Second and Third Tier Markets And Beyond

I am in Nashville for a couple days with The Gotham Gal who is giving a keynote at a startup conference today. I mostly came along for a chance to spend a couple days in Nashville. But I will also be at the conference later today to see her do her thing.

Last night we attended a cocktail party with investors from the southeast and then had dinner with an entrepreneur in Atlanta that The Gotham Gal backed a few years ago. At both we talked about entrepreneurship in the southeast and the funding environment for companies in this part of the world.

The way I think about the startup sector in the US is that the first tier is Silicon Valley. More than half of all startup activity and startup funding activity happens in the Bay Area which now includes SF and the east bay. You could simply focus on Silicon Valley and ignore every other part of the US and the world and do just fine as an investor. Many do.

The second tier is NYC and LA and Boston. Between these three cities, another third of startups and investment capital reside. All three of these startup cities are vital and growing rapidly. You could simply focus on NYC, LA, and Boston and ignore the bay area and other parts of the US and the world and do just fine as an investor. I am not aware of any firm that has that strategy as it doesn’t really make sense. But it could easily be done.

The third tier includes Seattle, Chicago, Atlanta, DC, and a few other smaller places like Boulder and Austin. I am doing this entire post from my head and not referring to any survey. There are a bunch of these surveys and I’ve read them all so I am sure this is directionally correct but I am also sure that I am missing a place or two.

This third tier is a decent place to be an entrepreneur and an investor. But there are challenges. Entrepreneurs in the third tier can access the talent and capital they need to be successful in these third tier markets but it is a bit harder to do both. Investors can be focused on these markets if they keep their fund sizes small enough or they can take a hybrid approach by being focused on these markets and also investing in the first and second tier markets. The latter is how we have always approached being a NYC centric investor.

But there is a dynamic that goes on in these third tier markets where the local investors look to investors in the first and second tier markets to come down and “validate” their investments. And the investors in the first and second tier markets won’t come down and do that without a strong local lead. This game of “chicken” happens ways too often in these markets and is incredibly frustrating to entrepreneurs in these markets. These third tier markets need a few strong Series A focused VC firms who have large enough fund sizes to be aggressive lead investors and also have the conviction and stomach to play that game. That is what USV, and Flatiron before it, did in NYC. That is what Foundry did in Boulder. That is the game Upfront is playing in LA. Every third tier market needs a few VC firms like that. And being that investor is a terrific way to make a lot of money.

Beyond the third tier lies a lot of even smaller markets. I am in one today in Nashville. It has a huge health care sector that produces a lot of entrepreneurial and executive talent. It has a decent amount of local seed capital. But it is not a major VC destination. The southeast VCs will come here regularly looking for opportunities. But it suffers even more from the issues I talked about in the third tier. The same is true of places like Pittsburgh, Des Moines, and Kansas City. I mention those three cities because USV has investments in companies in all three places.

The truth is you can build a startup in almost any city in the US today. But it is harder. Harder to build the team. Harder to get customers. Harder to get attention. And harder to raise capital. Which is a huge opportunity for VCs who are willing to get on planes or cars and get to these places.

There is a supremacism that exists in the first and second tiers of the startup world. I find it annoying and always have. So waking up in a place like Nashville feels really good to me. It is a reminder that entrepreneurs exist everywhere and that is a wonderful thing.

#entrepreneurship#VC & Technology

Comments (Archived):

  1. Mario Cantin

    “You could simply focus on NYC, LA, and Boston and ignore the bay area and other parts of the US and the world and do just fine as an investor. I am not aware of any firm that has that strategy as it doesn’t really make sense. But it could easily be done.”And thus, for better or for worse, Tristate Capital was born…. 🙂

    1. fredwilson

      that is a thing?

      1. Mario Cantin

        No — satire. But it’s not too far fetched in the current world, wouldn’t you say?

        1. fredwilson

          LA is pretty far geographically from NYC and Boston

          1. Mario Cantin

            Could become someone’s beloved “triangle”.It’s not even as far as Berlin ;-)It pretty much rules out having to travel elsewhere, except for LP meetings.Different partners can attend to each city, if feasible, or the whole firm can “follow the good weather” as you do.And for sure, it becomes a non-issue once Elon’s Hyperloop has been switched on.On the firm’s coat of arms it’ll say (in Latin):”Tristate Capital — On Sand Hill Road we’re not”He he!This was a fun interaction; thanks for playfully engaging.

          2. Donna Brewington White

            But seems to be getting closer all the time.

  2. John Ruffolo

    Fred you just explained the strategy behind the formation of OMERS Ventures. The biggest challenge for Canadian tech entrepreneurs was the mistaken belief that without a strong local VC financing ecosystem, US VCs mainly in the Valley would satisfy the demand. We have found the great US VCs (such as USV) prefer to have a local, deep pocketed partner who can in effect be the boots on the ground and add local networking expertise, etc.

    1. fredwilson

      It’s a good strategy

    2. Jevon


  3. Christopher Ayala

    Enjoy 3686. I’m actually moving down that way in a few weeks. Some exciting opportunities, but echo your thoughts about the need for a few real Series A funds.

  4. Bipper Media

    Living just outside Atlanta, I would love to get into the VC business. However, I’m assuming I would need millions (or billions) of my own capital to make it happen (correct or incorrect?). And let’s just assume that I don’t need my own millions or billions to make it happen, where / how could I get started?great article

    1. fredwilson

      Not true

    2. Dan Moore

      googling “Atlanta vc” turned up a couple of firms that you should probably research/reach out to.

  5. Trey

    Headed to Nashville this morning from another small market, Birmingham. Looking forward to hearing the Gotham Gal. Thanks for making the trip.

    1. fredwilson

      What is going on in Birmingham?

      1. Pointsandfigures

        Some of the most creative chefs in the US are there

  6. JimHirshfield

    Great execution has no zip code.

    1. Richard

      Location, location, location

    2. LE

      In some zip codes they actually can’t get enough execution drugs to carry out the executions.

      1. JimHirshfield

        Ar ar ar, yer killin’ me

  7. jason wright

    do you cover the ground by making use of ‘scouts’?is Blue Yard a USV partner?

  8. JamesHRH

    Not often you are wrong, but you are wrong here.If you are serious about your entrepreneurially life and you have something that really could be great, but you live in a a third tier market….the first thing you should do is move to a first tier market.If you have ties to your market that you cannot sever, you need to reread the definition of serious.I bet it feels good to wake up in Nashville, but startups are already impossibly hard. Willingly adding a layer of difficulty is insane.

  9. Mark Buckle

    Really helpful overview, Fred. Perfect timing for us – thanks! Observing this situation from London, but with a view to seeking out US investment, I now realise there is much to learn around the subtleties of the various VC ‘markets’ in the US. But, as someone else said, great ideas have no geographical bias….

  10. kelleyboothe

    Fred, do you happen to be taking any meetings while you’re here? I know someone who’d like to send a deck.

    1. JamesHRH

      Skip the deck and promise Fred the best BBQ he has every eaten or the most delicious Cortada he has ever drank.

      1. karen_e

        Shhhh … you’ll waken the tiger from Texas, talking BBQ trash like that.

      2. kelleyboothe

        I’ll remind them but I’m sure they will. I’m not the one pitching but I do have plenty of food/drink/music recommendations up my sleeve.

      3. Pointsandfigures

        Nashville is not a BBQ town. Memphis is

  11. William Mougayar

    Well said, and that has been part of my strategy. Be strong locally, and also have strong ties with Tier 1 VCs in the US. At the end of the day, quality talks, and bullshit walks, whether it’s in NYC, Silicon Valley, Waterloo or anywhere.

    1. awaldstein

      Nice.I live by this phase but I am not a VC.Isn’t it true that till you have exits and success it’s all talk? Not BS but its all posture till you have market fit and for VCs market fit is an exit–no?

      1. LE

        Not BS but its all posture till you have market fit and for VCs market fit is an exit–no?Well in a technical sense this is correct no doubt. But I would argue that having irons in the fire, even if they haven’t paid off with an exit, has tremendous value for a VC (or even an angel investor). The obvious reason is it helps attract others that you can invest in who might give you an exit. The “toombstone” of deals of a VC is important. Backing a well know company even if it hasn’t exited has value in itself in that way. [1][1] In the same sense that someone who starts and fails spectacularly is often (I mean in this day and age) in a way better position opportunity wise than someone who never failed and runs a small and profitable operation.

        1. awaldstein

          DisagreeThe only thing that matters for a VC is winning from my perspective.Till you have that it is all treading water.

      2. William Mougayar

        There are different levels you reach of course. Exits are like notches on your belt, but if there is visible momentum in your portfolio, then you go by that, until you have exits.

        1. awaldstein

          Well said, I simply don’t agree my friend.Entrepreneurs can win by losing sometimes.Investors win by winning .All the buzz may drive deal flow but at the end of the day you are successful if you exit and return profit to the fund.Yes it takes time and how you manage that time is critical.But that’s it and nothing more.It’s what drive more funds. It’s what earns you a carry.I like being an angel investor, an operator and an advisor for startups.I have made more capital on the third than the previous two over the last decade.That is my mark.

    2. Jevon


    3. TeddyBeingTeddy

      Someone needs to start a business that exports single girls from tier 3/4 cities to tier 1, needs to correct the supply/demand shortfall. I mean, you gotta drive to friggin Campbell to see the equivalent of a 6 in tier 3… It’s getting to be like those oil fields in North Dakota out here… But much more ethnically diverse.

  12. Michael B. Aronson

    you left out philly, its first or second tier in healthcare including hcit. Its second tier in IT and ecommerce although a lot of these companies out of PENN end up in NYC, Yodle and Invite Media to name a couple. Our funds have been about 1/3 philly and the rest NYC with an occasional SF and Seattle. Philly has Curalate, Monetate, RJ Metrics and others right now.

