I’ve mentioned the book The Power Law by Sebastian Mallaby before. In it, he gives a detailed account of the genesis deal of the Silicon Valley we know today - Arthur Rock funding the Traitorous Eight to leave Shockley Semiconductor1 and form Fairchild Semiconductor.
The ironic thing about the deal is that the Traitorous Eight weren’t looking to start a company. They were fed up with the management style of William Shockley and after attempts to remedy the situation failed, decided to try to find new jobs. Their only criteria was that they wanted to continue to work together, so they went looking for a company willing to hire them as a team.
During their search, they got connected to Arthur Rock, a New York finance broker. Rock was actually the one who broached the idea of starting a company, with the promise of financial backing he would arrange.
Directly from the book (emphasis mine):
"The way you do this is you start your own company," Rock said simply. By striking out on their own, the scientists would be able to work independently in the location of their choosing. But more than that, they would be company founders. They would own the fruits of their creative wizardry. A self-made loner from outside the establishment, Rock felt strongly on this last point. A certain kind of justice would be served.
Rock's proposal took some digesting. "We were blown away," a researcher named Jay Last remembered later. "Arthur pointed out to us that we could start our own company. It was completely foreign to us."
Gordon Moore, the engineer who led the failed appeal to Arnold Beckman, recalled a similar reaction. Years later, when he had achieved fame as the co-founder of two iconic Valley companies, Moore was still at pains to describe himself as an "accidental entrepreneur." “I'm not the sort who can just say, 'I'm going to start a company." he reflected. "The accidental entrepreneur like me has to fall into the opportunity or be pushed into it.” At that restaurant in San Francisco in late June 1957, Rock was pushing him firmly.
Gordon Moore would go on to co-found Fairchild Semiconductor, Intel, and lend his name to the prophetic Moore’s Law. He is undoubtedly one of the founding fathers of modern day computing, startups, and Silicon Valley.
Amongst all of those accomplishments, he still considers his journey into entrepreneurship as “accidental”.
Small cities need entrepreneurship to stay economically competitive. Small, local businesses are important, but most of them are dollar retainers, not dollar importers. In other words, once dollars come into the local economy, most small businesses ensure they stay. But you also need a set of businesses that import those dollars in the first place.
These are companies that can grow independent of local demand. That can start by first meeting a local demand and then expanding to meet that same demand elsewhere. Or it can start by finding demand elsewhere from the start.
In any event, we need a supply of founders to create these new companies. Not all will work. Not all will last. But a job of economic development is to develop the conditions to have a constant supply of attempts. Over time and with some volume, a certain number will work and last.
In many of small cities, there is a certain group of individuals who feel strongly about this notion. Sometimes they are entrepreneurs themselves. Sometimes they are part of a multi-generational family business. Sometimes they are long-time service providers that have seen the merits of entrepreneurship through those they serve.
The most common way to act on their belief is to form an angel investing group. These come in all forms and fashions, but they are all a way for people to put money directly behind a city’s economic future. Let’s call them “Small City Angels”.
Small City Angels have three main criteria for an investment:
It can create good returns on a risk-adjusted basis - they aren’t in this to lose money or sacrifice return potential for impact
It can grow to a scale outside local demand
It can become a durable part of the local economic base, with the city also experiencing the benefits of its growth
However, Small City Angels often face a dilemma.
Given their return profile, these angel groups aren’t built to fund restaurants, retail, or other local service businesses. They want to fund businesses that can grow outside local demand. So even though this type of business is prevalent, they aren’t really a fit.
But tech unicorn hunting doesn’t work either. Firstly, and most importantly, these opportunities are just few and far between in small cities, so it is rare to find a high-quality one to invest in. Secondly, many Small City Angels are skeptical of the speculative nature of multi-million dollar pre-product and pre-revenue valuations and the venture capital funding train. It just doesn’t reflect their experience of how to build an enduring, sustainable, and growing business.
