Silicon Valley VCs Go South to Show They’re Not Out of Touch

(Bloomberg) -- A group of venture capitalists sat at the front of the lecture hall, unsure of what to say. They had heard countless pitches before, but none quite like this.

The stale classroom with yellow paint on the cinderblock walls and tan carpeting was a world away from their glossy offices in the San Francisco Bay area and New York City. Freight trains roared on a track nearby, drowning out some of the presenters. They were at South Carolina State University, a historically black college in Orangeburg, South Carolina, a city beset by poverty for more than a generation. A local delegation led by Mayor Michael C. Butler sat on stage for the investors -- all eager for their dozen or so guests to inject money into their small city.

“If I told you I had a building, a warehouse -- 18,000 square feet -- how much would you be willing to pay for that?” Gary Robinson, a local business consultant, asked from the stage. 

The VCs, who generally buy a piece of early technology startups, sat still for a while, until one said he didn’t know.

For these VCs, the third leg of a four-city tour through the U.S. South wasn’t going well. The trip, dubbed the Comeback Cities Tour, was meant to help investors from the coastal U.S. learn about the challenges and opportunities in places far away from the nation's largest technology centers. They hoped to connect with promising entrepreneurs, students at historically black colleges and local officials. Though the VCs had discretion on making investments, the trip was meant to be exploratory, with no guarantees that they'd take out their checkbooks. Still, some of their hosts gave it a try.

Then, Vladmire Haynes, an agriculture major at SCSU, spoke up. He was one of the few students in the room, and he was eager for more knowledge on how to start a business. “If I have an idea, how can we talk about that and expand on it?” he said. “I want to bring hydroponics and vertical farming to Orangeburg.”

The VCs lit up: Here was a question they could answer. “One of the things young entrepreneurs could do is be part of a team,” Rick Klau, a partner at GV, an Alphabet Inc. venture capital arm, said. “Develop a network of people who are just as interested in the idea as you are. Learn on someone else’s dime and then with that team, you can get some of the capital you were exposed to along the way.”

That's a common career trajectory in Silicon Valley, but would involve leaving Orangeburg. Many of the investors exchanged contact info with Haynes and offered themselves as mentors.

Cities around the world have long sought to recreate the magic of Silicon Valley, which has a robust ecosystem of startup founders with experience and ideas, investors willing to fund them, and prospective employees who can help the companies grow. Some of the stops in the South had virtually none of those things.

The region has long been plagued by inequality, and the shadow of slavery and segregation had crystallized disparate access to education and technology resources, particularly for African-Americans. That's one of the reasons why the VCs decided to visit historically black colleges and universities.

Butler, Orangeburg’s first black mayor, prompted the investors to look out the window, overlooking the town of 13,000 people, and pointed out the abandoned two-story buildings on a main road nearby. “We used to have four theaters,” he said. “Now we have none of that. We need you. We really need you.”

The idea of the Comeback Cities Tour sprung from U.S. Representative Tim Ryan, a Democrat from Northeast Ohio, who sought to connect investors to entrepreneurs they might not otherwise meet. In February, Ryan took a group of investors around the rustbelt, including Youngstown, Ohio, in his district. The trip so affected the investors that one, Scott Shane, raised a $2.25 million seed fund called Comeback Capital that was meant to bet on companies in the Midwest.

The second trip brought a busload of VCs to visit the startups and historically black colleges in Charlotte, North Carolina; Columbia and Orangeburg, South Carolina; and Atlanta.

“We’re trying to pierce the veil,” Ryan said. “We want to bring expertise and opportunities from the coasts.”

Bloomberg Beta, a VC arm of Bloomberg L.P., which is the parent company of Bloomberg News, helped organize the trip with Ryan, as well as Representative Jim Clyburn, a Democrat from South Carolina and Representative Ro Khanna, a Democrat from California.

Each stop represented a different stage along the startup scene spectrum, with Atlanta having the most vibrant tech landscape and rural Orangeburg having the dimmest.

“I’m here because I’m terrified,” Tyson Clark, a general partner at GV, which has investments across the U.S., said on the first day of the tour. Clark said that he was shocked by the outcome of the 2016 presidential election, and wanted to do more to bridge the gap between the America he knew and the America that elected Donald Trump.

Tech outreach to parts of the country untouched by the industry’s prosperity hasn’t always gone well. Cities all across North America hosted delegations from Amazon.com Inc., pleading with the company for the chance to host the e-commerce giant’s second headquarters. The company took reams of data about the municipalities -- including some information its residents weren’t privy to -- all in the hope of being transformed by 50,000 high-paying jobs and $5 billion of investment in a cyber Cinderella story. In the end, Amazon went with New York City and a suburb of Washington, D.C. – two of the richest urban hubs in the country.

"We need more capital on the ground in communities -- investment capital and bank lending, which has gone down," said Stacy Mitchell, the co-director of Institute for Local Self-Reliance, a nonprofit group that works to foster homegrown economic development. (She was not on the tour.) "But the investment that might happen is going to have a marginal impact because we have a massive problem to address."

In a glassy room atop Johnson C. Smith University in Charlotte, the VCs sat in a circle with local entrepreneurs, school administrators and government officials for the first stop.

