Although I sit on the patio of my new Austin home, wearing shorts and flip-flops, I sorely miss being a part of Delaware Innovation Week. I miss working with my friends and colleagues from Delaware. I want to give you something. I want to share my observations now that I am no longer a permanent part of the Delaware tech community. This one’s for y’all.
1. Startup Asphyxiation Kills: Add More “Startup Oxygen” (Capital)
The most visible face of the Austin tech scene, Capital Factory founder Josh Baer, has put together a great presentation that gives an introduction and overview of the Austin tech scene. In it, he talks about how, when Michael Dell started Dell Computer Corporation in his University of Texas dorm room, it was the start of something big. After the company saw massive success, it created hordes of “Dellionaires” that became the next wave of Austin founders and investors, pouring capital and talent back into the ecosystem, in a virtuous cycle that spawned companies such as Trilogy, which IBM acquired, and on again to companies like BazaarVoice, HomeAway, Indeed and RetailMeNot. It’s a known recipe but it takes more than one of these for an ecosystem to thrive, and it’s something that’s noticeably absent in Delaware.
Delaware needs its version of Austin's 'Dellionaires.'
In the past 30 days here in Austin, IT management software company SolarWinds was bought for $4.5 billion, HomeAway was bought by Expedia for $3.9 billion and there have been at least half a dozen multimillion-dollar acquisitions of smaller firms. And this was one week following the big news here in town, the announcement of the largest technology deal in history: the $67 billion merger of Dell and EMC.
In 180 days, Title III of the JOBS Act will go live and allow non-accredited investors the opportunity to participate in startup investing for the first time in 80 years, through equity crowdfunding. This will closely coincide with the 180-day “lock up” period that restricts employees from selling their stock following many acquisitions.
Which leads to one thing that is making a lot of buzz in Austin: around 180 days from now there will be another huge wave of capital and talent pouring back over the ecosystem. This is something that Delaware is sorely missing: there are no exits in sight.
It starts with exits.
SevOne is a fantastic company, and one that could have had a huge impact in the Delaware ecosystem if it exited there. But it won’t. SevOne moved its headquarters to Boston and, because it’s been profitable for years after its early investors were bought out in a $150 million cash infusion from Bain Capital, the prospects of an imminent IPO or acquisition by a company like IBM doesn’t necessarily have any sense of urgency.
Without a big exit that fuels an ecosystem, the second best way to get much needed capital is early-stage investment, but that is also missing in Delaware.
More venture capital has been invested in Austin startups in the IT sector alone in the first eight months of 2015 than there has been total across all sectors in the entire State of Delaware this century. There is an absence of investment capital at all stages of the tech ecosystem, but it’s a catastrophic absence at the earliest stages. The Delaware Innovation Fund has gone inactive after the passing of founder David Freschman last March, and Leading Edge Ventures is not doing any seed funding. One successful, high-potential startup that managed to raise a small amount of capital was Carvertise. But even with six figures in revenue, it took them much longer than necessary to raise capital at all, and it came through individual angel investors.
Where's the early-stage capital?
We’ve never publicized it, but the very day we received the call from Patrick FitzGerald to let us know we’d been accepted into the DreamIt Ventures accelerator program was the date we had promised our families we would go back to working for other companies, and run Cnverg on the side. We were completely out of money. The $25,000 that we got from DreamIt gave us the fuel we needed to keep going.
How many stellar companies could be formed at an early stage if $2.5 million was injected into 100 startups in Delaware? What would it do for the local economy if one of those companies was acquired for $400 million?
We’ve sustained our company by raising hundreds of thousands of dollars, with not a single dollar of it from Delaware investors that weren’t family. Companies need to leave Delaware to find funding, and it kills Delaware’s already existing advantages.
2. Fully Leverage Delaware’s Competitive Advantages
I wrote last year about the need for established businesses to work with startups to foster a thriving tech ecosystem. Yet, aside from people like Paul McConnell and Chris Buccini, it was incredibly difficult to get introduced to decision makers at these larger companies. We were met with direct skepticism and told outright by many leaders that they didn’t believe visual management or planning was something that was desired for large companies, even when we cited examples. When you keep hearing the same thing, it can lead to doubting your assumptions. Even when you’re right.
An absence of meaningful support.
My cofounder, Richard Prieto, is at MIT today with our consulting partners where they run a workshop for Fortune 1000 executives, teaching them how to incorporate visual management into their businesses. They will be using Cnverg to show how those same companies can digitally connect their distributed workforce. Our partners established these methodologies at the Genomics Platform of the Broad Institute of MIT and Harvard. The biggest companies in the world need this problem solved, and we’ve had several global enterprises reach out to us asking how they can get started. This is more than the number of established firms who even would give us a meeting in Delaware.
Business leaders in Delaware need to look at places like Austin, and stop ignoring startups, especially in software. Software is “eating the world” and companies with long-established history and profit are being upended by technology startups.
Working with them at the earliest days can give a company an unfair advantage, because those early customers will get more attention from the startup, and they will be able to influence and shape the direction of a product or business in a way that a more “established” startup could not. So answer the email or call with the introduction request and listen. I can guarantee that you’ll find a startup founder eager to solve problems that you might not even realize you have.
While Delaware’s advantage of quick connections is conspicuously lacking from the business community, it pales in comparison to the lack of decisive action from the local and state government.
State government needs to step up.
Two years ago we submitted a proposal for how Delaware could leverage its already substantial advantage by allowing companies to headquarter their remote workforces in Delaware. It went nowhere. The objection we received from our civic leaders was, “What would stop another state from doing something similar?”
