Building a better startup eco-system in Dallas
June 25, 2008
When I was in my twenties I knew I wanted to start my own business. I sat down and wrote a business plan and called my Dad for advice, asking him, “How can I raise money?” My Dad was out in Silicon Valley running an ATM switch company that was acquired by Cabletron and his advice was, “Move to Palo Alto.” For a number of reasons I wanted to stay in Dallas and suggested, “Surely I can keep my business in Dallas…” I was right, ultimately raising more than $20MM, but it took me twice as long as it would have in the Bay Area. I didn’t deserve the money, I wasn’t necessarily qualified, but someone took a chance on me and my idea. Of course that was the late 90’s, today would-be entrepreneurs are finding it much more challenging to start a business. What is it about Dallas that makes it so hard? We have the money, we have the talent, we have the schools, we have the infrastructure ~ then why isn’t Dallas a hotbed of entrepreneurial activity like San Francisco, Boston or Boulder.
Over the years I have spent quite a bit of time in the Bay Area. Walking down the streets of San Francisco you are likely to run into scores of people running startups. It isn’t unusual to run into people like Stewart Butterfield (founder of Flickr) or Erika Hall (founder of Mule) on your way to lunch. There is a sense that everyone is on your side. They want you to succeed. Advice flows freely. They will offer you a desk if you need a place to startup. They will introduce you to potential employees. They will set up meetings with their investors if you ask. The environment is very much one of cooperation. They will do all this in the simple hope that if you are successful that you will return the favor to them or someone else in the future. Ironically, these typically ‘left-leaning’ people completely believe in the ‘bigger pie’ theory that there is enough for everyone. What they won’t ask for is a cut of your deal (i.e. a percentage).
Over the past three years authoring the Texas Startup Blog scores of people have contacted me for advice, referrals and ideas. More often than not the person on the other end of the email or phone line asks me ‘what do you want’. I am quick to suggest, ‘nothing, I am simply happy to help’. Often times the person is skeptical and I have to spend my time convincing them I don’t mind helping out - for free! For example, my Dad is trying to raise $2-4MM for a health care startup here in Dallas. I happily connected him (and would even if he wasn’t my Dad) to various investors and wouldn’t think to ask for a percentage. But it would seem I am in the minority, here in Dallas everyone wants a percentage for a bit of advice, a referral to an employee or a introduction to a potential investor. Half of the people with suits on are ‘deal guys’ (I am not referring to you if you are reading this). Do we really need a guy with a suit to introduce us to kids with great ideas? Why not let the kids come talk to us directly? Why not let the community (i.e. once we get one) police itself. The going rate for ‘deal guys’ is what’s known as 5 and 5 ~ 5% of the amount raised and 5% of the post-money equity. Are you kidding me? Really? The going rate for a CEO is 7-10% and he has to work for the company for three or more years to get it. Come on!
There are other groups here in Dallas that will offer a startup a phone and a desk for 5-10% of the company, oh and the cost of the phone and desk are only deferred until you get funded. Again, are you kidding me? Really? Of course I have mentioned the groups that charge you to pitch. Really? These groups, who may represent a minority, give Dallas a very unfriendly feel to startups. Take a couple cool 20-something founders from Dallas and let them spend a week in San Francisco after trying to raise money in Dallas and I guarantee we will lose them. They will be gone forever. We all lose out when they leave. Take for example Jambo Networks. Charles Ribaudo and Jim Young started Jambo to offer mobile social networking software for online social networking sites, associations, and conferences. Charles and Jim are just the kind of guys we need in Dallas, but after struggling to find capital I recently learned Charles moved to San Francisco to work for Seagate. Ug! I am confident that it would easily be worth $1MM to the city to keep Charles here (in taxes, corporate development and so on). Matt Mullenweg, the kid who founded the WordPress (the software that makes this site go) had to move from Houston to San Francisco to get his business to the next level.
My proposal: Can we all start making an effort to help startups and investors here in the Dallas area without thought to ‘what’s in it for me’. If someone asks you for advice and offers you equity, turn them down. Just give the advice freely. Ask them to return the favor sometime in the future. If you make an introduction between an entrepreneur and an investor quickly explain you are happy to make the connection, but that you don’t want anything in return. If you have an extra couple of desks in your office, make it known to connectors in the community (guys like Brandon Cotter, Christopher St. John, Charlie Humphreyson or me) and we will connect someone doing something cool to you. Get it? Entrepreneurs, you can do you part by stop being so secretive. No more NDAs, confidentiality agreement or non-competes ~ open up your process. This is the first step in building a community. (Oh and come to the Startup Happy Hour) What are you ideas? Please comment:
