Small Towns, Bigger Games

A guest post by Jamie Finney from Innovative Finance Newsletter

Dustin Mix

and

Jamie Finney

May 21, 2024

This is our first guest post and I’m really excited for it to be from Jamie!

Introduction to Jamie

I first connected with Jamie when he reached out about a post I wrote. I was really surprised and excited to get his email. And funny enough, although I didn’t know him, I knew of him and had even briefly met his brother at a Kauffman Foundation conference on alternative capital back in 2019.

Jamie, his brother Cory, and Marc Nager started a firm called the Greater Colorado Venture Fund in 2018, which invests in startups born outside the major urban corridor of Colorado. This wasn’t just a theory when they started - they had done the on-the-ground work to know the opportunities existed. Jamie spent time living in a van and touring the state prior to the fund, and then once the fund was finalized, the whole team did something similar to find what companies were out there.

Not only are they different in their thesis of who they want to invest in, they are also open to being different in the how. They offer traditional venture capital structures, but experiment with more innovative structures as well. Their goal is to fund what exists, not prescribe what should exist through the structure of their fund.

Jamie collaborates on a publication called Innovative Finance Newsletter, that you all should subscribe to if you’re interested in new ways to put capital behind companies. One of my favorite posts is his exploration of what a place-based portfolio looks like for smaller cities - Modeling The Flexible, Place-Based Portfolio.

Given the crossover in interests, Jamie and I have gone back and forth on a lot of topics and we both thought it would be interesting for readers of this newsletter to get his take on the intersection between small cities and startups.

As we went back and forth on ideas, I came to wonder what he learned about the companies in his portfolio that differed from the more urban-born norm. I’ve mentioned in the past that I’m not just interested in companies that solve problems for small cities, but also in companies that are built differently as a result of being born in small cities. Jamie seemed like a perfect person to learn from on this front.

So without further ado, here Is Jamie responding to the prompt:

“What differentiates the companies you’ve invested in, in rural Colorado, from those with more urban roots?”

Small Towns, Bigger Games

Actors have LA. Musicians have Nashville. Startup founders have San Francisco.

Anyone in these trades who has not moved to their respective mecca (and has the means to) ought to have a good answer as to why. The statistics for success are grim, and certain places offer a slight bump in the odds. Why do it anywhere else? Why do it in hard mode?

Even if your trade is not one of overwhelming odds, the same logic applies to any career. This is the dominating calculus of the last 100 years, taking humans from a rural to an urban species seemingly overnight.

If the game is career, the game theory optimal decision is to move to the city.

My job is to bet on founders who reject the modern urban playbook. We look for topophiliacs - lovers of their place.

It Starts With Place

A place can become special for endless reasons. It may be the local music scene, the outdoors, or just a familiar place where one can count on a sense of family. In my case, I invest in small-town Colorado. We have founders who have migrated for 300+ days of sunshine and others who are the sixth generation to live in their valley. Having been born here myself, I’ve been infected with our local strain of topophilia.

While rural Colorado happens to be the community I’m most qualified to speak to, I suspect our topophilia thesis holds up well beyond our borders and well beyond the rural-urban divide. Any place can become beloved. Once it does, it can defy the odds.

The odds may blatantly favor urban business endeavors, but topophiliacs make for a much more interesting investment.

Why Not Play the Odds?

Before I divulge why place-obsessed founders make a great bet, we have to answer that all important question – why not invest in the big city where career success gets a bump from big city odds?

As a rural focused venture capitalist, I’ve heard this critique from countless coastal city-dwellers. They are not trying to be condescending, they just can’t imagine a calculus other than their own. Ironically, this critique reveals that they’re already invested in winning the wrong game altogether.

San Francisco deserves cred as the undisputed mecca for startups.

Take the Traitorous Eight, for example. In 1957, eight employees at Shockley Semiconductor left to form Fairchild Semiconductor, a soon-to-be industry leader and eventual incubator of Intel, AMD, and other huge startup successes.

Meccas Dilute

Meccas, however, are a function of how often they birth enlightenment, and how profound that enlightenment is. In our example, that is the proportion of startup successes and the size of these successes. How potent is the special sauce, and how much of it is there to go around?

