close the capital gap with in-region capital sources.

Bend is now home to Seven Peaks Ventures and Cascade Angels, both born over the past year in response to the opportunity in the region. The state of Oregon is also making funds available to invest in and support the formation of venture funds within the state.

Bend Venture Conference Winner

5. Local Entrepreneurial Community Entrepreneurial-driven Events
The local entrepreneurial community has been active in running Startup Weekends, launching the FoundersPad accelerator, running hackathons and Ruby on Rails conferences (Ruby on Ales), building out shared tech space, offering incentives (The Big Bend Theory) for startups to relocate to Bend from the Valley, and building up the state’s largest tech/venture conference, the Bend Venture Conference which is now going on its 11^th year. There are many more efforts underway to build upon what has worked and continue the process of evolving and learning.

6. Business Community Support
One of the most difficult things to do is technically the easiest – a dispassionate self-assessment to understand what assets your community has and what you lack.

First, what is your value proposition to a family or business to locate in your region? Recognize that a big part of your job is to remove friction, drive awareness, and amplify the efforts of your local entrepreneurs. Successful entrepreneurs attract other entrepreneurs, so it’s vital to kick start the cycle.

Next, identify your goal. Is it creating a job works program? Stopping brain drain in the region? Attracting and building some key core competency in the region? Ideally your existing talent base and ecosystem naturally support the “core competency magnet” you want to develop.

Finally, put your money where your mouth is – help fund the events and programs in the early years. Once the tech cluster forms, these activities will become self-funding. The ROI won’t be obvious for some early on, but will pay dividends in time.

Regional Cluster Ecosystem

Summary: Bend Is a Global Entrepreneurship Experiment
There are about 25,000 economic development agencies in regional markets across the U.S., all trying to expand the number of businesses that create products and services sold outside their region. These regional businesses create primary jobs that lead to the creation of local secondary jobs.

The Bend experiment is a model to consciously engineer an entrepreneurial cluster in a regional market to spur economic development and job creation.

In the past most regional growth strategies have focused on attracting established companies looking to expand or open a new plant. While it may be strategic for the region to recruit some of these established businesses, those deals usually involve huge tax subsidies and typically create a small finite number of jobs. What isn’t part of most regional growth plans is the organic growth of an entrepreneurial tech cluster in the region. If successful, sewing the seeds of entrepreneurship can lead to a more rapid and sustainable job growth for the region.

By engineering a regional tech cluster, we can impact the trajectory of growth in the region and:

• Slow and even reverse the historical migration of tech talent and capital out of the region/state
• Locally grow successful tech companies to become amazing primary job creators
• Recycle the wealth that is created by re-investing in the region versus transferring wealth to Silicon Valley
• Help local successful entrepreneurial and technical talent stay local – by creating their next startup in the region versus emigrating to Silicon Valley
• Create a more diversified and healthy economic base that includes tech entrepreneurs

The democratization of entrepreneurship has created a huge opportunity for any region with the right characteristics to create its own sustainable tech cluster. But, as with any true democracy, it won’t happen without the combined participation of the community and desire of entrepreneurs to lead the movement. This is happening in Bend, and I look forward to hearing from others about your own experiments.

Lessons Learned:

• Regional tech clusters can be engineered if …
  • the region has key attributes and a focused effort from the entrepreneurial and business community
•  Opportunity exists for economic development in regions where tech clusters can be formed
  • potential to dramatically increase the growth of entrepreneurship and job creation in the region.
• Entrepreneurs are the path to job creation and growth…
  • attract them, reduce the friction to growth, and do everything possible to cause the wealth created to recycle locally

Listen to the blog post here [audio http://traffic.libsyn.com/albedrio/steveblank_hplewis_140124_FULL.mp3]

Download the podcast here

Filed under: Customer Development, Lean LaunchPad, Science and Industrial Policy, Venture Capital | 5 Comments »

Dino Vendetti a VC at Bay Partners, moved up to Bend, Oregon on a mission to engineer Bend into a regional technology cluster.  Over the years Dino and I brainstormed about how Lean entrepreneurship would affect regional development.