So they struggle. Deal flow either doesn’t fit or barely trickles in. People stop showing up to pitches. Volunteers to diligence deals get harder to find. Founders don’t understand why they won’t write checks. Frustration mounts and eventually those dollars set aside to invest in the economic future of the city make their way back into the stock market, real estate, or funding a tight circle of ventures of family and friends.
What’s going on here?
Many assume that the problem with small city entrepreneurship ecosystems is that there isn’t enough capital. As you can see from the narrative above, this usually isn’t the case. There may not be institutional capital, but there is usually more than enough initial capital to get businesses off the ground.
The problem is that there are just fewer people starting things that strike the balance these angels are looking for. The research proves this out. 71% of small cities are in states with opportunity entrepreneurship rates (percent of new entrepreneurs who created a business by choice instead of necessity) below the national average.
And the founders that do exist are often pulled to the two ends of the entrepreneurship spectrum - either a small business that meets local demand or a billion-dollar-or-bust software company. There is a missing middle of founders who have ambitions to grow a large company, but also don’t believe that the risky venture capital path is the only way to do it.
Should we assume this type of founder talent just doesn’t exist in these places?
We don’t think so.
Our hypothesis is that while founder talent may be evenly distributed, it’s culturally activated.
The Traitorous Eight founding story is a telling one. Eight engineers who had to be coaxed into starting a company became the start of a Silicon Valley genealogy that lives on today. As of 2014, over 2,000 companies could trace back to Fairchild Semiconductor, including 92 public companies, with a combined value at the time of over $2.1 trillion dollars (a number that is much larger today).
All of this because someone tapped them on the shoulder and said, “You all should start something and I want to support you to do it.” Imagine what would’ve happened if he hadn’t.
Arthur Rock wasn’t just an investor, he was an activator.
If our cities are struggling to produce the type of entrepreneurship we want, we might have to change tactics. Angel groups, accelerators, venture funds - they just might not be a good fit to address the problems our ecosystems currently face.
Erik Torenberg has a good post on how to grow the startup economy. He talks about three required ingredients: builders, capital, and customers. On increasing the supply of builders, he writes:
Additionally, you can increase the supply of builders by simply encouraging more people to become founders and reassuring them that they do have the ability to start a successful company. Giving builders belief capital to do something extraordinary can be the difference between success and never even trying. As Scott Alexander puts it:
“Most people don't accomplish great things because they don't try to accomplish great things, because they don't think of themselves as the kind of person who could achieve great things.”
Encouraging more talented people to take the leap, and become a founder can greatly increase the supply of builders.
It might take a new model of activation to get things moving in small cities - of finding hidden founder talent and tapping them on the shoulder. The data suggests they are out there. The stories suggest so too.
I’m not saying that if we do this we will create the next Fairchild Semiconductor. But I am saying that if we wait for the right kind of founder to just show up, it might be a while.
Small City Angels might need to rethink how they go after the outcomes they want.
Maybe before we can write checks, we need to write more invitations.
Maybe before we can due diligence, we need to help someone see what they can do.
Maybe before we can syndicate, we need to scout.
I have this vision of bringing a new type of angel group together once a quarter and having a simple requirement to attend the meeting - bring one name of someone in our city that you think should be starting a company that fits the Small City Angel criteria. How quickly that simple act could add up.
I’m excited about this idea because it doesn’t take any money, approvals, committees, or programs to start doing.
Now, how to do it well may be another story - and the topic of another post…
If you…
are interested in building for the small city segment…
are already building for the small city segment…
know someone who might be/should be building for the small city segment…
want to contribute expertise to problem profiles…
or want to help us expand our networks of trust in small cities…
please subscribe and reach out at dustin@invanti.co.
Interesting aside - William Shockley was originally from Palo Alto, but was located mostly on the East Coast during his professional career. A major reason he founded Shockley in California, which became the genesis of so many tech companies to come, was because he had moved back home to care for his ailing mother. Never underestimate the power of family in understanding where people decide to work and live!