Greener pastures? A tale of the Minnesota startup that was

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adios!Woven throughout Minnesota’s Angel Tax Credit saga was the painful testimony of local startup companies looking outside of Minnesota for viable funding options. And because investors often have a real need to see, taste and touch their investments (in a non-creepy way), relocation typically becomes a contingency of funding–both for the security of proximity, and for the potential economic value to a city/state business ecosystem.

Reflecting on the psychology surrounding the passage of Minnesota’s Angel Investor Tax Credit, it was that same prospect of loss — be it entrepreneurs, new tech companies, jobs, future tax revenues, or bragging rights — that would (in part) move the emotional dial and tip the scales in favor of Minnesota’s entrepreneurs and investors.  We can’t have promising new companies leaving…to Wisconsin of all places!

The reality is homegrown entrepreneurs and their tech startups are still emigrating from Minnesota (Angel Tax Credit or not) for greater opportunity elsewhere, and some appear to be finding it. Forget Wisconsin-we’re talking about Boulder, Austin, Seattle, Chicago, the Valley (and increasingly) the Dakotas.

Yes, money is often the driver, but the carrot has grown to include: convenient access to pools of like-minded and skilled talent, strong entrepreneurial support/infrastructure through formal programs (ie-incubators) and established yet progressive corporations that serve as both conduits for and customers to innovative young companies.

One recent and concrete example is autopsied below and there are multiple known instances which are off the record or largely remain under the radar.  Draw your own conclusions.

Startup: Seeing Interactive

Founded: 2009

Founder: Lloyd Armbrust & Jason Novek

Product(s): Maker of software that works with companies such as Google, Facebook, and Twitter so that newspapers can remain at center of local.

Customers: 87 local newspapers

Employee’s: 8 full time; 9 contract

Funding: <$25k spring 2010;  $1m on 6/28/10 (Baseline, Buchheit, Schachter, and Lerer Ventures)

Origins: Duluth, MN

Current location: Between Austin, TX, and San Fransisco, CA

What’s the background story? Why the decision to build/grow elsewhere?

In 2008 Jason Novek and I (Lloyd Armbrust), both Minnesota natives, started working on our first project building applications for car dealerships in Minnesota and Wisconsin.  We had a few customers and then a newspaper in Nebraska contacted us and wanted us to build a special product for them that they could resell.

We did and started making real recurring income.

At this point it’s early 2009 and we realize that this if company is going to be bigger than just a couple of guys and that we’d need growth capital.  At first, we tried at first to get an SBA loan and although we had thousands coming in each month from paying customers we couldn’t obtain a $25k loan.  And we knew that getting equity financing for such a small amount just wasn’t a realistic option in Minnesota.

In mid-2009 we decided to move the operation to Texas and incorporate there, for various reasons, but mainly because Austin has a great software dev community with bigger opportunity for early-stage investment.  We stayed here for a while but learned that if we wanted real investment we’d need to move to San Francisco–which we did after first receiving initial funding from Y Combinator in early 2010. Less than six months later, we would close on a $1m round.

The amazing thing about this process is how easy it was.  We had a company, we had a product, and we were making money–that’s all the investors wanted to see.   Some of our investors only briefly looked at our product before writing big checks.

Where is the company now?

We are in both Austin, TX and San Francisco, CA.  Austin is a great town with lots of experienced software engineers and a great place to build a high-tech company (also no state tax).  We have a lot of customers in TX and we feel more like a small-town company than a big-city company.  So Austin seemed like a good compromise.

Our main development office is in San Francisco because this is the heart of the Ruby community.  We will likely always have a San Francisco office, though Austin is our home for now.

How did the Y-Combinator experience impact your startup?

It helped through the learning curve and cut through red tape with connections. I mean, you can’t just walk up to a guy like Paul Buchheit or Joshua Schachter and have them take you seriously.  We’re talking about people who, to some extent, created the internet we use today.  With YC as a starting point, we were at least able to get an introduction–and it worked in our favor.