  13. David C. Baker

    Interesting perspective–I appreciate you sharing it. I’ve lived in Nashville for 20 years, and it’s really changed over that time. When I first moved here with my consulting business, I quickly discovered that I had to have a toll-free number because prospects from either coast had no interest in learning anything from someone in TN. Now, of course, it’s considered a cool place and I proudly proclaim the Nashville connection.I have very little connection with your world: JumpStart Foundry is a client and I’m on the advisory board of the Entrepreneurship Center, and that’s it. But as you note, we have the largest healthcare presence of any city–IN THE WORLD. But we don’t have the tech or funding footprint to take advantage of that. I’m not sure if it’ll every change, although some entities are working hard to change it. Steve Case and crew came through last year touting the area as one that should be on everyone’s radar, but there might have been another agenda there.

  14. Jeff Lunsford

    Dude! You forgot San Diego! ServiceNow ($12B market cap), Illumina ($21B), and many more…

  15. awaldstein

    Nothing in Austin?Spent three years managing an investment and channel from Dell and it seems to have all the pieces in place.

    1. Pointsandfigures

      Austin is growing. It’s not huge but it’s growing.

  16. Pointsandfigures

    I live this. In Chicago when we started there was nothing. Now there is momentum and great companies. We are slightly behind LA. If you are going to build a local startup ecosystem I believe strongly that you lead with your strength. Fred’s example of healthcare in Nashville is a good one. There are usually historical reasons cities exist. Figure it out and build off it. If you try to compete with the Valkey you will lose

    1. awaldstein

      hmmWhat are the top market strengths of LA and Chicago?I know the former but curious on your perspective?And honestly cross the boroughs I can’t pinpoint in in NY either.

      1. Pointsandfigures

        In Chicago there are a lot. Chicago’s biggest sector since 1848 has been finance. But strongest businesses have DNA in what built the city. FinTech for sure. Events is another. Logistics is another. Ag is another. Consumer goods are strong. Healthcare is strong. Most successful startups here generate revenue and solve B2B problems that are not sexy. Cool thing is there is plenty of talent here if you know how to find it-and have that network. Tons of customers within a 4 hour drive any direction

        1. LE

          I grew up with a great deal of admiration for Chicago as my Dad did significant business there. It was always a place that, to me, had a nice feel to it and was “important”. That said all I hear now is about the gun violence. And it just doesn’t stop this was a NYT interactive feature within the last week:

        2. awaldstein

          Fintech. Events. Logistics. Ag, Consumer. Healthcare. B2B.All you are missing is sauteed kale.

    2. BillMcNeely

      That’s a challenge here in Dallas. We are a real estate, oil and gas and to a lesser extent retail and logistics town.

      1. Ana Milicevic

        So what about tech innovation in those sectors?

        1. Jonathan Van

          There are fledging startups like and that are Dallas home-grown. There’s also a company called Dwelo that’s opening an office in Dallas.

          1. Drew Meyers

            I’m a fan of real estate plays :)Hadn’t seen leaseful before.. its a space I’ve been thinking a lot about w/

      2. PhilipSugar

        I know some really good tech companies there.

      3. Bipper Media

        I’m in Dallas today visiting some friends, and they told me there’s a lot of VC activity here… they just weren’t able to elaborate on exactly what or where.

        1. BillMcNeely

          Tech Wildcatters, deep space ventures perot Jr

    3. Donna Brewington White

      There are usually historical reasons cities exist. Figure it out and build off it.This seems like really sound and insightful advice. I have Chicago on my radar for future expansion and this really rings true for this city in particular, but I am sure others as well.

  17. LE

    Firstround in Philly “first round” is a top tier local investor although I haven’t looked to see how many of their investments are in the metro area vs. elsewhere.

  18. Steve Berneman

    Fred, thanks for the post and welcome to town.”These third tier markets need a few strong Series A focused VC firms who have large enough fund sizes to be aggressive lead investors and also have the conviction and stomach to play that game.”Curious: why a Series A and not something earlier? From most Nashville entrepreneurs’ experience, we can raise the A from LA, Chicago, NY, and Boston because we have strong metrics and low burn rates. It’s the early investment that is very difficult to find, so the best entrepreneurs are forced to leave town.

  19. Mike Wangsmo

    I’m in Houston and while there are unbelievable amounts of investable wealth here, it is very hard to find VC for technology companies. It is easier to raise $10M for a company starting up to explore of new oil reserves than it is to raise $250k for a software technology company.

    1. BillMcNeely

      Great point! When PICKUP expanded to Houston we were hard pressed to find the infrastructure of startups such as co working space Start Houston was it

      1. Mike Wangsmo

        There are several co-working spaces but the funding side is still sparse. Mercury Fund operates here and are very helpful but that is the only VC presence I’m aware of for technology companies. There are angel investors here but since their wealth is O&G related primarily, they seek companies in that space. There is some technology angel activity but given that Houston is the 4th largest city (close to becoming the 3rd), it just doesn’t create the amount of investable opportunities needed to sustain.

  20. Dan Wick

    Interesting post. Where would you place Minneapolis and The North? I’m biased because I exist here, but after being here for 15 years, it feels like we are at all time high in terms of capital flowing into starts ups here. TechStars is kicking off this summer here. Do you have an opinion or hear of any of the activity up here?

