The following is the transcript to an interview with Catapult Managing Partner Jonathan Tower that appeared on Taiwanese Television Network, CTV. The interview was conducted in Taipei City, Taiwan on January 25, 2019.
Q: Welcome back to Taipei City. You were here only a couple months ago. What brings a venture fund from Silicon Valley all the way to Taipei?
While Catapult is headquartered in Silicon Valley, the firm has a global investment orientation. It’s a guiding principle of the firm. We’re focused on working with the best entrepreneurs wherever they compete that are developing meaningful, transformational innovations, and we’re committed to helping those companies achieve global scale. That’s our core value proposition. Geography is not a gating issue for us. And we have a specific focus on investing in underserved markets outside Silicon Valley, which would include a place like Taipei.
Q: But you still invest in Silicon Valley, yes?
Of course. Silicon Valley has been a dominant innovation hub for decades. Historically, we’ve been very successful investing in Silicon Valley companies, and we will continue doing so. But the tech innovation story is no longer just a Silicon Valley story. Great entrepreneurs and transformational innovations are coming from every corner of the globe, not simply from Silicon Valley. And those startups are typically utilizing the prevailing technologies of the day which are making the world a lot flatter and, hence, mitigating the traditional barriers of geography and time zone differences.
Q: How so?
Well, whether you’re a startup based in Mountain View or Madrid you’re likely using something like Amazon AWS and any number of technologies like Slack, Github, Trello, or Asana which are all making working across disparate teams in multiple time zones both more effective and efficient. Moreover, your customers are likely global customers and—unless your product or service has a particularly high-touch local context like prepared food delivery from local restaurants, for example–your customers likely don’t care where you’re headquartered.
Q: True, but what about the concerns about finding talent?
Great teams and great talent are bubbling up from everywhere. When you look at the smaller tech hubs what you often find are many of the same characteristics that made Silicon Valley into the Silicon Valley we know today: world-class universities and research institutions; a great quality of life; an affluent, tech savvy, well-educated population; a deep pool of technical and creative talent; and so forth. What’s not in evidence in most of those smaller innovation hubs is a robust venture capital ecosystem and sufficient mentorship and know-how to help those startups scale beyond their local ecosystems which, by their very nature, are too small.
Q: What about the argument about talent in Silicon Valley being better than that elsewhere? Or that entrepreneurs in other geographies are not as ambitious?
I think these are stereotypes. I spend much of my life on airplanes crisscrossing the globe and I’ve met with all manner of entrepreneurs. I’ve concluded that any notion that only Silicon Valley entrepreneurs have grit or hustle, or a strong work ethic is nonsense. Of course, there are cultural differences here and there. But that does not mean those differences are inferiorities. In many ways, entrepreneurs in smaller geographies, or “geos,” have more of a chip on their shoulder precisely because they know their home markets are small; so, they must think global from day one.
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“…any notion that only Silicon Valley entrepreneurs have grit or hustle, or a strong work ethic is nonsense…”
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They know that most venture investors will insist that their startups have the potential to expand to the major geos – north America, greater Europe, Asia, and so forth. Dominating a small geo that’s not growing much is like saying you’re the prettiest ballerina in Amarillo. In other words, no one cares. The pond you’re swimming in is simply too small, and the startups you are competing with in that market are not strong enough.
Q: We’ve read recently that there are now more people moving away from Silicon Valley and the Bay Area than moving there. Is that true?
That’s accurate. There has been an exodus of startups away from the Valley and toward other markets—some nearby and some farther away. There is a talent shortage and operating costs have soared. Other areas are picking up the slack. Oakland is booming, for example. Los Angeles is experiencing a nice growth spurt with new VC funds focusing on the region. We like Nashville and Miami also. It’s happening all over. This is not necessarily at the expense of Silicon Valley, mind you. Like I said, the Valley is not going anywhere. It’s a tremendous ecosystem and has had a remarkable track record. But, as I mentioned, we are in a global tech innovation boom. And I’d say we are in the 2nd or 3rd inning of this boom, so we have a long way to run. And, ironically, it is technology itself which is enabling these startups to exist anywhere and to become successful.
Q: Is this apparent exodus of people and startups from Silicon Valley a cost issue?
Partially, yes, but there are many factors. The Bay Area has long been one of the most expensive places in the world to live and/or operate a business. That said, it’s an amazing place and will always attract people and companies that want to be here.
The challenges of living here and/or running a company here are non-trivial, however: hiring, real estate, legal, healthcare, overhead, the constant fear that your best talent will be poached, etc. Many companies are finding it difficult to remain competitive in Silicon Valley so you are seeing some companies move elsewhere and/or have their workers be remote. A top engineering candidate in Silicon Valley might be 2-3x as expensive as a comparable hire in a Tier 2 market. This has real impact for both companies and investors.
