Earlier this year I wrote a GrepBeat column for founders discussing tips to help them attract top talent to their startups. With all the variables that come with a new venture, the constant I assumed we could all agree on was that the “Triangle and North Carolina at large is a great place to work and live.”
At Cofounders Capital, we invest primarily in North Carolina companies, so it is fortunate that many founders from the area want to stay local and grow their businesses here. In 2018, we heard pitches from over 250 startups, and saw well over 1,000 decks/plans from cold outreach. With this type of volume, it is often more efficient to rule a deal out for an investment than consider why to take it to the next step.
We try to give feedback to as many entrepreneurs as we can, and our most common reason for passing on deals we see in cold emails is because of geography. In the last six months, however, we have found an increasing number of entrepreneurs reach out to us telling us they contacted us and other Triangle investors deliberately because they were considering moving their company to the Triangle. At the same time, we have met with numerous serial entrepreneurs who have already moved to N.C. in anticipation of starting their next venture. We are now having to take a closer look at deal flow from other states, and have had to recently compete with several West Coast term sheets. In talking to these founders, I always ask them why they are considering making the move. I have heard very consistent and logical answers.
Quality of life—O.K., no big surprise here. Subsets of this response include, “cost of living, great place to raise a family, less traffic, better weather, etc.” Enough said.
Get further on bootstrapping, grants, friends and family, and angel money—There is typically a pretty big jump between the amount of capital that can be raised between these early sources of capital and the size of the first check an institutional fund wants to write. While there are obviously pockets of “super angels” that write institutional-size checks, most of the sources of capital listed above fall in the $10K-$100K range, regardless of whether you are in N.C. or Silicon Valley. In fact, a 2017 report by the Angel Capital Association showed that the average angel check in California and New England was $32,000, while the average angel check in all other regions was $37,000.
If you are able to put a few angel investors together for an early round in N.C. you will be able to get a much longer runway to gain the traction needed for institutional funding. Another great local example is the non-dilutive $50K seed grants or $10K micro-grants that NC IDEA awards to early-stage N.C. companies. Those are extremely impactful grants here that would not go nearly as far in some other geographies.
Better metrics as your company scales—At Cofounders, we have a model to estimate our portfolio company valuations as they consider later rounds of financing or begin to position themselves to be acquired. There are 11 metrics we track. There are obvious ones like ARR and annual growth rate, but one other significant driver to valuation is the LTV/CAC ratio (Lifetime Value of Customer / Customer Acquisition Cost). There are SaaS rules of thumb, like having a minimum 3:1 ratio and recouping your CAC in 9-12 months in order to have a sustainable SaaS company. At scale, the better the ratio, the higher the valuation of the company. The CAC refers to all the sales and marketing dollars that a company has to spend to acquire their average customer.
Three companies recently discussed with us that part of their decision to relocate to the Triangle was to essentially cut their CAC in half. The average salaries for the Sales Development Reps, Account Execs, and sales team was roughly 35-50% lower in the Triangle than on the West Coast, and allowed them more of a buffer for higher commissions for a sales team that was equally effective. Typically, you are going to price your product the same regardless of geography. So, while it is difficult to increase your LTV of a customer, a move to the Triangle can significantly reduce what it costs to acquire them. Hello, instantly improved metrics!
Other factors these founders cited include access to talent from the local universities as well as the growing number of venture funds and angel groups. Most of these relocating entrepreneurs have or are comparing the Triangle with other emerging tech hotbeds that can make similar claims. We still sometimes have to compete with higher valuations and “looser” investment terms that are more common on the West Coast, but the reasons to start or move a startup to the Triangle keep getting stronger every day!