Today’s post will discuss the five concepts essential to startup success outside Silicon Valley.
For context, I launched TheraNest in August 2013. It was my first foray into launching a SaaS business that seemed like it was going to get some kind of traction. I struggled to raise funding. It took eight months from when I started building the product to when I got my first investor check.
Hence, it didn’t breed a lot of confidence when I read an article in the Harvard Business Review published in October 2013 titled “Don’t Build Your Startup Outside of Silicon Valley.” Its core premise was that if you start a tech business outside the coastal powerhouses of San Francisco, Boston, and NYC, you are much more likely to fail.
The article gave solid reasons why this may be the case. The first was it would take longer to raise money. That proved to be true. I had just spent more than half a year trying to raise funding for my startup here in Birmingham.
The second reason was that it decreased your odds of being bought or having an exit. Again, if you think back to 2013, it’s not like I could look around Birmingham and count many exits around me, so it seemed like this article was giving me a prophecy of my probable future. In essence, if you built a company outside of Silicon Valley, you wouldn’t get on the radar of people wanting to buy your company or invest in it.
Finally, the article claimed building outside the coastal powerhouses significantly decreased your odds of success. In other words, doing the tech thing outside NYC, Boston, and San Francisco meant I was more likely to fail. The chances of failure are already very high by default, even if you’re in Silicon Valley, so why would you take your chance elsewhere?
In summary, the article told me that if I were a smart human being, the best thing I could do would be to pack my bags and head West (or Northeast).
There were many reasons why I decided to stay in Birmingham. My wife and I had a life here, I loved living here, and I felt (and still feel) you can succeed wherever you find yourself. The path to success may be different, but you can still succeed. I didn’t necessarily believe that going to Silicon Valley would mean that I would get Silicon Valley success. You’re taking a bet: am I going to beat the odds where I am, or will I make it if I move to another city?
The challenge in staying in Birmingham was: “How do I beat the odds? How do I build this into a very successful company? How would I build this without all the funding, team, and access advantage of Silicon Valley?”
So, how did we do it? Here are four things I did that helped TheraNest - and ultimately Therapy Brands - be successful and become one of the largest software exits in Alabama and one of the larger ones in the Southeast.
Curate Your Founder Community
One benefit of places like Silicon Valley is that you are surrounded by a community of like-minded, similarly-focused company builders. The high density of people going through the startup journey makes it easier for you to find community, share your journey, and interact with others in the same situations and challenges. This environment is critical to success.
Outside of Silicon Valley, you have to curate that for yourself, whether with like-minded individuals around you or through a virtual community you curate for interaction and learning.
I was fortunate to have found community, knowledge sharing, and interconnectedness within the Birmingham tech ecosystem when I launched. I spent time curating my sources of knowledge and inspiration, but I was also very fortunate that we had started TheraNest in the Innovation Depot, a startup incubator. I inherited a cohort of growth-minded, learning-focused founders going through the startup journey simultaneously. That led to a built-in community where we inspired and encouraged each other while sharing knowledge about what was working or not.
Apply a B2B SaaS Model and Focus on Current and Relevant Problems
This second point is especially crucial for first-time founders with no scale experience and no ability to self-fund but who want to build something of significant scale. To increase your odds of building a successful startup outside of Silicon Valley, I recommend you not tackle consumer-focused problems that require substantial capital infusion. These types of startups, while fantastic businesses when they do succeed, require you to run at a massive loss for an extended period.
Instead, I recommend you tackle operational business problems with software-as-a-service (SaaS) as the foundational business model. The B2B SaaS model is more predictable and generally less capital-intensive for customer acquisition. SaaS tends to be more predictable. The SaaS model is more straightforward to execute and more easily lends itself to strategies that accelerate positive cash flow and capital efficiency when compared to other models like hardware products, marketplaces, or consumer goods.
With the case of TheraNest, we decided to build a practice management system that handled patient info, payment systems, etc. Those were existing problems that we delivered better and matched our delivery and customer acquisition approach to the market's needs. Providers were beginning to look for software they could buy as easily as Quickbooks Online: have a trial process, have an easy onboarding process, put in your credit card, and purchase if it meets your needs, plus have a great product and customer experience.
