market size. Not necessarily the total market, but rather the perceived market opportunity, Hudson said. There are some sectors, such as edtech, music, and games, where venture investors have simply lost interest. In contrast, VC interest remains high in drones, wearables, and the Internet of Things.
(It’s worth noting here that other early stage tech investors aren’t necessarily seeing the changes Hudson describes. When I asked Jason Mendelson of the Boulder, CO-based Foundry Group about it, he wrote in an e-mail, “We haven’t seen any material differences in our world. I think there are many more strategies for getting early capital (angel, crowdfunding, etc.), but from what I can tell, the overall business has not changed.”)
When SoftTech looks outside of Silicon Valley for promising companies, Hudson said they consider some additional important factors.
“My biggest concern about investing outside of Silicon Valley isn’t the quality of the company or the founder,” Hudson says. “It’s really two big things: [The first is] access to skilled, experienced talent. Every market is different. In Toronto, you have no problem getting engineers from [the University of] Waterloo. The problem there is in product management and marketing, especially on consumer-facing things. It’s just not a deep pool.”
Nevertheless, Hudson says the number of really good companies in Toronto is growing. “I think the thing that really started to change peoples’ minds is that Waterloo companies started getting into Y Combinator.”
In Boulder, Hudson says the problem is “getting enough of everything. They have really good people in Boulder. We have some great companies there, like SendGrid and Gnip. It’s just that there are more really good startups and founders in Boulder than there are engineers, designers, UI people to support them.”
The second big requirement Hudson identified is being able to step in if there’s a problem and the CEO needs mentoring, or even just a shoulder to lean on. “Local support is the other thing I worry about. We have founders, especially at seed and early stage, where you just have to go see them. When we’re investing out of market, we really like to have somebody around who can do that.” He later added that once a firm has invested in three or four startups in a region, “you can justify doing the fifth because you’re going to be there anyway.” It’s harder to justify making a trip to visit just one company.
To build that initial level of needed trust in another region, Hudson says SoftTech needs a key local entrepreneur or investor who can help SoftTech figure out the market.
“In Toronto, we had a portfolio company exec who was from Toronto,” Hudson recalled. “He said I’m going to go back to Toronto to work for this company, and you should take a look at it. [I said] I don’t really do Toronto, but I think you have excellent judgment. If you’re going to go there, I want to know more about it.”
Asked for his perception of the opportunities in San Diego, Hudson said it seems to be one of those innovation hubs where it is “just too nice.” Such places often have one or two iconic companies that help to reassure out-of-town investors that they can make money. Qualcomm certainly qualifies on that score, Hudson said. But he could not point to any Internet companies in San Diego that have built a high-profile consumer Web business. As a result, San Diego is a tougher sell to investors.
In contrast, Toronto has had a flurry of successes with companies like Shopify, Wave, HootSuite, and FreshBooks, Hudson said.
How could San Diego do better? “Part of it is just a marketing effort and getting the word out that there are good, interesting companies here,” Hudson said. “The other thing is that it just takes a little more local capital. That would probably help. My sense is that there aren’t as many folks here writing seed-stage, angel, Series A checks as there are in other markets. But that’s a chicken-and-egg problem. Once you’ve had people who are successful in technology, they tend to want to plow their money back into it.
“Every city has got to have its thing. It’s taken L.A. awhile, but I think they’re doing consumer now as well or better than the valley. They’ve figured out e-commerce. And if there’s money to be made at the intersection of technology and digital, they’re doing it.”
More than anything else, Hudson said that a few successful exits would “just really change everything” in San Diego. A couple of IPOs, or even some buyouts, would answer the question that lingers in the back of every venture capitalist’s mind—and that question is, could we build a big company in a city like San Diego?
