What proximity matters most for building vertical startups?
For most of startup history, the prevailing practice was to move west. That’s where the opportunity, talent, and capital was (is?). In fact, many VCs refused to invest anywhere else… ignoring other startups or predicting their investment on a move to the bay.
For a number of reasons, we no longer operate in that severe of a world.
But, the idea that talent, knowledge, and experience density matter is valid. The question is not “does proximity matter?” but “what proximity matters?”
In second-tier markets1, the answer to this question is more complex. Yes, it includes talent and capital but also customers and exposure to problems. Maybe this exposure enables us to take non-consensus positions before our coastal counterparts.
A perfect example is the many logistics companies that scaled in Chicago, far before logistics was en vogue. Five or ten years ago, many generalist VCs thought (1) logistics was not a big enough software market and (2) even if it was, large software companies would not achieve scale outside the coasts.
And yet, they were. Arguably, they needed to be.
It’s not a coincidence that Chicago is home to successful logistics startups… companies like project44, FourKites, and ShipBob. Their founders spun out of local logistics companies. They employ local talent coming from the likes of Coyote, Echo, Arrive, and others.
Conversely, the coast may be better set up to build horizontal software 2 because of the resources there.
This is the narrative. Is it true?
We first need to see if there is any difference between vertical 3 companies and all others.
Vertical unicorns are more graphically diverse than horizontal
In fact, there is.
We find a difference between where vertical unicorns 4 and others are headquartered.
Second-tier ecosystems produce 15% of all unicorns but almost 30% of vertical-tech unicorns. That’s twice the market share.