Innovation and Investment Notes

At dinner last week, I heard an interesting exchange concerning the local climate for start-up investment.

On the one side was what I might call the "traditionalist" view: tech start-ups in Pittsburgh struggle to find local financing, because local early stage investors are much more cautious than their coastal counterparts. Start-ups that are any good can find coastal financing, but that puts pressure on the founders to relocate to the coasts.

On the other side was what I might call the "revisionist" view: Quality tech start-ups in Pittsburgh can find local financing - if they know where to look - and can manage to stay local and (try to) succeed, if they want to.

Both perspectives were (and are) ably represented by people who are, I think it's fair to say, in a position to know. We'll call the discussion "six of one, half dozen of the other," at least for now. Part of the phenomenon is where the money is really coming from and where it is really going. Part of the phenomenon is the rhetoric of the conversation. Even in the Silicon Valley, early stage capital isn't falling from trees like it once did, but the prevailing tone of dinner conversations is optimistic.

In that same "maybe this, maybe that" category is this story from the local newspaper that covers Palo Alto (heart of the Silicon Valley), which reports on a recent study that concludes that the Valley is losing its innovation edge. (H/t to Jim R. at Burgh Diaspora) One conclusion is that economies are competing based on human capital strategies. California, with its almost wilful disregard of public education, is doomed to do badly. Pittsburgh, an optimist might conclude, is positioned to do well, especially in light of the following quotation from the report: "Investment [in the SV] is shifting away from software and semiconductors and into biotechnology, energy, medical devices, and media." Those, or at least most of them, sound like Pittsburgh's strengths.

Comments

5 Responses to "Innovation and Investment Notes"

Anonymous said... 2/23/2010 1:23 PM

Interesting perspectives on the tech start up scene here in Pittsburgh. I'm new to the area so I don't have much background on the local happenings but I bet that if we dig deeper we'd find that there are more similarities than differences between the traditionalist and revisionist outlooks on early stage finaning:

1 - Good business models with the potential for fast growth and long term competitive advantages will get financed.
2 - Investors like to be close to their money.
3 - Investors will use their leverage to get close to their money and put the business in the best location for it to succeed.

If a company is pre-revenue, doesn't have a solid mgmt team and the local talent pool is shallow, it's likely that the investors will force a move. If the comapany is already showing a successful hiring history and has a strong mgmt team there's a good chance the founders can stay put.

Pittsburgh needs to plan for the time when it will get lucky. At some point, one of our tech start ups will have a great success/exit. What happens after that will have a significant impact on the future of the tech environment here. If the founders take their money and run, we'll be right back to where we are today. If the founders stick around and become serial entreprenuers, then we could significantly accelerate the regions tech growth. In any event, we need to build the incubator network so that there's a comfortable home for the serial entrepreneurs here in Pittsburgh.

Ed

Mike Madison said... 2/23/2010 2:38 PM

These are certainly fair and logical starting points.

There are some differences between the Pittsburgh entrepreneurial environment and larger/more established, similar environments elsewhere:

One - Money is money, but early stage investors in Pittsburgh have a reputation for being skittish. They are reluctant to invest, invest at low dollar amounts, and are more put off by failure than their peers elsewhere.

Two - There have been some tech successes here, with founders putting money back into play, but no giant wins (that depends in part on what counts as a giant win). Pittsburgh certainly has a class of serial entrepreneurs, but they aren't celebrated publicly the way they are in other communities.

Three - The talent pool, and by that I mean the tier of managers needed to grow and run companies, is notoriously thin in Pittsburgh. Pittsburgh is home to some smart people interested in *first* opportunities, but it struggles to attract a larger corps of people to expand that pool, and it struggles because of the relative lack of *second* opportunities. If the job that you move here for doesn't pan out, then what will you do next? Other regions have more of those second opportunities than Pittburgh does.

At least, that's the stereotype.

Anonymous said... 2/23/2010 4:42 PM

Very interesting....

Given those differences, I would think that #3 is the biggest limiting factor to achieving real sustainable growth in the tech sector. Would you agree?

I would also add a 4th difference/limiter. From my experience, regions that have a robust tech start up environment also have a strong support network of subject matter experts in functional areas such as legal, finance, etc...that make running an early stage business much more efficient.

My guess is if we have a thin talent pool from a management perspective then there probably isn't much of an outside support network in place either.

Ed

Mike Madison said... 2/23/2010 6:55 PM

That is basically right. If you look back through the archives of this blog, you will find a fair amount of discussion of all of these things and various efforts to address them locally. It is not that Pittsburgh isn't aware of its weaknesses. Addressing them takes time and a shared sense of purpose. There is lots of time. There is not always a shared sense of purpose.

John Morris said... 2/24/2010 5:47 AM

Looks like a lot of companies bunt to get on base and hit for average, which can be good.

I read the City Paper article on the emerging computer gaming industry here which seemed to have lots of small companies chasing modest opportunities like worker training and edutainment, not likely to produce home run products.

Even so, it's a start. A kind of Portland mentality with people trying to make a good life and follow their individual path/ values.

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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.

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