I visited Bend last year and caught up with his progress.

Today with every city, state and country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and what has not.

• Part 1: Bend, Oregon Ecosystem and Entrepreneurs
• Part 2: Early-stage Regional Venture Funds
• Part 3: Engineering a Regional Tech Cluster

Here’s Part 2 of Dino’s story…

——-

Tech investing is risky. Success depends on finding startups that have identified acute customer pains in large markets where conditions are ripe for a new entrant. Few entrepreneurs find this scalable and repeatable business model because it’s not easy. However, four critical advances over the past decade (cloud, accelerators, Lean, and Angels) not only changed the math for tech investing but made regional tech clusters possible.

• The cloud, open-source development tools and web 2.0 as a distribution channel have vastly reduced the amount of capital a startup needs at the early stage when the risk is greatest. (Startups still need capital to scale once they find good product-market fit and a repeatable-scalable business model.)

• Accelerators, which became mechanisms for focused entrepreneurship mentoring and delivery of best practices to startups. This was valuable to startups in the Valley and has been vital to startups in regions where the ecosystem is less developed.

• The Lean Movement, led by Steve Blank (and others,) created a set of methodologies that ushered in the era of Evidence Based Entrepreneurship. This has changed the way entrepreneurs think about building their startups and how investors should look at them.

• Angels & Crowdfunding: Coincident with the capital efficient movement came the current wave of angel investors, this time armed with the ability to collectively fund startups to the point of meaningful value creation on modest amounts of capital. Sites like AngelList have only amplified the collective reach of individual and grouped angel investors.

These four developments, while important to Silicon Valley, are vital to developing regional tech clusters. While the density of Silicon Valley startups can’t be replicated in regions, the barriers of money and resources have disappeared. These changes make entrepreneurship possible anywhere.

What’s Missing Is Early Stage Capital
While the technology gap is closing, what’s still missing in local regions is early stage capital.

Three types of regional venture funds exist today:

• Regionally located funds, such as Foundry Group in Boulder, are located outside of Silicon Valley or NY but their investments are primarily in the Valley or NY… they are not a regional fund per this discussion.
• Regional Angel funds that pool investors capital and typically make a one time investment in a startup, sometimes at an early stage but often at a slightly later stage.
• Late stage large regionally based funds that invest in late stage or mezzanine deals.

Large regionally based early stage funds have mostly failed.  They failed due to:

1. the dearth of deals in the region that have IPO potential and
2. most of those funds were also raised and invested prior to the huge capital efficient wave of the past 6-8 years. These regional funds invested in capital-intensive startups that required large initial investments. The result was too much money in too few deals. The inevitable failures then damaged returns.

The Oregon startup scene today looks very different from what it did 10 years ago. Today it’s dominated by capital efficient software, web and mobile startups whereas 10 years ago it was dominated by semiconductor and hardware startups that consumed huge amounts of capital before their first dollar in revenue.

So a regional fund must do three things:

• focus on early stage investments
• “right sized” for the exit environment;
  • if it’s too big you won’t be able to intelligently deploy capital;
  • too small and you won’t be able to follow on and protect your investments or make enough investments to ensure you have enough “at bats.”
• find and focus on the entrepreneurs and deals that want to build scalable startups

We believe that regional funds need to walk a delicate balance…but it doesn’t take huge IPOs to return multiples of capital on a small fund.

Why Valley Rules Don’t Work in Regional Economies
A typical VC fund in Silicon Valley might raise $200 -$400 million.  And over a 10-year life of a fund only one out of five deals will deliver all the returns.  A good return to your investors is 20% per year. That means over 10 years investors expect ~6x return on their investment. This means that those winning deals have to make a ~30x return to provide the venture capital fund that 20% compound return (the 6x).