Q: How so?
Well, for one thing, your capital does not go as far in an expensive market. As an investor, I want Catapult’s portfolio companies to have enough capital to achieve their objectives, but I also need to be efficient with my firm’s capital, which comes from our limited partners. In a perfect world, an early stage venture investor wants to take as little financial exposure as possible while its startups are navigating the high-risk stage of getting to product-market fit. It’s not clear there is a real business there yet. Seed stage investing has a high morbidity rate because startups are iterating on lots of new ideas. Perhaps there’s a crude product. Maybe there are a few pilots underway. Perhaps there are beta customers. That’s often about it. There is still much that must be de-risked. As such, you don’t want a lot of your precious capital going to landlords and the like when it needs to be allocated very deliberately to investing in whether there is a real opportunity.
Secondly, by its very nature, a less expensive market will give you a longer runway. A modest seed round in a Tier 2 market might provide a company 18 to 24 months of runway. In a more expensive market, perhaps it provides 8-12 months of runway. That’s a huge difference in terms of how far along a startup can develop its product and business before having to return to the capital markets to raise more money. As an early stage investor, I would much prefer that my portfolio company teams be working heads-down on product for 18 months or two years and building something amazing than them having to return to the capital markets in 8 months because they’re running low on cash due to high operating costs. This is a huge advantage of operating in less expensive markets.
And, third, there is the management distraction and the all-consuming nature of fundraising. Every VC wants their companies back at work and every entrepreneur I know wants to get off the fundraising trail and back to focusing again on the business. If you can extend the length of those fundraising cycles, all the better.
Q: Do you see this trend of “remote work” as a fad or a long-term trend?
I prefer to characterize this as “decentralizing the enterprise,” and it’s a theme we have been thinking about a lot. And I do consider it a long-term trend. We are seeing more companies embrace the notion of hiring the best people and teams wherever they exist, geography be damned. And it’s a big departure from the BPO (business process outsourcing) trend of the early 2000’s. It’s no longer about outsourcing call centers. I issued a term sheet for a company a while back where the CEO was based in Seattle, the company’s sales and marketing team was in New York, all technical development was in the Ukraine, and they were a Delaware C Corporation. So you have to ask: where do you exist as a company?
This distributed nature of enterprises creates all kinds of opportunities. It also means great talent does not need to uproot itself to work in its chosen field. It’s becoming more feasible than ever to stay put, live where you wish to live, raise your family where you to wish to, and have a fulfilling career in your chosen field. I think this is very liberating and very exciting—for companies, for their employees, for communities, etc.
Q: We’ve read that talent retention tends to go up outside Silicon Valley and other dominant tech hubs. Do you find that to be the case also?
I think that’s true. The battle for talent is very real and it’s probably most fierce in places like Silicon Valley where the sheer number of startups means talented hires have lots of options of where to work. Moreover, bear in mind that that talent is being fought over not simply by other startups, but by the tech juggernauts as well—Google, Facebook, etc—and they have almost unlimited resources with which to woo the best. And that level of competition drives up compensation and people churn more as a result.
Q: You mentioned that underserved markets had many of the same characteristics of Silicon Valley but on a smaller scale, but that they lacked mentorship and other requirements. What did you mean?
One of the primary challenges we find in many underserved markets is that their venture capital ecosystems, processes and infrastructure tend to be relatively immature. Obviously, this is a generalization and there is wide variation in the issues being faced in a more mature tech hub like, say, Toronto and those in emerging hubs like Nashville. But, for many emerging tech ecosystems one of the primary challenges for startups is finding sufficient venture funding options and sufficient mentorship. In many emerging hubs you might have some active angels and a few regional VC firms of some consequence locally. But oftentimes, those angels and VCs are little known outside that local ecosystem and have little to no footprint in Silicon Valley or other dominant VC hubs. The established VC firms simply don’t know them well.
The challenge this presents is that a startup in a small geo can often times be successful in securing capital locally from angels or seed VC funds, but fairly quickly they exhaust the local VC ecosystem long before they’ve gotten to a scale where they can attract a branded VC firm from Silicon Valley or elsewhere that can help that company achieve global scale. And this presents a problem because many established Silicon Valley firms have gone on to raise increasingly larger funds in recent years. With more capital under management, it becomes difficult for larger funds to justify making small investments in markets that are thousands of miles away. As such, many established funds prefer to wait to invest into a startup that is far away in a market they don’t know well until that startup has gotten to some level of scale, but the Catch-22 is that often these startups never get to scale because their local ecosystem of VCs are not able to continue to fund the company for it to reach the level of scale that it would need to attract an established Silicon Valley VC.
