Each month we see something like thirty to fifty new investment opportunities that generally fit our investment strategy. They come from all over the place. Just in the past month, we’ve seen opportunities in Israel, Australia, China, London, San Diego, Boulder, Atlanta, Boston and the Bay Area. It seems like our deal flow gets more geographically diverse every month. Web delivered technology startups are sprouting up all over the world.
But if you look at the eight investments we’ve made so far in our current fund, seven have been in the New York area and one has been in Chicago. We have not yet made an investment in the Bay Area even though we have seen many high quality deals from there over the past couple years.
And therein lies the quandry we face. We want to know entrepreneurs from all over the world. We want to know about all the interesting startups, no matter where they are located. We want to stay on top of new developments. And the Internet allows us to do that pretty easily. This is a map of the geographic location of the visitors to my blog in the past week. It shows the geographic diversity of our reach.
So we have developed a brand and a presence that has national and even international reach. That allows us to stay on top of the most interesting developments and entrepreneurs, no matter where they are coming from.
So why have we concentrated our investments in New York City? Well it has to do with our focus on early stage investing, our desire to be a lead investor, and our desire to be actively engaged with the entrepreneurs we fund.
If you look at the things we do for our portfolio companies, they generally fall into the following areas; help in recruiting management teams, help in financial planing and fundraising, help in business development and strategic partnerships, and mentoring, coaching, and advising the founders and their team.
The first item, helping to recruit teams, is one where geography matters a lot. We know a ton of people in NYC who either work in the web industry or in related industries like media, marketing, entertainment, financial services, and telecom. We have a great network here in NYC to help companies build management teams. We don’t have that kind of network in Atlanta, Seattle, or London. So we can’t be nearly as helpful in recruiting in those geographies.
The last item, mentoring, coaching, and advising, is better done face to face. Sure you can advise over the phone, IM, or email. But it pales in comparison to the value of a face to face breakfast once or twice a month. A few of our companies, like Delicious and Bug Labs, are even located in our building so we are/were able to work with them on a daily basis.
The middle two items, financial planning/fundraising and strategy/business development, don’t require as much face to face time, but even so being local is a big help. Passing spreadsheets over email is one thing. Sitting down face to face with the CEO and the CFO is another. We prefer the latter approach and have found that it just works better.
If you look at my personal track record, the facts are hard to ignore. Prior to raising Union Square Ventures, we prepared a detailed due diligence book for potential investors. We looked at our personal track records, all the investments we had sourced and managed prior to starting Union Square Ventures, and looked at it a bunch of different ways, including by geography.
Prior to starting Union Square Ventures, I had “led” twenty four investments, representing $230mm of invested capital and, at the time, just over $1bn of value. Those numbers have gone up a bit since then but I am not going to update the analysis just for this post. The gross return multiple (before fees and carry) was 4.6x cost.
There were thirteen investments (just over half of the total) in the NY metro area which represented $144mm of investment at cost and $832mm of value. The gross return multiple was 5.8x cost.
All of the other investments combined represented $86mm at cost and $219mm of value and a gross return multiple of 2.5x.
It’s hard to argue with those numbers. I am simply better at making local investments. 5.8 times your money is a lot better than 2.5x.
I explain that difference largely on the basis of the leverage we can apply to companies when we are local and can engage with the entrepreneur, as I explained above. But I also believe that we have the benefit of seeing a much higher percentage of the best deals in the NYC area than we do elsewhere.
I am not entirely sure that is always going to be the case. As we move more and more toward thesis driven investing, entrepreneurs are getting to know us from afar and when the things they are working on fit nicely into our investment themes, they are showing us their deals.
And we have been very intrigued recently by a number of things we’ve seen that are not located in NYC. We tried to convince one small team to relocate to NYC and build their business here. We got close, but in the end they decided to sell the company instead.
We are spending some time on an opportunity in London, the second we’ve seen there in the past year that we really like. We are spending some time on an opportunity in Israel that wants to locate its headquarters in NYC. We continue to look at deals in Boston, Boulder, and the Bay Area.
My guess is that when we are all said and done with our current fund, with something like 18-20 companies in our portfolio, we will have three to six companies that are located outside the NYC area and at least one that is located outside the United States.
There is simply too much innovation going on elsewhere to focus exclusively on NYC. But even so, the majority of our investments will be here in the NYC area, the place we know best and where we can do our best work for our portfolio companies.
When we do make investments outside of our local geography, we will look for certain things to make us more comfortable. We will want to work with an entrepreneur we know well and a co-investor who is local and has a similar style and worldview. We are likely to be attracted to slightly more mature companies, where the the key members of the team are in place, and the strategy settled. And we’ll look for something that is dead center in our sweet spot.
So that’s how we think about geography in our investment process. I know that entrepreneurs have not had a great sense of how we think about geography. I hope this post helps clarify it.