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Raising venture capital in Dallas?

May 8, 2008

Over the past three years I have been writing about entrepreneurship and startups and as a result I get to see hundreds of deals each year.  This afternoon  I was meeting with a local entrepreneur/investor and he showed me a deal for a ‘new’ social network he was considering investing in.  The deal was a prototypical ‘Dallas’ deal.  The team was stellar, lots of people with important titles from important companies like EDS, Nortel and Belo.  These guys simply need $5MM to build the next big social network.  What do they have to show us besides a PowerPoint and a business plan?  How about the social network - i.e. the site?  I wanted to touch and feel the site.  I wanted to ‘get’ why it was so important we fund their venture.  But I had nothing more than a few impressive resumes and hockey stick projections to review.  It was frustrating, but I have no doubt they will be able to raise capital (just not from me).

Had that same deal be located in San Francisco, New York or Boston, it would have likely included a link to the site and an extensive demo of the application.  We wonder why the vast majority of deals are done on either coast, but we fail to realize it is because we, as Dallas-based entrepreneurs, keep pitching the same crap over and over.  The same crap being, “give me your money and then I will build it!” Want to get funded?  My advice is to become a ‘maker’, become a ‘builder’ or if you can’t make or build find a partner who can.  Build something, show it to customers, get some traction and then raise money.  Quit paying $10,000 to a ‘broker’ to write your business plan and use that money to actually create whatever it is you want to build.  Stop sending business plans out like hotcakes before you have something to show potential investors.  Get it?  Sorry for the rant, but I sorted all of the plans I received in 2007 and my findings were startling:

In 2007 I received 230 business plans/pitch sheets.  Around 100 of these were for Dallas based startups and 130 of them were for Bay Area startups (I threw out the rest of the country for purposes of my research).  I classified each startup in two categories a) Green (i.e. there was no business, only a concept for a business) and b) Real (i.e. there was already a business or they had built the thing they needed money to grow).  Only 11 of the Dallas startups were real, out of 100 submitted.  The Bay Area numbers were completely reversed, with 121 real startups, out of 130 submitted.  What is wrong with this picture:

Written by Alexander Muse · Filed Under Blog, Startups 

Comments

9 Responses to “Raising venture capital in Dallas?”

  1. Scott Whigham Says:
    May 8th, 2008 at 2:40 pm

    Good to know - interesting. I’m trying to find good technical talent here in Dallas for my startup (LearnItFirst.com) and I’m not finding it easy. What do you think the correlation between having a hot tech school (i.e. Stanford) in the area has with your results? Dallas really doesn’t have a hot or even lukewarm tech school and I’m just wondering what effect, if any, you think that might have to do with it.

  2. Bryan Says:
    May 9th, 2008 at 7:58 am

    I had felt this was the case, but didn’t have the data like you have to back it up. When technology is so cheap, why would you at least not develop a prototype website with even just minimal functionality.

    Also I think that valley folks are savvy enough to understand that they’re going to get a much better valuation if there’s at least a beta site with some friends and family users. There is just a different mindset in the valley than there is here in Texas, and this is just one example of how different that mindset is.

  3. Bob Says:
    May 9th, 2008 at 7:59 am

    I hear ya, about the ol’ “cart before the horse” thing. We were lucky enough to get a decent amount of $$ in angel investments, enough to build out and start marketing our portal. By the time we’re ready for our first true round of financing, we’ll have a fully operational portal with users and (hopefully) advertisers.

    It can be done; you just need to spend wisely (and probably take a cut in pay). But if you really believe in what you’re doing, you should be able to make it happen.

    BTW, love following you on Twitter!

  4. sean Says:
    May 9th, 2008 at 11:55 am

    Scott,

    I would guess that part of the problem is that there is not a good place to go job hunting specifically in Dallas.

    I currently live in Seattle, but I grew up in Dallas. I think I fall into what you would consider, “good technical talent.” Every once in a while, I get nostalgic and start wondering about opportunities in Dallas.

    The problem is that I can never find a good central location to perform a job search there. Where are you posting your openings?

  5. Alex Leverington Says:
    May 10th, 2008 at 12:29 am

    Dallas is growing technically albeit slowly. A lot of folks seem to move out to one of the coasts or go into one of Dallas’ other trades. It’s good to see companies like RIM move out here but that’s obviously for cost and not talent, which is a kind of catch 22. Dallas just hasn’t seen any large successful companies make it a campus HQ with the exception of TI and Cisco and again, those companies are engineering and not “Internet startups”.

    The chart makes plenty of sense to me.

    How does this reflect upon the existing startups and investors in Dallas?

    How does this reflect upon the Dallas academic community?

    I wonder where the Dallas folks got their degrees from…

  6. Scott Whigham Says:
    May 10th, 2008 at 7:07 am

    @sean - I’ve posted on dice.com and craigslist. Right now I’m looking for a junior person; I’ve given up on finding a technical co-founder in the area!

  7. Scott Whigham Says:
    May 11th, 2008 at 8:36 am

    @Alex L.:
    It would be interesting to note where all of the folks from the chart got their degrees (if any). An interesting related article today was posted on ycombinator: http://www.scribd.com/full/2937816?access_key=key-qr8h7o0j18zgywjdxor

    The title is “Education and Technical Entrepreneurship” (published this month too).

  8. Scott Says:
    May 14th, 2008 at 1:29 pm

    With all due respect, I’m not sure this is sorting of your incoming investment opportunities in Dallas means much anything, least of all a conclusion that local startups are hawking vaporware. Seems to me the only deals from the West coast that are going to look for investors out here are the ones that can’t get funding in their own backyard. In other words, they most likely are investments that West coast types have already passed on. Second, while I’ve only been back to Dallas for a little over two years–after a decade in Silicon Valley–I can’t see much difference at all in the stages of deals. Types of deals yes. There are more digital media deals out West, for instance. Duh….Out of roughly 53 deals I’ve looked at in Texas, only three were pitches without prototypes. But that’s not to say I….or you for that matter….actually have a representative sample of local startups.

  9. Alexander Muse Says:
    May 14th, 2008 at 1:36 pm

    Scott - thanks for the comment. I would love to get together to compare notes. Your dealflow sounds amazing! I will shoot you an email.

    With regard to your comment specifically, I hope I was very clear that I was sharing MY experiences; and not providing scientific data that anyone should rely on. Simply hoping to start a conversation. Hopefully I wasn’t stepping on toes - i.e. you know what deal I was talking about specifically. I meant no offense…

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