Charlotte did have one problem that the VCs could help address, in theory. Finding investors was something of a nightmare, many of the local tech entrepreneurs said.

Charlotte, they said, has good private equity firms, but a limited number of VCs. And the ones who were there wanted outside investors to validate a company before making an investment, they said. Meanwhile, VCs from elsewhere wanted local investors to make a bet on a company before they stepped in.

"It's okay to lose a little money," said Patrick Hill, an entrepreneur from Charlotte. His startup, A Cultivated Mindset, provides programming and design services to other companies. "I do it all the time. I have an eight-year-old. I buy him things and then I step on it and say, I just wasted a little money."

The VCs laughed. One local official promised that Charlotte, home to large banking and insurance operations, would become a hot tech hub.

“Come down here now while we’re still in secret mode,” said Tariq Bokhari, a Charlotte city councilman and executive director of the Carolina Fintech Hub. “If you don’t, you’ll be wherever you are sitting on the outside, wishing you had gotten in. It’s in your court… Please, help us.”

A brief silence fell on the room. None of the VCs directly responded.

After the meeting, Shauntel Garvey, a general partner focused on education tech startups at Reach Capital, who was on the tour, approached Hill. “You’re going to stay in Charlotte, right?” she asked. "You can’t leave.”

“I got job offers in New York, in L.A.,” Hill said, a bright smile flashing across his face. “But I want to be that guy from Charlotte. If I make it here, everything else is possible.

Hill seemed like a connector, Garvey later said, back on the bus, rumbling toward South Carolina. “Once a city loses a nucleus, it can fall apart.” Since Hill didn't have an education-focused company, it wasn't a right fit to join her portfolio.

Still, she held out hope that she could one day invest in a company in the region, which is where she grew up. "I wanted to be active in going to these other markets and seeing if there were opportunities for us rather than waiting for people to come to you."

Hill was grateful that the VCs visited Charlotte, even if it didn't result in direct investment. “It didn’t exceed my expectations,” he said.
 

The VCs huddled on a street in downtown Columbia on their second stop. Mayor Stephen K. Benjamin soon arrived, dapper in a shiny blue suit as he stood in the middle of the circle. He brought gift bags for each VC, with a booklet meant to entice them to invest in his city.

Benjamin gave his well-rehearsed pitch about the efforts he's taken to revitalize downtown Columbia and maintain a low tax burden for businesses. But when one VC asked the mayor who the prominent investors were in his town, he was stumped.

"I'll have to get back to you on that," he said.

The investors sought a minor-league model, in which there were local scouts who would give them a call when a company proved itself to be a rising star after getting seed funding -- but that became harder if they didn't know who the nearby investors were, or even worse, there weren't any.

"The public-sector workers still seem to be focused on large capital bringing funding in, and they seem so disconnected from the people with two or three people in their companies," Rob Hayes, a VC at First Round Capital who was an early investor in Uber Technologies Inc., later said on the bus.

Andrew Suggs had an idea. What if the barbershop could be a place where black men, who are statistically less likely to go to the doctor, got their blood pressure and other vitals checked while getting a haircut? He eventually quit his job to work on it full-time.

“I kiss my wife, kiss my kid in the morning and then go out for 15 hours and grind and do the same thing again the next day,” he said.

Suggs pitched his company to the VCs in a brick-lined hall at his alma mater, Claflin University, in Orangeburg. One of the investors quipped that he felt like he was home.

Suggs had raised $450,000 for his business, Live Chair, which helps manage barber schedules and connect with clinics that do on-site screenings. The value of his company was now $5 million. It seemed like a coup for Orangeburg. But Suggs had to move. His investors were around Washington and Baltimore, Maryland, and wanted him to grow the business in Baltimore.

Suggs was a business student at Claflin, but taught himself most of what he knew about tech startups and venture capital. “If you don’t have the resources, you have to be resourceful,” Suggs said. “Google is your best friend.”

Patrick McKenna, a San Francisco-based VC who invests in tech startups outside of the Bay area, including Milwaukee, Atlanta and Baltimore, gave advice on how tech aspirants could attract the attention of VCs and learn more about the competitive industry. “Tell your students to read some blogs,” he said to the professors and administrators around the table. “I get pitches from people in Baltimore and Pittsburgh and it’s like, dude, go read some blogs. Make sure you know what you’re talking about. Don’t waste my time. My time is valuable -- more valuable than yours.”

Many of the VCs agreed that not every city can foster a booming tech sector, but in Atlanta, they found collaboration between government, universities and businesses spurring numerous startup accelerator programs and co-working spaces.

The VCs streamed into a downtown deli and lined up to buy lottery tickets. The sun hadn’t fully risen, and it would be a long day ahead, but they couldn’t pass up the Mega Millions jackpot cresting $1 billion. The return on investment was just too great. One of the VCs equated playing the lotto to their day jobs.

But some risks proved too steep for them: Most said they didn’t want to be the lone person taking a bet on a company or city.

“I want to invest. I ultimately want to put money to work outside the Bay area,” Clark, from GV, said. “My ability to help is diminished outside of the Bay area. What can I do for a company in Columbia besides give advice?”

To contact the editor responsible for this story: Emily Biuso at ebiuso@bloomberg.net, Mark Milian

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