Where do you find SaaS business ideas? There are many. Is a regulatory change coming for businesses? Are there regulatory requirements around your area of expertise that you could help businesses execute on using software? Have you found a better way to manage company assets or field teams? Have you found a fantastic solution for wealth management and family offices that they would gladly pay you for because you’re solving a real problem for them? Or maybe it’s a better way to manage internal learning and information flow. The opportunities are endless, and I firmly believe the SaaS model is still in its early days.
These types of ideas are more likely to succeed outside the coastal powerhouses versus trying to build the next Tinder, or Twitter, or some software requiring you to have millions of free users you hope to monetize 2-3 years down the road.
Of course you may succeed building the next Tinder or Twitter outside of Silicon Valley, but you are increasing your chance of failure. You’ll need major funding that will need to come from outside of your area of personal influence. You may need significant public awareness and education en masse, something much harder to do outside of the largest cities. You’re also more likely to need a team that’s been there, done that, which is harder to recruit outside the coastal powerhouses.
Don’t Be Overly Focused on Hyper Growth Too Early
If you’re willing to spend whatever it takes to have hyper growth, you’ll run out of cash before you get there. Focus on capital efficiency. Nail the product positioning and messaging. Find a customer acquisition strategy that produces results consistently. In your experimentation, always be thinking about capital efficiency.
The biggest advantage you have outside of Silicon Valley is that your money can go further. Take advantage of that.
How did we do that at TheraNest? We kept our costs low. We hired very slowly in the first year. We experimented with strategies that didn’t have a high cost of failure. For example, we stayed away from trade shows for the first couple of years. They required a lot of money to execute effectively, and we didn’t have the skillset or the team. While our first year was slow growing but consistent, we found some great customer acquisition strategies that produced great results and were very capital efficient. We doubled down on them in the subsequent years leading to efficient hyper-growth. When we launched paid ads, we weren’t guessing around messaging; we knew what worked and quickly shut down what didn’t or stopped working. Please note that I am not telling you not to go to trade shows or not hire—context matters. Just be hyper-focused on effective capital allocation and deployment. Optimize for survival before optimizing for hyper-growth.
Think Globally About Talent
The fourth thing is to think globally about talent. One of the bigger advantages that Silicon Valley has over places like Birmingham is the deep, deep pool of talent. How do you increase your chance of beating the odds in a small- or mid-sized city?
Teams make the growth magic happen. You cannot build a successful company without great teams. However, building great teams can be very expensive. How do you get around that in the early days? There are smart people all over the world. Think about talent beyond your city, state, and country. One way we executed on this at TheraNest was to be a remote-first team from day one. We found talent wherever we could get it for what we could afford. And there is talent everywhere; you just have to provide the opportunity. Our first developers were outside the US, and our first full-time US hire was in Tennessee. As we built the team, we began to hire locally. We did not handicap ourselves by having to raise significant capital to move team members to Birmingham or compete for talent locally with larger companies. Remote teams are now the norm, but it was a new trend back then. It’s all part of optimizing for survival and runway extension. Nobody will care about your headcount or local office space size if you fail.
If Possible, Build for a Customer, Not Yourself
If possible, one final fifth thing that’s great is to build with at least one existing future customer. I know it is not always possible to do this. It is ideal if you can find a business or businesses willing to pay to be the first customers you are building your solution around.
Remember not to fall into the trap of building a custom solution for a particular customer or one-off solutions that don’t scale to other customers. At TheraNest, we built with two local counseling agencies as paying partners, with the understanding that we owned the IP, and it wasn’t a custom solution for them. They got a significant discount on the product for years in exchange for their insight, testimonials, and referrals.
These five approaches helped us beat the odds.
Thankfully, times have changed over the last nine years. Given recent successes in second-tier and third-tier cities, more local investors are willing to take risks. More people want to get into the tech investing game. More capital is flowing outside of Silicon Valley, and talent is more accessible. COVID has accelerated remote work as an option, and talented managers and leaders are getting more comfortable managing remote teams. The cost of building and launching software, especially SaaS solutions, continues to decline. Now it’s up to smart people to take advantage of the environment to build great companies. We are doubling down on places like Birmingham at HVL and helping to develop entrepreneurial talent. We believe the future is very bright for builders.
Reading this article, I went from intimidated to inspired! Thank you so much for your honest thoughts and testimony. This article has made me rethink my focus. I am currently in an start-up accelerator program, and I really want to make the most of the opportunity.