  21. PhilipSugar

    Speaking from a >4th tier perspective:You have to play to your strengths. Kind of like Steph Curry. Does he try to play the low post game?Are you going to get that crazy huge funding round for an idea and parlay it into another crazy valuation??? Nope. You are right you need to be in the first two tiers to do that.But that doesn’t mean you can’t build a great company.Are you going to have the huge amount of talent? No but that isn’t a bad thing for several reasons:1. You aren’t going to have people that are just in it for the chase. My most important interview question is what did you do as a kid/off-time2. When you pay a person a six figure salary they can live and be happy, not just survive.3. You won’t have crazy turnover.Go to The Gulch in Nashville and tell me that is not a great lifestyle.

  22. jusben1369

    I think you nailed the RTP area in North Carolina perfectly. At least, on the tech side (life sciences is stronger here due to the Universities) At the seed level things like AngelList are making a huge difference. But after that it gets tough. In 3rd tiers few have gone before you. Seed to Series A? You can talk to a lot of entrepreneurs for feedback in 1st/2nd tier. Same again for A to B and so forth (admittedly the funnel narrows but still) And IPO’ing? There are just a handful of people who’ve done it here over the last decade. And local capital is not leading its following.What I notice here in RTP is a lot of senior leadership/founders has moved here from 1st and 2nd markets. I suspect that’s also the case in a lot of 3rd tier places.

    1. PhilipSugar

      I give you SAS Institute as a counter example.

      1. jusben1369

        SAS is a bootstrapped, privately held company that prides itself on a strong “quality of life” work environment. Many people have been there for more than a decade. It therefore doesn’t spin out investors (no equity) or startup talent or both. It could have been our Dell if they’d gone down a different path.

  23. Tom Hart

    Have fun and let us know what you think of the Music City. We’ll be headed there tomorrow night for CMA Fest (wife) and Bonnaroo (me).

  24. Vic Gatto

    Excited to see your trip to my hometown of Nashville generate this discussion. I’m a Co-founder of Jumpstart Foundry – we are building a dominant VC fund here in Nashville. I agree there is a huge opportunity in smaller geographies, but as you say there are challenges.At Jumpstart Foundry we believe VC Funds need a different operating model to be successful in “Middle America.” For instance, we are vertically focused on healthcare only. This builds on the strength of our local community while also allowing us to invest as a true expert in Tier 1 markets.We also have built a deal sourcing and filtering technology to allow for the screening of many thousand healthcare ideas each year. I agree with you that there are great entrepreneurs everywhere, but in Middle America the density is far lower. To be successful a fund has to be able to efficiently shift through a lot of weekend pretenders to find one committed superstar.Lastly, Jumpstart believes that VCs have to provide more than capital to be successful. Therefore, we are very hands-on and assist our portfolio in sales, marketing, finance and operations. Truly partnering with our Founders to build great healthcare business is the best way for our fund to insure great results for our investors.Great that you are here. I hope to see you at the 3686 conf. later today.

  25. Steve Weiner

    if one were inclined to raise a fund and geographically focus, one of the best proxies is to look at admissions trends at major engineering schools. as an investor with dorm room fund in philly (penn, Drexel, temple dominated), we thought about this a lot. challenge is uniting campus and local government stakeholders, while giving students the opportunities and freedom to experiment and build. the Stanford model doesn’t only work because the weather in Palo Alto is great.

    1. Vasudev Ram

      >the Stanford model doesn’t only work because the weather in Palo Alto is great.Steve Blank has an interesting video and (IIRC) blog post series, called “The Secret History of Silicon Valley”. The story starts from the 1950s or even earlier, and goes on to talk about the factors that made SV what it became – firms, research labs, univs, students, profs, researchers, engineers, corps and more, all interacting.Edit: The link for it:

  26. leigh

    Smaller markets just need to brand themselves. Come together and call themselves something fancy and then a really cheap microsite with a cool map and done! 🙂

    1. Donna Brewington White

      Spoken like a true marketer. 😉

  27. kenberger

    The EUROPE equivalent of this: would be fun to have that chat too.I moved to Berlin, in part for the investment oppties around Europe. But rather than just do the London Berlin Stockholm Paris beat, I’ve made multiple trips to Estonia, Portugal, non-amsterdam Holland, northern UK, Poland, etcThe world is really one’s oyster.

  28. Zoe

    Are you familiar with Venture for America? It’s a non-profit that connects job seekers to start-ups in third tier cities. As a start-up your first hire is free, then they ask that you make a donation for your second, third, etc hire. It’s a great way to infuse these smaller tech ecosystems with talent.Venture for America is how I got my current job as Product Manager at Splitwise. We’re in Providence, Rhode Island.Thanks for writing about this topic. Good luck to GG today, and safe travels back to NYC.- Zoe Chaveszoe at splitwise dot com

    1. Dan Moore

      Hi Zoe,Is the idea to have folks move from other places to the third tier city, or to foster interconnections within the city? If the former, then I am not sure what the value add is above recruiting in general; if the l am not sure what the value add is beyond networking.But perhaps I misunderstand?