The Valley strategy is to get as much money to work in the high flying deals that are going to pop….It’s an educated/calculated swing-for-the-fences model and it can work and be extremely lucrative if you can consistently get in those deals.

The problem for a regionally based investor is that there will be a limited number of startups in your region that have a realistic chance at an IPO. The percentage of VC backed startups that go public is very small, so counting on those exits in a regional fund would not be prudent (nice if it happens but don’t build the model to rely on it).

The reality is that the super vast majority of liquidity events are M&A and the majority of those are in the under $100M range. As a result, large multi-hundred million-dollar funds focused on early stage investing in the region can be challenging. There just aren’t enough “right” regional startups to invest in.

Regional Moneyball
Bend playing Moneyball makes a lot of sense. In fact, it’s the only game that investors in a regional cluster can play.  Regional investors need a way of improving their odds of getting base hits and minimize strikeouts.

Playing Moneyball in venture capital means making smaller, smarter bets focused on companies and deals that the big teams, the Silicon Valley heavyweight investors, pass up; because the deals are too far from Silicon Valley, not yet known to them, not in their comfort zone, or not the fad of the month.

Playing Moneyball also means playing with the money you have.  The reality for a regional investor is that you have to match the capital you raise to the deal/exit environment you are in.

Specifically this means that a regional fund should be $10-30M. (With a portfolio of at least 20 investments, or you are at risk of the adverse selection problem.) And the fund should be looking at startups that can provide $20M to $100M exits – almost certainly as M&A deals.

The chart below diagrams our regional fund strategy.

The good news for regional investors is that these factors allow you to play Moneyball if (and that’s a big IF) you are investing in entrepreneurs who are living and breathing evidence-based entrepreneurship and who are building scalable startups. This is true whether the company is concept stage or ramping revenue. I’ve found a lot of companies in the region that have found a way to get to some level of revenue traction but haven’t broken out. When you dig in, the reasons are usually easily discoverable and observable.

The Bend Experience
One of the fundamental benefits of being so active in building the FoundersPad accelerator (a 12-week, Lean Startup program focused on customer development) is working with the cohort participants on refining their business models. This experience has provided me a whole new set of pattern matching filters as an investor.

The business model canvas and the customer development process provide investors an incredible opportunity to evaluate how deeply an entrepreneur has engaged with their target customers and, more importantly, what they have learned about the problem-solution space they are going after. This learning and the measurements and metrics that surround it is what evidence based entrepreneurship is all about and what makes it a powerful tool for entrepreneurs, investors and accelerators.

If you are a regional accelerator or investor and would like to talk and compare notes please feel free to email me.

Lessons Learned

• Regions are missing early-stage capital.
• Valley-sized VC funds don’t work.
• Build $10-30M funds.
• Look for $20-100M exits.
• Focus on capital efficient, scalable startups and founders

Listen to the blog post here

Download the podcast here

Filed under: Customer Development, Lean LaunchPad, Science and Industrial Policy, Venture Capital | 1 Comment »

When Customer Development and the Lean Startup were just a sketch on the napkin, Dino Vendetti, a VC at Bay Partners, was one of the first venture capitalists I shared my ideas with.

Dino and I kept in touch as he moved up to Bend, Oregon on a mission to engineer Bend into a regional technology cluster.  Over the years we brainstormed about how Lean entrepreneurship would affect regional development.

I visited Bend last year and caught up with his progress.

This post and the two that follow highlight what Dino has learned about the characteristics of the startup and investing landscape in a regional market, and what it takes to intentionally engineer a thriving regional tech cluster.

• Part 1: Bend, Oregon Ecosystem and Entrepreneurs
• Part 2: Early-stage Regional Venture Funds
• Part 3: Engineering a Regional Tech Cluster

Today, with every city, state and country trying to build out a technology cluster, following Dino’s progress can provide others with a roadmap of what’s worked and what has not. Bend, Oregon is an ideal case study because of its size, location and entrepreneurial characteristics.

