Standing at the Crossroads in the ATL

The crossroads — a place where two roads cross at or about at right angles, otherwise known as “the forks of the road” — is a metaphor used in religious and folkloric belief all around the world. From the legend of the delta blues guitarist Tommy Johnson (no, not Robert Johnson, as some believe), who sold his soul to the devil at the crossroads, in exchange for other-worldly guitar playing skills, to the ancient Mayans to Robert Frost’s “The Road Not Taken”, the concept of the crossroads has been used to depict a “deciding moment” or “turning point” in life.

I think we’ve arrived at the crossroads in Atlanta, as it pertains to the early-stage venture scene. This is probably going to be a long post, so be forewarned.

The Appcelerator “Thing”

Unless you have been under a rock for the past few weeks, you are no doubt aware of the whole Appcelerator “thing”. Short version: Jeff Haynie founded the company, reached the $1M revenue mark, and poked around for venture capital funding here. He ended up heading west to Silicon Valley, pitched his deal there, and accepted a term sheet from some Valley VCs. Of course, as most VCs like to have the founders within “strangling distance”, the company is relocating corporate operations to Mountain View as part of the deal.

If you don’t know Jeff Haynie, or know of him, he has been one of the “voices” of this new emerging wave of entrepreneurs in Atlanta. Jeff has been very involved in everything from SoCon to StartupLounge to Startup Riot, and everything in between. There is no doubt that he will be missed.

Yesterday afternoon, Jeff came over to our office and hung out for a while. We talked some geek speak for a while, then went next door to the pub to snag a few beers. I figured the least I owed the guy was a farewell beer or two, especially given all that Jeff has done here in the Atlanta community over the past few years. Of course, invariably, we talked about Appcelerator, Atlanta, funding, et al. It was a brief moment of quiet fun — an oasis surrounded by the sad reality that Atlanta is losing one of its best and brightest problem solvers.

But as I have learned the hard way (mostly by occasionally opening my mouth just wide enough to insert my size 10 and a half shoes), there are always multiple facets to every story – to every problem. It is easy to fall into the trap of “blame the VCs” or “blame the culture here”.  But that is a slippery slope that doesn’t even begin to explain “why” things like this happen.

Appcelerator tried to raise money here in Atlanta. In fact, it is my understanding that they had one initial commitment for a couple of million, and another Atlanta VC interested. But when the west coast guys got into the deal, things got interesting. Why? Because there is a marked difference in operating models with west coast VCs (as compared to here).

Sanjay Parekh blogged about this today (“Why I hate Spreadsheet Jockeys”) – it is a good read – brutally honest, but there are some truths in it. Lance followed up as well, and posed an interesting question.

It is my opinion that most regional VCs in the Southeast tend to be driven by more traditional finance-based approaches to investing. On the west coast, the approach is often different. Sure, they still bet on the team, the founder, the jockey, the traction, etc. – all of the standard VC investment cliches. But they are gamblers. They bet on trends. They bank on their ability to predict the future. A lot more so than here. And there is a lot more at stake there … the funds are bigger, and so are the pressures from LPs.

The result is that their vetting and due diligence process can be quite different. They don’t necessarily want to see pro forma financials – at least not right away. Per Haynie, the west coast guys didn’t even ask about financials until his 3rd or 4th meeting with them. Why? Because they know they’re going to blow through cash as they scale the company. They also realize that many of their investments exit well before any real revenues are even present (e.g. Ribbit which was just snagged by British Telecom for north of $100M).

The old venture model was simple. The founder started the company and began to execute (possibly with the help of an angel, friends/family, etc.). Traction became present at some point. An outside investor was sold on the business model, and came in with an A-round. That cash was used to ramp up sales/marketing. Another subsequent round would be used to do rollups, M&A, or go global. Eventually, the company either had an IPO or was bought by a big box player.

Every VC played by these rules – even on the west coast. Then, something happened. The Internet arrived. Technology ventures shifted from semiconductor plays to online portals, search engines, networking infrastructure, and eyeballs. The west coast venture landscape started to evolve. Most of the rest of the country didn’t (including Atlanta).

The new model is different.

You don’t necessarily bet on revenues – at least not alone. You bet on value creation. Can this team create something of intrinsic value that can be moved to someone within a logical pool of buyers? You don’t believe me? Read the headlines. The venture scene on the west coast is full of companies that get picked up well before revenue, or certainly well before substantial revenues.

But in the Southeast, we are still investing in a linear model of Xs and Os. There is nothing necessarily wrong with that, mind you.  In fact, it is a much saner approach, especially if you are looking at it purely through the lens of financial risk.  But keep in mind, that just as companies compete against one another, so do VCs – at least in a normalized market.  If you are a “methodical” or “conservative” investor in this day and age, you are almost certainly going to lose out on opportunities to investors that are making deals based upon a more aggressive set of criteria. And that, my friends, is at least partially what happened with Appcelerator.

I should also note that some west coast VCs openly say that they don’t prefer to look at deals where there is local (non-Valley) VC money in play already.  Why?  For the reason I just outlined above.  Valley investors are likely focused on creating value, while a VC in an underserved market will likely focus on the financials and metrics of the business. Apples and oranges.  Oil and water. 1.0 vs 2.0.