Fairchild was arguably peak special sauce. After the Traitorous Eight, the ninth and tenth members of their cohort were likely pretty exceptional. In fact, Fairchild became known for producing highly successful alumni - the “Fairchildren”. Now over 60 years later, the Bay Area has continued to dominate the tech success scoreboard

Except the gross number of successes is not how a mecca’s effectiveness is measured. With each new pilgrim, the talent level regresses to the mean. Now four million people later, what percentage of SF’s startup success is due to its mecca special sauce versus simply the law of big numbers?

Said another way, is SF’s mecca status today the result of exceptional talent with high batting average or simply the result of an outsized number of capital and human inputs despite an ever-lowering bar for talent?

Don’t get me wrong - I absolutely believe there are exceptional founders in SF. I am simply suggesting that the ratio of exceptional to average can only ever decrease in the same way that “ex-Googler” meant a lot more in 2006 than it does in today. Betting on a talent pool and its special sauce is a losing game. Once word gets out, the sauce can only get diluted.

As meccas dilute, they evolve into something else - big cities.

Once again, if the game is career, moving to the big city is the game theory optimal decision.

Except with startups, the game is not career.

This is where finding exceptional talent in a diluting mecca becomes tricky. The earlier you are to a mecca, the more likely the pilgrim is radical. They’re not there for rational reasons. They were called by something bigger. The earlier a founder moved to SF, the more likely they moved to help shape the future.

Today, after sixty years of diluting the sauce, the radicals blend in with the career optimizers.

A higher purpose is unique. Career ambition is not. The ventures we aim to back require the former.

So how do I ensure I am optimizing for future shapers as opposed to just the career-driven?

I leave the game-theory-optimal cityscape behind. I look for those playing a bigger game.

Let’s be honest, building a business is intertwined with building a career. Why not just bite the bullet, hold onto those ideals of the “bigger game” and move to the city? Hard mode–remember?

It is true, we are perhaps 95% less likely to run into a lead investor at the coffee shop and rarely meet the critical early customer at the local watering hole. And all startups do need lead investors and early critical customers. However, on the scale of future shaping, those are petty, solvable, career concerns.

In contrast, the big city is hard mode for those playing bigger games. An incremental sacrifice in career odds is nothing compared to being close to family, the outdoors, or a sense of community. That 30-minute commute could have been spent having breakfast with the kids. Fewer fancy restaurants is correlated with more space to think. These are the bigger games that topophiliacs play.

As you may suspect, there are psychographic effects of topophilia. They like being underdogs from their underdog places.

Keep in mind, underdog places are most places.

What is it about Topohiliac Underdogs?

Knowing full well that they are in “hard mode” from a career focus, topophiliac underdogs aim to shape the world. They don’t wait for the special sauce, or even care if they get any. Why leave it to odds when you can get to work building the business and future you think should exist?

With location set as an unchangeable variable, interesting things start to happen amongst ambitious people.

It starts with an inherent internal locus of control.

Cortez, Colorado is not the game-theory-optimized place to build almost any company. Yet, this small town, at the edge of the endless desert of the Southwest, only reachable by long drives and six seater planes, birthed Osprey, a multi-hundred million dollar backpack company. The universe did not line up for Osprey to be born here. Mike Pfotenhauer, having already decided to live in Cortez, decided to birth it.

Thousands of square miles of desert beckon from the edge of city limits. If you’re going to study the ins and outs of backpack design, this is the harsh, adventurous environment to do so.

The lazy observer would think that this is the special sauce that leads to great companies. The founder is the conduit of these centers of product insight. Successful companies are bound to happen so long as we harness the insights available to us.

Consider the thousands of twenty somethings who flock to SF to try their luck at startup roulette. They are there because of their propensity towards entrepreneurship. From there, the insight to start a company is presumed to be a matter of knowing where to look. Problems are everywhere.

Small town founders may spot small town problems, but big city founders are simultaneously spotting big city problems. No place has an inherent advantage in opportunity selection. Our human nature can’t help but solve.

Thus, spotting problems is not what makes a mecca special. It is the density of fellow problem solvers who share a propensity to start businesses.

Cortez, Colorado is not known for this density. Or any density for that matter.

This is what makes starting a company there such a high signal. There is nothing about the environment which inherently fosters high growth multi-hundred million dollar ventures. The small town advantage is choosing to bet on one's self despite the odds.

