The Rise of the Startup Pioneer

“What do you do?”

“I am CEO of a startup company?” “

“Where are you?”

“Santa Fe, New Mexico”

<baffled> “Mexico??”

“No, New Mexico”

<blank stare>

“It’s a state west of Texas. Very beautiful and remote. You know, the Manhattan Project, where we invented the nuclear bomb.”

“Oh yeah… so….are you from New Mexico?”

“No, but let me tell you a story…”

After my last startup, I met a group of scientists at Los Alamos National Laboratory and we decided to start a company, Descartes Labs. Instead of moving everyone out to the Bay Area like a predictable tech entrepreneur, I took a leap of faith and made our home in New Mexico.

Initially it was about convenience, then it was about the lifestyle, but it’s become something more. New Mexico is now part of our culture, part of who we’ve become as a company, and one of our strengths. 

Because I’ve hitched my wagon to a state not known for high tech startups, I’m always on the lookout for the “rise of the rest” (a phrase from Steve Case) - other cowboys and cowgirls who have chosen new frontiers instead of known innovation centers like the Bay Area.

Two articles recently caught my attention because they start to tell a story about funding in the rest of the country. What causes a successful startup in a non-traditional place? There’s no easy answer, but one component of the solution is that recruiting out-of-state management/entrepreneurial talent is a key to success.

An article from CB Insights mapped out the top-funded startup in each of the 50 states. Descartes Labs was New Mexico’s representative, bringing the state up to 35th in the nation. For a state who regularly scores at the bottom of lists you don’t want to be on the bottom of, this is a real achievement.

On a national level, Descartes Labs is raising New Mexico’s profile, but we’re also having an effect within the state. Albuquerque’s local business journal said we were the top funded startup in NM in 2017. Indeed, not only were we the top funded startup, but we represented over half of the state’s total venture capital raise: out of $56.4M in funding, $30M was Descartes Labs. Yes, that’s half of all investment in one company. Looking back, 2016’s total for New Mexico was $18.7M. That means Descartes Labs’ series B investment alone represents a 60% year-over-year increase to New Mexico. Wowza!

On one hand, I’m really happy we were able to single-handedly move New Mexico’s venture capital numbers. But, I’d rather be one of many well-funded, successful startups. There are a few big fish here (Skorpios, RiskSense, Lavu, Meow Wolf are some other cool startups here), but there are limitations to being part of a small pool. In order for Descartes Labs to grow, we need a community of like-minded entrepreneurs and technologists. Having Sandia National Labs and Los Alamos National Labs each within an hour’s drive is great (a fifth of Descartes Labs is made up of former Los Alamos employees), but it’s not the same as having a thriving community of small and large tech companies.

One hope is that, as one company becomes successful, there is a gravity: success attracts capital and talent and eventually will create a community. One of the bright (and perhaps unexpected) spots on the CB Insights list is Utah. The Silicon Slopes of Utah (with Domo having raised $692M) have a booming community with at least 5 unicorns. Lifestyle, cheap cost of living, and access to talent from the excellent universities are cited as reasons.

But, there are counterexamples that suggest that success alone doesn’t create gravity. One shocker from CB Insight’s list was that Descartes Labs was able to inch out Nevada (PlayStudios led there). Nevada was home to Zappos, a massive exit and success for investors and the state. Zappos founder Tony Hsieh has made a commitment to Las Vegas and the startup community there, spending hundreds of millions to build out Downtown Las Vegas - not to mention the community was built by former Zappos employees. For whatever reason, the vision has not completely materialized. 

All of this got me thinking: what conditions allow for capital to flow into a state like New Mexico?

The lower cost of operations, "the bang for the buck" is not enough to sway a VC. Without other examples of success, places like New Mexico look like a real desert to them. In my many fundraising conversations with VCs, the low cost of business is an afterthought - they really want to understand our challenges in attracting talent and whether we can build a strong business outside of a tech center. 

One of the biggest sources of pain in New Mexico - and I suspect other members of “the rest” - is a particular kind of talent: experienced entrepreneurs. Many New Mexico startups I’ve talked to have great technology and great ideas, but the missing ingredient is often someone with the experience to take a startup through the ups-and-down that occur even with the best ideas and technology.

If you don’t have homegrown management talent, the logical option is to get someone from out of state with the kind of experience you need. Before I intersected with the founding team of Descartes Labs, they had been unsuccessful in getting venture funding - even from local VCs who knew Los Alamos well. Once I came on board and started fundraising, a lot of VCs from San Francisco and New York told me “no.” Eventually, Crosslink Capital led our seed round thanks to a relationship I had been building with them for years. I’m not sure we could have convinced another VC to fund us without that trust. I joke that Descartes Labs didn’t need me, in particular, but it needed a “me” to help it get escape velocity from Los Alamos. Investors needed a trusted entity on a smart founding team.

But, that’s not just a joke, that’s the reality of raising money outside of the Silicon Valley. Most quality capital comes from the Valley (and a few other select places). They prefer to place bets on what they know. So why not reduce the risk and bring in someone from the outside?

Once we were able to raise our seed funding, additional talent continued to join Descartes Labs. We’ve certainly sourced heavily from local institutions. But, we’ve also been able to attract talent from out of state. In the early days, I drew heavily on my network. Now that we’ve been successful, we’ve been able to broaden that recruiting pool and attract even more talent.

I still think back to those early days and wonder about the many fledgling startups here. How do they attract experienced talent in their early phases? Unfortunately, those people likely won’t be local or, when they are, will need to be supplemented by out-of-state talent.

Do we create some kind of “EIR” program here in Santa Fe, a place where entrepreneurs can hang out for 6 months in between gigs, helping local companies and potentially joining one? Do VCs need to get more aggressive about finding an executive for companies with great ideas but who need a CEO? Or maybe it’s just luck - kind of like the Descartes Labs story.

I’d love to know what you think, especially if you’ve been in building a Silicon Valley-style startup outside of Silicon Valley.