Our answer was, “Nothing, if you just sit around and do nothing.” So it came as no surprise to learn that over a year after our proposal was submitted, several other states were actively seeking to attract tech companies and remote workers.
Delaware has an advantage over other states, as 90 percent of companies that would likely employ remote workers incorporate there. It’s an unfair advantage for Delaware, but one that isn’t being leveraged even though the legislative framework is mostly in place.
Delaware will need to make bold changes if it hopes to compete with states like Louisiana, which offer tech companies a 25 percent tax credit on qualified payroll for software developers a company hires in-state. Technology is about the people involved in making it happen, and fortunately even 1,600 miles away, watching what the people are doing makes it clear to me that Delaware can have a very good future in tech.
3. The Future is Bright — if Delaware’s Young Leaders Stay
At the end of last year, Jon Brilliant, Gov. Jack Markell and Carvertise founder Mac Nagaswami were asked what would be big for Delaware for 2015.
Mac’s answer was Cnverg, Kurbi and Ellen Kullman, and all three are now “gone.”
Today I read a heartbreaking blog post by one of the most promising up-and-coming Delaware entrepreneurs I’ve met, Benjamin Rapkin, Founder of ProjectedU. When I heard that my alma mater, University of Delaware, where ProjectedU was born, and which gave them the pilot program that validated their business model, had rejected a full rollout, it felt like I had been punched in the gut.
I was present when Ben pitched ProjectedU at the coIN Loft during Startup Weekend. I attended events through the Horn Program at UD and listened as they refined their pitch. I was thrilled to hear about the tremendous engagement they were seeing from the students and the positive feedback from their pilot customers. A company like this, with enthusiastic and talented founders, is exactly what you need in a thriving tech ecosystem.
It reminded me of how close we’d come to failure with Cnverg. We’d come close to having to go back and get “real” jobs, as Ben’s professor suggested to him. It was only through luck, timing and the faith of DreamIt cofounder Steve Welch, and our program director Patrick, that we received the $25,000 to keep us going.
Ben has a bright future in tech, and he is staying with startups — just not his own. We’ve lost him to New York. He now works at Parse.ly, a rapidly growing 40-person startup that also got an early vote of confidence from DreamIt.
Would that have happened if there was a viable alternative in Delaware where Ben could get $25,000 to prove his model? How many others like him could there be if the business community and state worked together to make a real contribution and inject capital into early stage ideas? $2.5 million for 100 companies. What would Wilmington’s tech corridor look like with that kind of capital?
You would get a vibrant ecosystem and spawn a class of entrepreneurs who, even if their first idea didn’t work out, would come right back with a bigger one. And another.
It wouldn’t be fair to compare Delaware or Wilmington to Austin because the latter is a much more established tech community and a larger city, even though it’s younger than DuPont. But it might look something like a city that’s only slightly larger — Boulder, for example — which has more startups per capita than anywhere in the country. A city that, even with fewer than 100,000 residents, has a GDP nearly one-third the size of Delaware’s total state GDP in 2010, and has only grown larger since.
How to fix it.
Something that Austin’s tech scene has taught me about Delaware is how similar the people are.
The enthusiasm is palpable and talented men, women and kids who are deeply embeded in tech are everywhere. Delaware’s startup community has the people, the talent and amazing organizations like the Archer Group, SevOne, 1313 Innovation, Start It Up Delaware, Zip Code Wilmington and, soon, The Mill, that can collectively help push it over the edge. If the next generation of founders sticks around long enough to see it happen.
I watched too many friends and colleagues leave Delaware because of lack of capital and customers, only to find it elsewhere. I have now joined their ranks.
When I picture what the ecosystem could look like, I envision a talented student in the Horn Program who’s got an idea she’s passionate about. She asks Mona Parikh for advice on where to start, and she gets plugged right in. She’s introduced to folks like Nick Matarese and John Meyer who help turn her idea into a prototype. She finds people who are equally excited about the idea that become cofounders, and they all move into a startup apartment in Wilmington and work out of coIN Loft to get started. They fund the company with savings, credit cards and sale of some services, and they work to find beta customers in the local community and incorporate their feedback back into the product. They have more work than they can manage, and they find a junior developer who has just completed Zip Code and is eager to start working on a real product. In order to pay this developer, they go out and seek a small amount of funding. They have great feedback from their users, are solving a problem, and have a scaleable solution with a bright future.
This is the part of the hypothetical where the future of a thriving tech scene in Delaware starts to look murky. If they don’t get that early feedback from local customers, and they don’t raise local investment, the ending of the story looks this: They hit significant hurdles and either fail or move to Austin/Boulder/Seattle/Portland/NY/SF/CA to raise capital and continue.
Like an aging high school athlete, Delaware sustains on the faded glory of its past successes. That past is gone. We stand now at a crossroads of our future and the direction we choose will echo through the coming decade. Down one path lays the fulfillment of the pledges we’ve heard from countless civic and industrial leaders. A promise that we will nurture our best and brightest startups — providing to them the breath of life that all early-stage ventures require: their first customers and seed investment.
Down the other path, the one we seem hell bent on traversing, stretches a valley of shadows cast by long-departed companies whose only vestiges lay gathering dust within countless filing cabinets in a small, brick building at the corner of 13th and Orange. As someone who spent his entire life in Delaware, and the past decade living in downtown Wilmington up until two months ago, and who cares deeply about the tech ecosystem in Delaware, I sincerely hope that we choose the former.