As Yoda would say, “Do or do not. There is no try.”

Mike Pfotenhauer did.

Rejecting these odds demonstrates an irrational but durable abundance mindset.

Whatever bumps the city-dwelling, mecca-migrators get by happenstance, they are dwarfed by the will and dedication to shaping one’s own odds from their hometown. All the ingredients of success are available, there are just those who wait for them versus those who create them.

This leads to the next, and perhaps most critical, small town advantage:

Grit is in the water.

Thousands of hours of startup podcasts boil down to this same X factor. However, grit is not obvious. It takes years to show up (or to find out that it is not showing up). Resumes and life stories may reveal it, but these are notoriously unreliable. Was the fancy degree a function of grit or privilege? Silicon Valley has famously over indexed on accolades only to find they are not as correlated with grit as once believed.

As opposed to hemming and hawing over what we think grit looks like, we invest in places where grit is in the water.

This is intentionally backwards to the mecca school of thoughts. While founder after founder flocks to the place with the least friction possible for their startup ambition, we optimize for founders who don’t blink at their relative disadvantages.

Might all of the nudges offered by the big city add up to propel startup success? Maybe. However, the presence of grit is a much higher indicator of startup success.

As a result, instead of going to meccas to look for grit, we look for founders amongst the meccas of grit.

low-resolution, oil painting of a rural Colorado setting and small-scale precision agriculture technology at dusk, DALL-E

This is the right time to play the farming and ranching card.

A 9-5 job in front of a computer can be challenging, but it is not hard work. Hard work is building fences, digging ditches, and waking up when the work asks you to. It does not happen on a watch and is often subject to the elements.

So how does this square with a VC fund? I am literally writing this from the comfort of my laptop as my wife drives us past farms and ranches. What would I know about hard work?

Meet Barn Owl Precision Agriculture. On our very first call, one of the founders said something that always stuck with me, “We speak farmer. We need your help to speak investor.”

Hundreds of agtech startups begin in labs, raise millions from just down the road from the lab, and then fail before they ever reach a farm. While every startup book repeats some version of “get out and talk to your customer,” this corner of tech manages to subsidize years in a lab with minimal customer input. Why?

Understanding the customer’s problem means knowing their work. In agtech, that means getting into the field and doing actual hard work. With Barn Owl, we didn’t have to guess if our founders would get out of the lab to do this customer development. This team is multiple generations into this journey. Their lineage is farming on the plains of the Ogallala aquifer. The language of “investor” is easy. We want founders who are fluent in “farmer.”

Sarah Hinkley, CEO of Barn Owl Precision Ag, on her way to victory at the American Farm Bureau Innovation Challenge (photo credit)

This came in handy when an unprecedented hailstorm decimated crops in Southeast Colorado, where Barn Owl is based.

The key to the growing season was supposed to be pilot customer success. They were supposed to be able to demonstrate better yields and lower costs for their pilot customers - proving years of meticulous invention and iteration on their autonomous bots. They couldn’t out-innovate mother nature.

This would be a fine place to call it quits.

While I suspect the Barn Owl team never considered it, place also tilted the odds to favor the grittier path. Being an unemployed robotics engineer in Palo Alto is still a pretty good hand to play. Another robotics startup is always getting funding just down the road. Being an unemployed robotics engineer in La Junta or Canon City is a different prospect. These founders are dedicated to solving food insecurity and their hometowns. This has to work.

The Barn Owl team is sending the next generation of farmers into Colorado fields as we speak. They are the story of the future of small farming, small towns, and their hometowns.

Forget hard mode. Barn Owl literally couldn’t have happened anywhere else.

Ambition is a present desire to achieve something in the future.

If you want to get to the future first, raw ambition is the fastest way to get there. Meccas are littered with ambition.

If you care about what that future is, before you hop on the ambition train, look for those who are presently embodying the future you want. Those are our rural Colorado founders. Today, it is more rare to prioritize family, 300+ days of sun, or the great outdoors. Those who are living out these kinds of priorities, as opposed to their career maximal peers, have a deeper well to draw from in building the future.

I trust the future they’re building too.

That’s a more interesting bet. And rural Colorado is far from the only place it can be made.

If you…