  29. Ryan Ferguson

    Respectfully, the other place you are missing is Utah (Salt Lake and Provo)… bigger scene there than Boulder or Austin

  30. sigmaalgebra

    Gee, Fred, you omitted a biggie example: FedEx in Memphis! Yes, it was venture funded, starting quite early on. IIRC, Weiss, Peck, and Greer and some more. E.g., General Dynamics was in early on. And, IIRC, Newcourt. And there was an arm of Chase; I met one of their guys in my office (next to Fred Smith’s) in Memphis. E.g., my work with the differential equationy'(t) = k y(t) (b – y(t))pleased our two representatives of BoD Member General Dynamics, got them to stay afterall (they had tickets back to Texas), and saved Fedex.Another biggie point is the Internet: If we believe in connecting people separated by long distances with voice telephone, e-mail, Skype, social media, PDF files, etc., then setting foot in Nashville, Poughkeepsie, Memphis, Austin, DC, Richmond, a Big 10 university town, Atlanta, etc. should not be a huge obstacle. If we are willing to pay attention to Oklahoma in basketball, then why not pay attention to, say, Urbana, IL in information technology?Besides, IIRC, USV has been willing to go to Eastern Europe — not just because of the beautiful women in Solvenia, right? Ah, in January, Melania will be First Lady!!!!!!!I have to believe that there is another biggie point: The returns venture funds need are high. Only exceptional projects can achieve those. Only a little of what is in Silicon Valley is the exceptional means. Really, there have to be many times more exceptional means outside the leading venture cities than inside.E.g., there is the applied math topic linear programming and various extensions for integer programming, network flows, scheduling, various cases of what can be called resource allocation, etc. For the right practical problems, which in my experience have to be selected quite carefully, it’s darned powerful stuff. Now there’s a good shot at making an application SaaS. The centers of the work are at Georgia Tech and Rice University. A big center of applications is Houston for running oil refineries. A possible promising application now is worker scheduling. The whole field has been focused on saving money in real operations, including business, from the beginning. For some decades, a shockingly large fraction of the Nobel prizes in economics have been based on linear programming or closely related applied math — that is, the field really is supposed to be relevant to the real economy.IIRC, for a while PeopleSoft believed that they had a good application of linear programming. IIRC, Oracle bought PeopleSoft.IIRC, SAP is big on linear programming related applied math.If someone finds a new appropriate application of such optimization applied math, then they stand to have a good enterprise startup, maybe SaaS. But, will such a startup tend to be in one of the main venture cities? I’d say no: More likely would be near Georgia Tech or Rice University.[Note: There is nothing in the applied math of my startup at all close to linear programming.]But linear programming is not nearly the only powerful applied math that computing and the cloud might make valuable, and the location of a corresponding startup is most likely not in one of the top dozen venture cities you mentioned,So, for venture firms, might try to reach out to the green field of problems and solution technologies outside of those top dozen cities.Here’s a way to look at it: What the world (A) can like a lot, and be the basis of a successful information technology venture, is quite broad, and so are (B) the corresponding powerful, valuable solution techniques. Well, for basically social reasons, the top dozen cities are, in a word, too inbred and have far too narrow views of (A) and for reasons of not nearly enough in education are nearly blind to (B). So, to do well on (A) and (B), the green field far from the top dozen cities stands to be where to look.

  31. BenWinokur

    Very nice post, Fred! I’ve worked at startups and lived in these much smaller markets since I left school. A few observations to add:1) There’s an order of magnitude difference between the third tier and the smaller tier below. I’m currently in Charlotte, and the networks here are so much less dense than they are in the Research Triangle (for instance). This has all kinds of effects negatively affecting founder support to mentorship to idea vetting.2) One of the biggest issue with finding a great local lead investor is that in smaller markets, the VCs operate on a different, less risk-tolerant model for two reasons: 1) there are a lot less potential “return the fund” investments available in these markets, and 2) the LPs tend to prefer less risk in the portfolio, because they tend to come from more traditional backgrounds. As a result, VCs in smaller markets are more excited about filling their portfolios with relatively safe “doubles” than you and your LPs are. I have come to suspect that risk tolerance among local VCs increases with entrepreneurial density (or in Brad’s case, sheer force of will and personality :)).3) Your observation about market specific advantages (healthcare in Nashville) is really important and often underemphasized by local governments and tech communities in smaller markets. There is sometimes a naivety that the universality of the Internet means that any business can come from anywhere, which ignores the value of dense networks of expertise. For example, I once asked someone in Detroit what types of companies they thought would succeed there. Their answer touched on consumer internet and enterprise software, even though the dense networks there are around physical goods. These kinds of local specialities have the potential to even out some of the hiring disadvantages.4) I’ve also seen that, although it’s harder, really good companies will find money from a less well-known launching pad. It’s just basically a completely different set of challenges than doing a startup in a real Tier 1 or 2 market

  32. Guest

    @wmoug:disqus and/or Shana, trying to change my email address at disqus, and I’m not getting their “verification emails” (over about a week) so I can’t post here. No response when I atted them on Twitter…their online help for this is a little opaque.Can you point me to the right avenue to solve this? Thanks. (It’s Anne Libby)

    1. Donna Brewington White

      Oh no! I hope that gets fixed fast. We need you!

