Reading TechCrunch and the other big Silicon Valley blogs, you’d be forgiven for believing that anything less than a billion dollar valuation constitutes utter failure. Silicon Valley has, of course, always been about fast growth and big values, but it is only in the past decade or so that these values have been so disconnected from any semblance of reality or perspective. It’s something I struggle with on a daily basis – it feels fake and unsustainable to have that many zeros on a company valuation.

My other bone of contention is in this artificial “Silicon Valley versus the world” conversation. It seems like most people either want to shift their startups to Silicon Valley or else are trying to invent some new Silicon somewhere-or-other in an effort to recreate the Valley’s success. I’ve always said that Silicon Valley is a product of a unique set of attributes and that, given the problems, the area has to contend with, that aiming to recreate it is kind of illogical.

Given these views, it was interesting to hear from a group that is today launching a new Venture Capital firm – one that invests exclusively in business software companies that are located outside of traditional VC hubs. in another twist, the firm is also looking for real customer traction (you know the sort, customers that actually pay money for a service), and all from companies that haven’t raised significant outside funding.

Essentially, it wants to bet on people who have gone against the odds – both in terms of location and capital resourcing – to achieve success.

Elsewhere Partners (an apt name) is being founded by veteran investors Chris Pacitti, John Thornton and Sam Kentor. Founder and Partner Chris Pacitti is a long-time investor with 22 years of experience as an investor and mentor to software entrepreneurs. Pacitti remains a general partner at Austin Ventures, the nation’s largest regional venture capital firm, where he co-led technology investing for 16 years with Elsewhere Partners Co-Founder and Partner John Thornton. Thornton has 27 years of software investing experience and also continues as a general partner at Austin Ventures, where he led or co-led technology investing since the late 90s and served as managing partner 2005-2008. In addition, Sam Kentor, co-founder, and principal, brings investment experience from JMI Equity and was previously at Bain & Co.

Flipping the “growth at all costs” models

Recent times have seen huge numbers of startups follow the “go big or go home” ambition. Their intention is to make huge losses in an effort to grow user numbers. The very model that companies like Box and Dropbox, two Silicon Valley darlings, have done well out of. But despite these two companies doing well, it has come at a cost. Box’s CEO Aaron Levie had to take on some pretty horrendous funding rounds back in the day, to the point where his company’s IPO didn’t really make him that much money considering the years of toil he’d put into it. And Dropbox, while having raised gazillions of dollars, does so based on a model or acquiring users no matter how much that acquisition costs.

Reflecting on these Silicon Valley norms, and how they relate to the VC industry, Pacitti said that:

Most venture capital firms are busy chasing unicorns; this ‘billion-or-bust’ strategy means that they have to accept an excessive number of losses. That’s not our approach. We see a tremendous opportunity to invest in software companies that don’t fit the traditional model — these ‘outliers’ are located beyond the boundaries of the major VC hubs and have proven their business models without standard Series A or B rounds thanks to a customer-centric culture. Our strategy is to make 100 percent of them successful by building off what they’ve already achieved

Accelerating the journey to exit

Traditional VC firms are all about getting in early and encouraging companies to do multiple funding rounds. The reality is that VC firms need big chunky exits from some of their portfolio companies to ensure their fund is successful overall. It is for this reason that the generally accepted rule is that is a startup snags a VC for a Series A, they will either go on and do subsequent rounds or fail altogether. VC’s don’t want moderate exits of a few 10’s of millions, they’re looking for the new unicorns.

Elsewhere is a little different and is both coming in at a later stage and investing seven-figure sums in an effort to help already successful companies transition to their next stage of growth. But whereas in traditional VC this generally means scaling user numbers through increased spend (thus necessitating more VC investment), Elsewhere looks to accelerate the exit opportunities.

The firm looks to their team of operating advisers to help give portfolio companies more options. Explains Thornton:

As more private equity firms look to acquire software companies, the exit model for venture-backed start-ups is ripe for radical change. We intend to help all of our portfolio companies become exit-ready on their own timeframe and ensure there is a broad range of options for realizing value. To that end, we’ve built an extraordinarily talented team of operating advisors who collectively have decades of experience doing just that – and, unlike other VC firms, we put them directly in the board seats to maximize their impact

An active helping hand

While most VCs will push for board representation when they do a deal, their attention doesn’t generally extend down to operationally helping their portfolio companies out. Elsewhere has another model that includes active support from advisers. Instead of Elsewhere’s partners filling those board seats, those places will be taken by members of Elsewhere’s list of “operating advisers.” As board members, the operating advisors a charged with not only providing executive mentorship but also hands-on tactical and strategic support.

One of these advisers is Kenny Van Zant, who is a member of the board of Itential, one of Elsewhere’s recent investments. Van Zant is the former head of business for Asana and SolarWinds chief product strategist; he currently serves on the boards of Castlight Health, Idera, and Puppet. Says Van Zant:

As a board member, I’m able to engage in a deeply meaningful, impactful way and can be more effective in helping the portfolio companies quickly achieve milestones. After spending decades in the software business, I’m also drawn to working with the companies that match the ‘outlier’ profile Elsewhere Partners has developed. These companies have incredible potential to leverage the strong foundations they’ve built, and it’s rewarding to help them take their businesses to the next level.”

Accelerating Success Stories

Recently, Elsewhere Partners made the first outside investment in Atlanta-based Itential, a Software Defined Networks (SDN) vendor. Partners also led a round of transitional capital for Relatient, a patient engagement software company located in Nashville.

Other Elsewhere Partners portfolio companies include Vancouver-based Tasktop, a supplier of value stream integration for software development organizations in large enterprises; and Austin-based Vyopta, a provider of unified communications and collaboration performance management solutions.

In addition to the cities where Elsewhere Partners has already invested, the firm reports that it is in active discussions with companies in Boulder/Denver, Charlotte, Chicago, Dallas, Phoenix, Pittsburgh, Raleigh/Durham, Salt Lake City, Toronto, Washington D.C. and beyond.

MyPOV

It’s hard to change firmly entrenched models, and the fact that the founders are staying on in their more traditional VC roles shows that Elsewhere isn’t going to fundamentally shift the models anytime soon. That said, the focus away from the Unicorn-potentials, and away from the Silicon Valley echo chamber is a good thing. There is a bunch of innovation happening in different areas and Elsewhere will help that innovation to reach its potential.

Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

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