Why geography matters for funding

Most entrepreneurs don’t understand why having local investors is important.  After all, entrepreneurs are always on a plane meeting with customers, their life runs virtually and the team may even be distributed, so why does it matter where their investors are?  Are investors so lazy that they won’t do a deal that’s a phone call or plane flight away instead of a short drive?

It’s actually not about the travel for most investors, it’s about adverse selection.

Typically investors only have a network of so many people.  If you’re in our network, we can do our homework on you. We can understand if you’re an elite company, how you’ve performed to date, and how those who have watched you perceive you.  

If you’re not in our network, we need to find a proxy – a way to trust that you’re as great as you seem. If you’re based in, say, New York, and are reaching out to a firm in Atlanta, the default assumption is that every fund in New York has already passed on your deal, and you’re now going to other geographies that may not have as much purview or dealflow.  If you were truly one of the best deals in New York, wouldn’t someone in New York have done the deal? The answer isn’t always yes, but more often than not, if you’re coming to me cold from out of market, it’s because you’re not one of the best deals in that market and looking for less savvy sources of capital. 

That’s at least how VCs see it.  So you certainly don’t need all local funding –but having one local investor doing the deal because you’re one of the best in your city will help other investors rally around you and ease their anxieties about adverse selection.