Here’s Part 1 of Dino’s story…

———

Let’s get right to the point… I fell in love with Bend, Oregon, once a sleepy logging town, now population 79,000. If you like skiing, hiking, biking, rafting, golfing, camping, fishing, picnicking, rock climbing, and startups – you’d like Bend.

Before moving to Bend last year, my career took me from engineering development roles at defense contractors in the 80’s to product management and executive marketing roles in companies like Qualcomm in the 90’s, to the world of venture capital at several firms including Bay Partners, Formative Ventures and Vulcan Ventures.

After several visits skiing here, I had become smitten with the “mojo” of Bend – its superb quality of life, recreational opportunities and proximity to the San Francisco Bay Area. The vibe of Bend is appealing, unique and unpretentious given the number of successful business, tech and professional athlete transplants who call it home. It’s home to a small but growing tech community that has been developing over the past decade, and that’s what piqued my interest.

What’s Different
The differences between the Bend, Oregon region and Silicon Valley are obvious. The sheer density of talent, companies, capital and universities that exist in the Valley are second to none. It truly is the epicenter of the startup world and it’s the regional cluster for innovation and entrepreneurship. Working in the Valley, I took for granted the constant and real time networking opportunities, the volume of deals, and the ability to access nearly every corner of the tech industry – no surprise to anyone who has spent any time in the Valley.

However, what I found in Bend was a deeply entrepreneurial community that is leaps and bounds beyond just a destination resort town. Bend fights way above its weight class and is professional scale for its size. Its ability to do so is tied to the deep entrepreneurial DNA that permeates the region (a very similar characteristic to Silicon Valley), originally out of necessity and now out of strategy.

Job creation in Bend is everyone’s business.   People who make the move typically need to start a business to have a job. Bend is the 16^th largest metro area in the country for high-tech startup density^. Pretty amazing for a town with fewer than 100,000 people.

Startups in Bend
So what types of entrepreneurs and startups exist in Bend?  There’s a concentration around several sectors: software, hardware, medical-technology, aviation, and a specialty of Oregon – craft beer brewing. The chart below shows the clustering of startups around these sectors.

Bend Startup Ecosystem

In addition to the four major data centers that include Facebook and Apple, Bend currently boasts 95 startups across multiple technologynsectors: 47 software, 26 hardware/semi and 22 med tech related startups. Nearby Portland Oregon (just 160 miles away) is home to over 300 startups; between the two markets, nearly 80 new startups are forming each year.

Silicon Valley Transplants
In addition to local entrepreneurs building startups, I found something else I wasn’t expecting in Bend: a deep pool of talented Valley transplants who’ve made their way to Bend – either during their careers or after. There are retired Fortune 500 CEOs, senior execs from Valley startups and public companies as well as successful entrepreneurs who exited their companies. These smart, successful transplants have gotten involved with the local business community as mentors, advisors, entrepreneurs, or investors.

But the real surprise was learning that for some Bend is a Silicon Valley bedroom community. A daily direct flight on United can have you in your Bay Area office by 8 a.m. Monday. Every week I meet someone new who just moved to Bend and commutes to work for Google, Facebook, Salesforce, Oracle, Marketo, Workday, and on and on….These people are important and useful in the engineering of a tech cluster; as startup coaches, angel investors and advocates for the community. They communicate and pass on the DNA of how Silicon Valley operates and what level of performance is needed to compete on a global scale.

Entrepreneurs in Bend
Within the Bend tech startup community I found three kinds of startups/entrepreneurs:

• Scalable entrepreneurs similar to those you would find in Silicon Valley (although a smaller concentration exists in Bend). These entrepreneurs want to build a big company. They’re typically Silicon Valley transplants who had enough success and experience to know what they were getting themselves into, what it means to raise capital from investors, what it means to scale a company, and how to engineer an exit.