A lot of YC is about learning to run a company, and at the time we already had the company, made the mistakes, and went through a lot of that pain: a bunch of these founders are fresh out of college. But some things you can’t teach or read about.  We got to ask guys like Ben Horowitz and Mark Zuckerberg questions about building their business in a room with just 30 people; you can’t buy experiences like that.

Any thoughts on Minnesota’s tech ecosystem based on your experiences elsewhere?

If Minnesota, (or any state that is serious about nurturing the startup community) it’s simple: strategically reinvest at the earliest stage through local angel investor engagement.

Minnesota also has another big hurdle to get over: the corporate tax system.  Just moving to Texas took a huge tax burden off of our of company (even though we still have some Minnesota employees).  I imagine that if we had all TX employees, we could probably hire a whole extra developer just on the tax savings alone.  That kind of matter can be the difference between living and dying for a small company.

What advice would you offer Minnesota startups who want to start in Minnesota and remain here to build their companies?

You’re not going to like my answer. If you’re in with love the land of 10,000 lakes, your best bet is to move to a more dynamic market to build your product and get financed. Then move back. It’s almost impossible to grow a tech startup in a place where banks rule and experienced (modern) tech investors are scarce. If your product is legit, there’s a strong chance that you’re competing against venture backed companies and teams of serious talent (stacked upon talent).

When are you coming home?

We still have a few full-time guys working for us from Minnesota, but it would make no sense for us to return there at this point. On that note, we are hiring!

So Minnesota – what can we do to ensure that which starts here — stays here? What would it take to be known as hostpot of activity and opportunity that out-of-state tech startups think of when considering the options?

Comments

  • Scott

    I have a small (<20 employees) and very profitable tech company that I recently relocated. Tax credits, incentives and other ways of government getting in my business were of limited interest to me. What I looked for was freedom and to be left alone. That's no longer possible for small companies to find in the US. The US as a whole is hostile to small business interests, and always sides with the large corporations in schemes to destroy small business competitors.

  • Greg Awtry

    We are a small newspaper in Nebraska. We use Seeing Interactive online products. We began using them in April 2009 and now, less than 18 months into it, our online revenues are up over 80% and represent 12% of our entire newspaper's advertising revenue. It's innovation like Seeing Interactive has demonstrated, when they saw a a void and were determined to fill it, that will help restore the economy.

  • Nobody

    see also zencoder.com (another YC company), pedalbrain.com (actually has investors), mediashelf.com (doesn't need investors) among others.

  • guyAtHockeyBiasDotCom

    WARNING: Pro-family/balanced life tidbits follow – I have done a lot of startup tech work and a lot of consulting. My wife and I lived in the bay area for 10 years before moving home to Minnesota; I am now at an age (51) where putting food on the table for a family I adore trumps all.

    I think a lot of Midwesterners feel the same way; I wouldn't trade it for anything! As a result, my last two entrepreneurial pursuits have been side projects. They have no doubt developed more slowly as a result; but my family has not! :)

  • http://lloydmedia.com Lloyd Armbrust

    Let me rephrase something here, I was quoted in the article here saying “you can’t just walk up to a guy like Paul Buchheit or Joshua Schachter and have them take you seriously.” This is actually wrong.

    The great thing about the Valley is that you can approach guys like Buchheit, or Schachter, or Paul Graham, or even Mark Zuckerberg and they will listen if they have the time. Y Combinator gave us a chance to interact with these guys, here their stories, and in turn have them listen to us. I'm pretty sure if you saw Schachter at Trader Joes or something he'd talk to you and listen to your idea (though he'd probably ask you to send him an e-mail).

    My point was and is that some places, by virtue of simple geography, will never have this advantage.

  • http://twitter.com/robertjweber Rob Weber

    Today I scored a meeting for a local tech start-up with one of the top five VC's in the world. I put my reputation on the line with this high profile Silicon Valley firm because I believe in Minnesota tech, and I believe in this company. In return, I asked for nothing. It can be done… We need to help each other out.

  • http://www.marketingshow.com Clay Collins

    Excellent piece, Jeff. Thanks for writing this.  Would love to see more thought pieces like this in the future.

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