Q: Hence, the Catch-22?
Precisely. At the end of the day, venture capital is a relationship business. VCs typically like to work with other VCs that they know and like and have collaborated with in the past. They have built up scar tissue with these other VCs over good investments and ones that fared poorly. There is a trust that is created over time. These networks are built by having co-invested together. Unfortunately, when a startup is not funded by well-known investors, and is not demonstrating very compelling traction, and is in a small geo far away from established VC hubs, it presents a real challenge.
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“…a startup in a small geo can often secure capital locally from angels or seed VC funds, but fairly quickly they exhaust the local VC ecosystem long before they’ve gotten to a scale where they can attract a branded VC firm…”
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Fortunately for us, my partners and I have been investing in Silicon Valley for 10+ years over dozens of companies, so our networks here are well-developed. Having done this a long time and having established a strong track record with tier one VCs, I think I can say with some immodesty that we are now a respected “feeder fund” to established VC brands. Our reputation precedes us now such that when we fund a company and make an intro to an established VC firm we’ve worked with in the past, that firm—assuming the startup is a fit for their stage and sector focus—will take the company into consideration because of the degree of social proof that our involvement provides. This, of course, does not guarantee that one of our portfolio companies will be offered a term sheet from one of these VC partner funds but it certainly helps connect our portfolio companies to global pools of capital, which is one of the most important things a seed or early stage investor can do for its portfolio companies.
Q: Do most established Silicon Valley VC firms avoid underserved markets?
Not all the big firms avoid small markets, but many do when the startups are very early. There are reasons for this. Like I’ve mentioned, VCs like to refer deals to one another and like to work with other investors they have some reputational currency with. That’s why you rarely hear a VC admit that he or she financed a startup that came in from a cold email over the transom. VCs like opportunities to be referred by trusted sources. In smaller geos, that’s harder. The local investors are typically not as well known among the established VC community. There hasn’t been an established track record of companies emanating from that ecosystem. It’s harder for the established VCs to diligence that opportunity given they likely do not know many people in that ecosystem—other investors, founders, partners, etc—with whom they can run reference checks on the founders, help with recruiting, and so forth.
Then, there are the partner dynamics at that firm and the post-investment issues. What partner will want to fight the good fight at the Monday meeting trying to convince the other partners why he or she is spending time chasing a seed stage company with a Cap Table of investors that the firm does not know, that’s perhaps thousands of miles away, where there are no ways to clearly diligence the opportunity, and where it is not clear who would be supporting the company or taking a board seat post-investment. For these and many other reasons, established VC firms prefer to focus on companies closer to home and that come through established networks they already have and only consider startups far away when they are much further along in their evolution.
Q: So how do startups coming from these smaller hubs resolve this challenge?
Well, the throwaway response is to build an amazing business such that no one can ignore you. But the more practical approach is to work with investors who can help you bridge the gap between your local VC ecosystem and the more established VC and strategic partner ecosystems in Silicon Valley and elsewhere. Work with investors that are willing to invest in your company when it’s still early but can really add value when you are ready to tap into global pools of capital. Ideally, have an least one investor around the table that can bridge that divide. Having many local angels might be sufficient to get a first product out, but they probably don’t have more capital to deploy beyond their initial check nor the credibility to bring in tier one VCs from Silicon Valley or elsewhere when the startup is ready for its next round. Those investors also might not be as conversant in knowing what established VCs want to see in terms of metrics and traction to support a next round.
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“…work with investors who can help bridge the gap between the local VC ecosystem and the more established VC and strategic partner ecosystems in Silicon Valley and elsewhere…”
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One of the advantages of being in Silicon Valley every day as we are is having that granular sense of what’s happening here on the ground among the investors and helping our portfolio companies navigate that opaque environment. What are the themes that VCs here are thinking about? Which sectors are in vogue; which are overfunded or out of favor? What firms are ascending. Which partnerships are imploding? Which partners are on the way up; which partners are transitioning out? Which firms just raised a new fund and are actively looking to deploy capital, and which firms are at the end of their fund life? This may seem like a lot of ‘inside baseball’ but it’s critical when contemplating a fundraising process. When a startup’s investors are far away or are not actively networked in Silicon Valley, that level of detailed market knowledge is missing from the equation. The net effect can often be a lot of wasted time pursuing and pitching the wrong investors, or not being aware of the right investors who might resonate with the company and the offering because the company’s existing investors don’t know who they are and/or how to approach them.