  33. Donna Brewington White

    When you write a post like this, I have learned to pay close attention. Very close attention. This is not just good awareness to have as an investor or entrepreneur, but also for those of us who serve the startup ecosystem. To bring Tier 1 quality services to startups in Tiers 2 & 3 and beyond seems like a good business strategy (especially related to a vital need such as hiring). At least I’m betting/banking on this.

  34. James Ferguson @kWIQly

    Once upon a time – an entrepreneur had an idea for a market and delivered.They were the first in their niche , location , eco-system.And in every eco-system you can still find that first – yes they had it tough – Because – “you dont do that here.”But they said “so what “- and did it anyway – this is the biography of every startup hub.Like it or not – discounting outliers is a common and ignorant game.Romans 5:3″… we also glory in our sufferings, because we know that suffering produces perseverance; perseverance, character; and character, hope.”If a VC does not take that to heart – they are gambling !

    1. Donna Brewington White

      Interesting how those who were once disruptive become targets for disruption.Blessed are the eternally hungry. Or cursed.

      1. James Ferguson @kWIQly

        For I was hungry and…It is for each of us to fill the blank

  35. jeffgrillo

    @fredwilson:disqus – where do you think Portland, Oregon fits into the mix? They have a big mobile startup scene. Urban Airships technology is especially cool.

  36. jkaljundi

    Very relevant also to all European countries, with the exception of UK and may be Sweden and Germany.

  37. Rayhan Rafiq Omar

    Now extrapolate that it’s harder to do a start-up in third tier or lower cities to Europe. Or even just London.Lots of hype, as would be the case in a massive city, but very little risk capital.The resulting behaviour is no focus on innovation, and lots of funding for unimaginative e-commerce, gaming and FinTech.I think the key to this post is the safety net of community and capital in Silicon Valley provides an environment for the best people and ideas to have a chance at surviving ‘the struggle’.

  38. heather

    I didn’t read through all the comments but wanted to shout out Baltimore. We’ve got a strong start up ecosystem with exciting third wave sectors – healthcare (hello Johns Hopkins), cyber security, edtech, and food plus strong support of major brands in town such as Under Armour. Cost of living is reasonable and talent is not fleeing from Hopkins. Proximity to DC/Defense is also a bonus. Check out the world-class things happening in 3D printing at the Army’s nearby Aberdeen location (with lots of defense contractors relocating to be close) and you might just move us up to Tier 3 Fred. 🙂

    1. Donna Brewington White

      Would this be part of the DC ecosystem, or distinctly different?

      1. heather

        Baltimore is distinct at the moment but there is convergence happening around bio-tech and 3D printing-manufacturing innovation.

  39. RacerRick

    Great post, Fred. From out here in the fourth (or fifth) tier of markets, I think you’re spot on.

  40. SP

    As someone that started companies in NYC and now helping others grow here in Austin, you’re always welcome down here and I am happy to help connect you Fred. It would be great to have you here, as there are just as many promising companies here to invest in.

  41. Ashley

    I’m curious, for my own selfish reasons – what are the standout Series A firms you see or have worked with in DC?

  42. Ryan Macy

    Thanks for visiting our city! As a healthcare startup in Nashville, I can attest that there are some challenges. Startup’s path to institutional venture capital isn’t easy or clear here (relative to other cities). We have such a colorful angel ecosystem that is heavily comprised of operators. I find this to be a strength because these people provide incredible advice and insight. We have a lot of really, really good tech/product and business talent that isn’t fought over as competitively in other markets, which also is a bonus.

  43. Howard Marks

    Equity crowdfunding is going to solve the third tier access to capital in a big way.

  44. Rick Bullotta

    Philly is constantly overlooked in these types of analyses. At probably $600 million in deployed capital in 2016, it’s just a shade behind LA…probably because a large percentage is healthcare technology and doesn’t get tracked in some datasets?

  45. tommariner

    Many of the recent winner VC investments are collaboration tools. For project management. For design and development. For using talent wherever it resides. These Internet tools let everyone anywhere judge progress, theirs and other team members. Trello. Slack. Basecamp. Etc.Why can’t VC’s use these tools, not only to help their invested company management teams organize, but to track real progress, and judge past doings to see if a team is grown-up enough to succeed? How about being in an Uber car in Nashville and track or attend a meeting in Silicon Alley, or Valley? Or vice versa?

  46. Swatee Surve

    Fred, would love your reaction. Geekwire asked me to provide my thoughts about Seattle from a healthcare perspective.

  47. Emerson

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  48. fredwilson

    Great comment and great perspective

  49. JamesHRH

    Its not often you are wrong, but you are here.A healthy tech ecosystem has a massive success that becomes the industry standard which also spits off reputation based funding at a large scale (‘ Hi, my name is Dustin Moscovitz, have you met my friend Dave Morin?.”)The cycles you describe here do not happen without that huge winner.