• Viable entrepreneurs who think they are building scalable startups but lack either a key element of their business model and/or lack the right team DNA to “go for it..” In this region, these are the majority of new startups I see. They have two limitations, which I help coach to see if they have the capability and desire to become scalable.
  • They go after a market opportunity that’s too limited to result in a truly scalable business (still might be an M&A candidate, but at the lower end of the range).
  • Most teams have a reluctance and willingness to “go for it” when they finally do have a scalable business and have validated the key aspects of their business model. This “small business” mindset is a holdover of how capital starved early stage startups are/were in Oregon. Entrepreneurs (and angel investors) prioritize profitability over growth (this is OK for lifestyle startups, but not for scalable startups where capturing market share and thought leadership is vital).

• Lifestyle entrepreneurs who are just building a business to make a profit and support their awesome lifestyle (Bend has a lot of these). There is nothing wrong with lifestyle entrepreneurs as they are providing valuable products and services to the local/regional economy, but these do not make for good venture or angel investments under the traditional equity based venture model.

Regional entrepreneurs are at an inherent disadvantage in getting the attention of customers and late stage VCs.  Therefore they need to focus on building the most efficiently scalable business model possible. Without focus, it’s difficult to create enough signal to noise ratio to become relevant in their market segment. The good news is that whether you are an investor or accelerator, if your startup is located in an advantageous regional market (defined below) and if you apply lean methodologies, you can improve your on-base and slugging percentage.

The opportunity and challenge in regional markets is to:

• Educate the ecosystem about the differences between the three kinds of startups/entrepreneurs
• Find, nurture and invest in the truly scalable startups and entrepreneurs, as they will be the ones that have the potential to deliver outsized returns

Fixing the Missing Pieces of Infrastructure
The evolution of very capital efficient business models and Lean Startup methodologies has led to easier paths to funding, launching and growing businesses. With a tech cluster developing in Bend, it was clear that there were four missing pieces in its infrastructure.

I decided to fix each of them.

Bend needed a startup accelerator.  While entrepreneurship in Bend was talked about, and everyone read the same blogs, there was no central place founders could get focused and intense coaching and mentorship. So I co-founded the FoundersPad accelerator, a 12-week, Lean Startup program focused on customer development that helps founders develop, refine and grow their business.

Founders Pad

Bend needed its own venture firm. While Silicon Valley and New York are magnets for great startups, our bet is that awesome startups exist in (or can be attracted to) Oregon and Northern California. So I launched Seven Peaks Ventures with a team of investors that includes some of the region’s most active angel investors. We help Oregon-based startups build and scale their businesses by providing highly relevant mentoring and leveraging our deep network in Silicon Valley and beyond.

Bend needs to attract more entrepreneurs. So I launched The Big Bend Theory with Bruce Cleveland.  We’ll fly founders and their spouses/significant others along with a team member to Bend to meet local startup executives and community leaders and experience the lifestyle. If they choose to relocate in Bend we’ll offer free temporary office space and help get them funded.

Oregon State University’s new Bend campus didn’t have a Computer Science or User Experience design program.  So I helped develop the Computer Science program at Oregon State. (We’re looking for Computer Science professors, so email me if you want to live and teach in Bend!)

Lessons Learned

• Bend is a bet on a regional tech cluster
• To build a successful regional cluster, look for an eco-system with:
  • experienced professionals willing to mentor
  • entrepreneurs with the energy and drive to build businesses
  • viable startups under development
• We are engineering the infrastructure that lacks: accelerator, venture firm, outreach, university and training.
• It is critical to understand the types of startups and entrepreneurs in your region and for venture funding
• Seek out the truly scalable startups.

Listen to the blog post here
Download the podcast here

Filed under: Customer Development, Lean LaunchPad, Science and Industrial Policy, Venture Capital | 12 Comments »