They say that investors are driven by one of two motivating factors: fear and greed.  With any equity investment, there is a balance between the two.  Investors in the Southeast are driven more by fear (risk averse) than greed (risk tolerant).  Obviously, out in Silicon Valley, the balance is different.

By his own admission, this decision was a difficult one for Jeff to make – he was born and raised here. I can only imagine. I know I speak for all of the Atlanta startup community when I wish him the very best success in his journey.  Jeff – go make a fortune, then come back to Atlanta and help continue to make a difference here. We’ll save a seat at the table for you. :)

The Crossroads

I started this blog post referring to a crossroads for Atlanta.  So what is it? It’s actually pretty simple.

The Atlanta community has a choice to make. We can continue to play second fiddle to communities with half of the innovation present here.  Or we can treat Atlanta as a greenfield opportunity and evolve. There are plenty of problems to tackle, and lots of work to be done – but it can, and will happen. But certain views, approaches, cultural hangups, and models will either need to evolve, or be pushed out of the way (this is already beginning to happen).

Change is afoot here. There are new funds emerging, some of which will have perhaps different investment drivers.  More and more tech ventures are getting off the ground without venture funding. Entrepreneurs and investors are increasingly coming together at places like StartupRiot, StartupLounge, and the various coffee/dinner gatherings being hosted by community advocates.  Some of our successful entrepreneurs are “getting back in” and playing the angel game (a trend that I hope continues).  New angels are being drawn out of the woodwork and funneled into the process. Middlemen are being disrupted, and bottlenecks are being removed. A shift is on.

No one wanted to see Appcelerator leave Atlanta – not even the venture community here.  This much is certain.  But I believe it could very well represent a watershed event for this community.  We will look back in the not-so-distant future and we may actually thank Jeff for leaving.  Because the whole affair will likely further the grassroots community initiatives already underway here – and push us closer to our collective goals.

A Parting Shot

Fair warning to those that are not embracing of change and/or do not care too much for the open sharing of opinions and views:  the grassroots movement that is happening here is becoming stronger, and is becoming increasingly more organized and influential.  Big things are on the horizon. This town will be unrecognizable at some point, and those that aren’t part of the solution are going to become largely irrelevant.  Thanks in large part to the emergence of social media, the Atlanta startup community has a voice now, and you should strive to be a part of it, rather than shun it – no matter what your role is within the ecosystem.

During the American Revolution, the British didn’t worry too much when a few rabblerousers were simply printing pamphlets and talking smack about King Georgie the 3rd.  But when the pitchforks turned into muskets, and the tea crates started flying, it became a “problem”.   The rest is history.

Cheers.

Scott Burkett - Peace Out!

5 Comments

  1. An insightful post that underscores some key issues affecting the tech community. I hope to focus on some of them in my reporting for the Atlanta Business Chronicle.

  2. Scott: Wow. Sublime. Hope we get to see you envision in your “road not yet taken.”

  3. Scott,

    I think there is a major nuance that needs to be pointed out related to venture capitalists and the way they operate. Because there is a preponderence of opportunity and venture firms in the Valley, many of the venture firms tend to specialize. Peter Fenton of Benchmark Capital for example, is an open source maven, earning his chops from the likes of funding Marc Fleury’s JBOSS. When you specialize, you can react more quickly to things because you are a true expert in the space and understand the gaps and opportunites. Southeast VCs are not experts, although we do minor in categories that we think our regions is good at. I know a fair amount about Internet Security having invested in three deals and looked at many more. Greg Foster has ad network and deep new media knowledge.

    When I see an Internet security deal, I have a good sense of its potential for success. Witness Purewire, which just received $2 MM in angel funding. I would have loved NMP to have been in that deal if we could have gotten the terms and ownership, without looking at a number.

    Reaction time by VCs regardless of region is largely based on specific knowledge. In the absence of specific knowledge, which is the case for many Southeast VCs, there needs to be some evidence of success, like what you spoke of in your post. In the case of Jeff, the truth falls somewhere in between. Jeff is an impressive guy who surrounded himself with successful people. We were really never given the opportunity to react to his company. We could not fund just the idea because we are not experts in RIA. But given who he was, we also would not have to see much to be persuaded. Anyway, it is a bummer he is leaving and I wish him the best.

  4. hey scott does the southeast VC community really care about “real” high tech disruptive technology companies leaving the southeast? My experience tells me that east coast series A is akin to west coast series B/C. Even the angel funding takes too long. I gotta tell ya our company is at the cross roads with this one. I was ‘out there’ for 12 years (all good exits) in the valley and in the pacnw. Came back to the southeast thinking that maybe i could bring some west coast success and experience back. i was told the problem would be attracting talent. It hasnt been. We have a full staff of former valley and other professionals who have worked in successful startups and corporations (apple,microsoft, lockeed – major schools etc) engaged with a pilot after 6 months. Yet the RISK AVERSION is so full bloom here that we have been pushed into engaging with our former colleagues “out there”. Of course the relocation thing comes up. I am from the South and we have a HUGE opportunity here. Quality of life AND ability to do great technical work. As most know the west coast will tell you they invest in the team’s ability to execute because the business model and product will invariably change and one must be able to adapt and ship software. I hope things do change. Good read thank you.

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