Pittsburgh's Entrepreneurship Darknet

In recent conversations with experienced local entrepreneurs, I've formulated a new hypothesis: The conventional wisdom about Pittsburgh's entrepreneurship and startup communities is wrong.

That conventional wisdom runs something like this: There are lots of great ideas in Pittsburgh, but there isn't enough risk capital. Individual family + friends and angel investors are more risk-averse than their counterparts in regions where the entrepreneurial winds blow more regularly than they seem to here. Local institutional investors are reluctant to place bets here rather than in higher velocity locations. Local investors are skittish; they don't like to lose money and would rather take a break from investing rather than get back into the market after a failed play.

The new hypothesis is that the conventional wisdom applies -- perhaps -- if one focuses on the "public" entrepreneurship space, the one dominated by conversations that include regional economic development enterprises, local governments, big companies, and technology transfer operations at local universities. (I add the "perhaps" because my sense is that even that "public" space has gotten a little more lively and energetic, and investors there have gotten a little savvier and more risk-oriented.)

But the conventional wisdom may not apply if one focuses on what I'll call Pittsburgh's entrepreneurship Darknet. (Darknet or dark fiber? You choose the better metaphor.) What I mean is that there is, in fact, a vibrant off-the-public-radar community of entrepreneurs which is regularly and happily building enterprises based on excellent ideas, and getting funding for them from local investors, with none of the "no one takes risks in Pittsburgh!" angst that percolates via the conventional wisdom. It's a Darknet because this high-bandwidth network functions effectively to circulate ideas and money, yet it deliberately stays out of the news. There are no big public parties or show-and-tells; there is little engagement with the better-known local economic development institutions; they give few interviews to the media - even social media. Yes, these folks are trying to hit home runs, but in the meantime, they are doing what entrepreneurs do: Researching, planning, building, executing. In the words of Nuke LaLoosh, "This is a very simple game. You throw the ball, you catch the ball, you hit the ball. Sometimes you win, sometimes you lose, sometimes it rains."

If the hypothesis is right, then it doesn't solve all problems, but it puts certain propositions in a different light. First, for example, it's still true that Pittsburgh lacks a legal community that can fully support a vibrant entrepreneurship and startup sector, Darknet or no Darknet. Second, entrepreneurs' reported difficulties in securing local financing may in some cases have less to do with the lack of local risk capital and more to do with the fact that the ideas in question are mediocre, or that the entrepreneurs themselves are lacking a certain something. Third, Darknets don't just happen; they get built, intentionally; Darknet entrepreneurs and investors may be cut from a slightly different cloth, or they may conceive of what they do in somewhat different terms. But they don't wait for good ideas to fall from the sky like manna from Heaven (i.e., they don't wait for the phone to ring with Pitt or CMU on the other end); they go in search of the good stuff; and they don't, as a rule, do their dancing in public (at least until the exit strategy has been executed). They don't focus their search for ideas on public meetings and conferences. By the time the ideas hit the show-and-tell, the good stuff may be gone, or the market opportunity may be gone, or both.

And the hypothesis says nothing about the fact that the conventional wisdom is, well, conventional. Nothing would be better for all of Pittsburgh's entrepreneurs than for the conventional wisdom to change and for Pittsburgh to be known as a place that is as welcoming of innovation as Austin or Seattle. At least some of the re-framed propositions in that last paragraph involve things that can be modified. The legal community can get brighter and more vibrant; entrepreneurs at all levels can be more aggressive in chasing down new ideas; with more experience and better mentoring, it becomes easier to distinguish promising ideas from lousy ones -- though this is more quantum mechanics than classical physics. That distinction is never easy.


4 Responses to "Pittsburgh's Entrepreneurship Darknet"

kentropic said... 5/19/2009 10:25 AM

Thanks for the great post. A "brighter and more vibrant" legal community to support and sustain innovative startups sounds good, but could you unpack that a little? What kinds of legal expertise do you think we're missing here? Is it just IP, or is there something else?

There are no doubt hundreds of local law students and recent graduates (to say nothing of law firm managing partners and law school deans) who'd welcome that sort of insight -- especially coming direct from the VC darknetters you describe.