  50. LE

    Team is definitely an issue if you are not located in an exciting/happening place. Not for everyone but most likely for a nice majority. Enough to move the needle. Also, once again depending, for getting certain types of customers. Young people are going to think “do I really want to live there?”. Older people will think “do I want to move my family there?”. I don’t think that’s to be dismissed (not saying you are doing that). A business has enough issues starting out it doesn’t need to have two hands tied behind it’s back in several area. Location typically does matter I think to a much larger extent than people want to think (because they will highlight successes that broke the mold somehow).My advice for guys starting out is NYC (women are abundant and men can pick and choose). For women it’s Silicon Valley (opposite situation of NYC balance is for women). Think that doesn’t matter? It does try talking to a women trying to date in NYC.

  51. PhilipSugar

    I agree with the first part of your paragraph but not necessarily the second. If your customers are just based in one of those two tiers sure. But if like most they are spread out all over the place, I think it is a huge advantage not to have the cost structure that a tier 1 or tier 2 burdens you with. I have never had a client say well you’re from DE so we’ll pay you less or you are from SF we’ll pay you more.

  52. sigmaalgebra

    Charlie, you are talking startups and venture funding attached to points of geography. Hasn’t the Internet made that attachment no longer important?

  53. Donna Brewington White

    Lancaster may warrant its own tier. (I mean that in a good way.)

  54. PhilipSugar

    Sorry meant last paragraph.

  55. LE

    If you need to recruit someone who comes from a high rent and cost of living place how easy is it to get them to take a pay adjustment? By pay adjustment I don’t mean less than they are making. I mean how easy is it for someone to adjust to what pay means in an area they have no seat of the pants feel for?Also with hiring I think the size of the company matters. If you are in DE and only need 20 or 50 employees that’s one thing. But if you need 1000 employees perhaps enough good people will think “do I really want to relocate to Delaware?”.I was surprised to find out that my brother in laws property taxes are ridiculously low compared to what we pay where I am. (Plus no sales tax).

  56. LE

    Ok, however I don’t think that you can deny that the serendipity in NYC/Valley is in a league by itself. That type of connecting (and ease which you can do it in the right place) is what leads to things for someone on a personal level. That is why you see these seemingly normal people no smarter than the guys in your area that are worshiped as gods by bloggers and the media.

  57. JamesHRH

    You didn’t stress the success in the original comment. I live somewhere where startups are promoted, but the cycle does not work.We have had some medium success, but they have not cycled forward.Maybe the specific intent is missing for tech here, but it is not missing for other sectors.

  58. JamesHRH

    Well, to me & you, but to folks who encourage entrepreneurs but have no stake in it, startup activity is success.Parsing a bit here, but….that’s the experience I have had in West Can.

  59. sigmaalgebra

    > Ok, however I don’t think that you can deny that the serendipity in NYC/Valley is in a league by itself.IMHO, it’s already over or never really happened in bio-medical technology because Silicon Valley just doesn’t have the research and expertise in bio-medicine. Instead the bio-medical centers are, where? Boston around MIT, Harvard, and the research hospitals? NIH and Walter Reed in Bethesda? Johns Hopkins hospital in Baltimore? More? Rockefeller University in NYC?IMHO, the simplistic, social, mobile, local, sharing stuff that paid the rents on Sand Hill Road for the past 10 years are over, and for the new stuff Silicon Valley is missing it just like now they are missing bio-medical.

  60. sigmaalgebra

    The people you are talking about are likely young, single, poorly qualified, low grade labor writing HTML, CSS, JavaScript, or SQL queries for startups for more social, mobile, local, sharing nonsense apps funded by Sand Hill Road hoping, hoping, hoping for a big win, a big exit, a big acquihire exit, etc.I have to believe that soon someone will do some arithmetic and conclude that there’s no money doing that except for the SF real estate people riding a bubble in property rents.Apparently there is a lot of momentum, from simplistic consideration of past patterns, past gains by LPs from FB, SnapChat, and Google, from the 2% from some big funds, etc. IMHO it’s all about to crash.

  61. sigmaalgebra

    Yes, but with VCs, were talking business, not family, right? Isn’t the Internet good enough for business?

  62. Donna Brewington White

    Even though much of my business is transacted via internet, I have learned that navigating regional cultural nuances (even within the U.S.) can be critical. This sensitivity can be present without proximity but must be consciously cultivated. There is often distrust of those outside the region truly being able to understand their needs and challenges. I found this particularly true in working with clients in Texas and the South.This may be less of a factor when it comes to providing capital rather than recruiting services, but I wonder…

  63. JamesHRH

    We totally agree here, but that is where the wire got crossed, communication-wise.