Q: Are you implying that most startups still need to raise capital from Silicon Valley to scale their businesses and/or to be taken seriously?
I’m not suggesting that all top VCs are based in Silicon Valley, or that they need to be. Fortunately, there has been a boom in new VC firms forming across the globe. This is great for founders. And, to be sure, there are many highly respected VC firms in smaller geos. My point is that in order to build dominant global companies it is often necessary to have investors that are global as well. And even with the boom in new VC brands, many of these new firms are sub-$50mm funds and focused on seed. Having firms that can straddle those stages and geos is vital.
Additionally, most of the venture capital being deployed on the planet is still being deployed in the US; and within the US, Silicon Valley is far and away the dominant VC ecosystem. Silicon Valley still holds tremendous sway in the VC/tech economy and is a powerful brand in its own right. There remains a powerful halo effect that is conveyed to a startup when an established, highly respected and recognized Silicon Valley VC leads a large round. This is particularly true when the startup had its origins elsewhere. It creates positive signal.
Q: What other differences are you finding in your travels to these emerging tech hubs? Are you investing any differently by looking outside Silicon Valley?
It’s axiomatic that every ecosystem is idiosyncratic and has its pros and cons. When Catapult was founded a lot of time was spent in the formation stage studying how other firms had successfully and not so successfully navigated the challenges of investing cross-border. Obviously, Catapult would not be the first firm to look for startup opportunities in markets far away. We quickly determined that “drive by” investing, however, does not work.
Q: What do you mean by that?
What I am referring to is the practice of flying into a market once a quarter, holding a couple days’ worth of meetings with founders and other investors, and then flying back. That approach doesn’t work. To invest successfully, a firm needs to make a commitment to the ecosystem and develop a ‘boots on the ground’ approach to deal sourcing and post-investment support. This does not necessarily mean spinning up an office in that locale and taking on the OPEX burden of doing so, but it does mean having resources there 24/7. For us, we have adopted a seed scout or venture partner strategy. Our Seed Scouts are often angel investors we already know and have co-invested with in the past, former and current founders the firm has worked with in the past. and people like that who have strong deal flow from the area but are not institutionalized in any sense. They might be writing small checks on their own but that’s it. We bring them onto our platform, provide more capital for them to deploy on our behalf, and share economics with them on investment on which we collaborate. It’s a win-win. These relationships provide us local and cultural expertise in a new ecosystem, and a point person to lead investments and provide mentorship. It also provides the firm an asset who can liaison with the constituencies in that ecosystem daily – coffees with founders and angels, meetups, launch parties, demo days, and the like – and build our brand and our access to great founders and opportunities, writ large. The net effect is to provide Catapult first look at many, if not most, of the exciting startups emanating from that emerging ecosystem in ways that other VCs simply won’t have.
Q: Have you identified areas of strength or differentiation in these ecosystems?
Like I said, there are innumerable differences in these emerging tech hubs. We have a thesis around identifying ‘centers of excellence’ and investing in those areas. When you consider many of the emergent areas of what’s often referred to as ‘frontier tech’ that’s garnered a lot of attention these days—artificial intelligence, machine learning, autonomous vehicles, and so forth—you find that many of the strongest technology teams working today and focused on these areas are coming from smaller tech hubs than Silicon Valley. Take AI, for example. I’d wager that it’s hard to argue that a fund is a serious investor in AI if they are not spending a lot of time in Toronto, or Pittsburgh, or Tel Aviv and speaking with the incredible teams working in those geos. The same can be said for Fintech and places like London, Atlanta and Frankfurt. And there are many others. Therefore, it stands to reason that if a fund has a strong investment thesis in any of these areas they need to be investing in the best teams in these sectors, and these teams are often coming from smaller geos.
Q: How many markets do you focus on now?
We have identified a dozen cities in North America and Europe where we have now or will have shortly a local investor working with us as a Venture Partner or seed scout.
Q: How do you think about Asia?
Obviously, I am a fan of Asia and am closely watching the different ecosystems here. I am in Taiwan today, I leave for Beijing tomorrow. I was in Tokyo in September. Later this quarter I will be in Southeast Asia. I am meeting with all manner of founders, strategic partners, limited partners and co-investors that could work with us here over the long haul. But, for the moment, we are focused on the markets we have already identified. We are still on Fund I and not entirely done with fundraising, so we are being cautious and calibrated in how we scale the firm. But, for sure, there are enormously exciting things happening in Asia and I am confident Catapult will be here in due time.
Thanks for your time. We are excited with what you are doing. Please let us know when you are back in town and we will catch up again on your progress.
Will do. Thank you for having me.