Mike Madison said... 5/19/2009 10:49 AM

Here's a little unpacking:

IP is the least interesting and least needed skill set among local lawyers. There are plenty of patent lawyers here, though not necessarily plenty of patent lawyers who work on IT and biotech inventions and don't charge large law firm rates. There are relatively few copyright and trademark lawyers here. Need #1: More IP lawyers who cater to small ventures and emerging companies, and that includes both less expensive lawyers, and lawyers will skill sets beyond patent prosecution.

Basic business organization and corporate finance skills are well-established in Pittsburgh. The skill set needed to do more complex deals and financing for social media/IT infrastructure/university-research driven innovation is thin. The problem is that lawyers on the two coasts simply see more of these deals than local lawyers do, so they ramp up to expert level pretty quickly. Local companies that need these services don't have the patience to underwrite training for young lawyers here, so they ship their work to the coasts as well. The rich get richer; Pittsburgh never changes. Need #2: More lawyers with experience with more complex deals, which largely comes from practice on the coasts.

One might think that this would create a market opportunity: A lawyer with good experience in Boston or New York could move to Pittsburgh and clean the clock of the local firms. But it generally doesn't work that way; local practitioners and their professional colleagues (accounting, real estate) tend to act like a cartel, blocking entry by outsiders. My solution: I've taken to encouraging recent grads of our law school, especially those in small practices and/or those who have already exited the big firms, to create their own informal cross-selling network and market themselves aggressively as a talented but cheaper option to the traditional downtown firms. You can create a bit of deal flow by competing on price. I also try to help my former students reach out beyond Western PA. Pittsburgh ships legal work to other cities; there is no reason that other cities can't ship legal work to Pittsburgh. Again, however, price points are key.

The last thing that isn't robust locally is the sense of lawyer-as-business-development-guru. I'm not talking about lawyers developing business for themselves; I'm talking about lawyer as consigliere, or information broker and counseler, which is central to the deal-oriented lawyer in the Silicon Valley, LA, Austin, and (to a slightly lesser degree) Boston. These are lawyers whose vision of the client isn't limited by the lawyer's departmental affiliation or formal practice specialty. These are lawyers who can see the basics of corporate, finance, tax, employment, real estate, privacy, federal contracts, and IP issues and can pull strings, both inside the firm and outside the firm, to get the client where the lawyer thinks the client needs to be. This is both a problem of law firm economics (not many local law firm partners want to train their associates to act this way; it's more efficient for partners to flog associates to bill like crazy) and a problem of the lawyer's mindset. And I don't have a solution for either one.

kentropic said... 5/21/2009 9:49 AM

Many thanks for the thoughtful response. It's a long-shot, but might a few of those young lawyers be able to set up some kind of co-op, almost like a farmers' market for VC specialty services, to organize and represent themselves to the finance, research and development communities, and to market themselves to prospective clients? That could be one way to tap into professional networks that already extend to the coasts, too.

Unrelated note: discovered by chance today the the Pitt Law School's "Jurist" website was one of five Webby Award nominees in the legal category, and the *only* law school represented (congratulations!). That's a big deal in the online design and development world -- did the nomination get any play at all in the local media?

Mike Madison said... 5/21/2009 10:08 AM

The "co-op" idea or something like it is in the air, though somewhat quietly. There is no timetable and there is no specific deliverable, but I expect to see some progress in the region over the next couple of years.

On JURIST, thanks (though I'm owed zero credit; this project has always belonged to my colleague Bernie Hibbitts). JURIST gets a broader media profile from time to time. This year, the nomination seemed almost ho-hum, since it won the category outright last year (and got appropriate PR as a result)!

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Pittsblog 2.0 is written by Mike Madison, a law professor at the University of Pittsburgh. Send email to michael.j.madison[at]gmail.com. Mike also blogs at Madisonian.net, on law and technology. Chris Briem of Null Space drops by from time to time.

All opinions expressed at Pittsblog 2.0 are those of their respective authors and of no one (and no thing) else, least of all the University of Pittsburgh.

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