  64. sigmaalgebra

    Long it has seemed that your judgment on such things is impeccable, and your post is articulate. I give up! You win!So, it seemed that in the recent Meeker KPCB report she was anticipating more use of video for socializing, or, as I put it in a post here on the report, maybe bros scattered across the country watching the NBA finals together via some high Internet data rates, some high quality video, and some clever software. So, the only problem is not just that can’t easily use video to pass the chips, dip, and brewskis.As we saw here at AVC a few days ago when some of the former AVC analysts submitted video clips, there can be challenges in sound quality and lighting.So, lots of Internet data rate and video but, still, no chips, dips, brewskis and poor sound and lighting.Then, you’ve explained the worst of it: Even with all that technology, the situation is still a long way short of actually being there.For the Meeker conceptions or predictions for Internet video for social, your insight looks like a severe warning or reality check.Okay, sorry Nashville. You’ve done really well in the country music business, but don’t count on a lot in venture funded information technology startups. Same for the rest of … ah, heck, it’s easier just to list the usual suspects that do have a chance: Silicon Valley, LA, Seattle, Chicago, Philadelphia, DC, NYC, and Boston. Oops, sorry Brad — Boulder.But my view is that anything much like present venture capital for information technology startups is living off past glories and has no real future, not even in Silicon Valley.With some big changes, maybe a big stir of the economic pot, sure. Maybe some of what Trump does will lead to some big changes. E.g., Trump wants to bring manufacturing back to the US.Well, for an example, IIRC the Taiwan company that is making iPhones in China is on the way to automating that work. Broadly, Trump and all of us will have to expect a lot of automation. Automation can use a lot of computing, e.g., the internet of things (IOT). E.g., will need capital budgeting, training, supply chain management, logistics, scheduling, order entry, shipping, all under uncertainty, and for all of that can use a significant fraction of the full range of computing, management science computing, etc. So, maybe there will be some new categories of venture funded information technology startups there.More generally, I believe that with Trump the economy is going to get going with some significant changes. Lots of change is caffeine for entrepreneurial startups.Venture capital for information technology has reinvented itself more than once before, so maybe it can do so successfully again.Somehow I suspect that the situation will be “Only the exceptional survive.”

  65. Donna Brewington White

    So you think Trump will be president?

  66. sigmaalgebra

    Sure. At this point, no real doubt. As we have seen, Trump is good at beating opponents — 16 former opponents can speak to that. Then, if only from the pattern, Trump will beat the Democrat candidate “like a rented mule”. I was saying this last fall or summer — I’d have to check some old posts or e-mail to find the exact date.Why will Trump win?The economy is sick, and a LOT of VOTERS are very concerned and like Trump’s message on the economy.This stuff of refusing to enforce the immigration laws and refusing to deport criminal illegal immigrants is close to treason, a LOT of US VOTERS very much do NOT like that nonsense, and Trump will put a STOP to it.Then there’s stuff like admitting many tens of thousands of young men from Syria. Gee, with ISIS in Syria promising to attack the US, what could go wrong with admitting all those young men from Syria? And, as a bonus we get TB, measles, likely more, people who just do NOT have a clue about US values. So, with radical Islamic terrorism, the US has to temporarily essentially stop Muslim immigration until the US can be sure about the people entering. This is just simple, common sense that a LOT of VOTERS clearly understand and LIKE. At least Trump has some good common sense.A LOT of voters are totally sick of the US throwing away huge quantities of precious US blood and treasure trying (A) to give away big parts of the US economy to dirt bag countries to get them to behave, (B) policing the world with a global military, and (C) building constitutional, parliamentary, secular democracies with basic human rights and capitalist economies where no such are understood, wanted, or tolerated. Instead, we will back off on a lot of that and pursue, for lack of a better phrase, “America first”. A LOT of VOTERS like that version of a revised US foreign policy. We’ve had 24 years — Clinton, W, Obama — acting like total idiots throwing away our precious blood and treasure in the disgusting oily open sewers of the Mideast,in the wastes of Akrapistan, etc. We’re not doing that anymore.Trump can use fourth grade language and just obvious common sense to explain how the US can do much better, and a LOT of VOTERS like that.Trump seems sincere, strong, smart, determined, for the middle class voters, and able to get things done — e.g., in his first effort at politics, essentially totally blow away the other 16 state governors, US senators, etc., for the rock bottom, bargain basement cost of just $55 million, and win the nomination, as of later today, from just the committed delegates, by a wide margin and wider from the uncommitted delegates who either like Trump or just want to be with the winner.Can Trump achieve all that his Web site says he wants to achieve? Maybe not, but it looks totally clear to me that he will achieve much more of that than anyone else in the race.Besides, we get Melania as First Lady — with all five languages! Terrific!

  67. Drew Meyers

    no, I don’t think so. Strong relationships are built in person.

  68. sigmaalgebra

    WOW! For the optimism about video over the Internet for remote presence predicted by Meeker, etc., sorry people — that dog won’t hunt!

  69. Drew Meyers

    I’m not in the camp that thinks everyone should/will work remote and all businesses will thrive as a result. It can be done, yes, absolutely. The basecamps & automattics of the world have proved that. But that doesn’t mean its the best route for everyone. I think it really takes the right type of person to thrive in a remote environment.