Portland, Ore., is clearly an up-and-coming startup city with plenty of fast-growing companies sprouting up in recent years. Some have already been acquired by large corporations, others are well on their way to huge success, and there are several more up-and-comers. There’s also a recent pattern of big tech companies like eBay, Salesforce, and Airbnb setting up satellite offices in the region.
But the area lacks certain qualities that places like San Francisco, New York City, and even Seattle exhibit. For one, Portland does not have a big, established tech company helping feed future entrepreneurs and angel money into the ecosystem. Critics also point out the low amount of investment dollars available in the Rose City.
Still, though, many think Portland has become one of the best places in the world to start a company. One of those people is Diane Fraiman, an entrepreneur-turned-venture capitalist who’s been a partner at Portland-based Voyager Capital since 2008. We had a chance to sit down with Fraiman and discuss why she’s so bullish about the Portland startup scene.
“You can build great teams here, and you can do them in very large markets,” Fraiman explained. “You can have an outstanding environment for growth and you can do that in a highly capital efficient environment — which, to be honest with you, is a beautiful thing.”
The startup growth in Portland has resulted in more venture capital money flowing to the city, with total funding increasing from $41 million in 2009 to $139 million last year, according to data from Thomson Reuters. The city is also attracting out-of-state giants like Airbnb and eBay, while the Portland City Council recently approved a Google Fiber project for high-speed Internet.
So what’s next for the Rose City? Continue reading for edited excerpts from our chat with Fraiman.
GeekWire: Thanks for chatting with us, Diane. Let’s start with the money problem. One knock on Portland is the lack of investment money flowing around. Your thoughts on that?
Diane Fraiman: “Money is not a problem. I say this with the caveat that money should always be a problem. It should never be easy to get money, because when it is easy to get money, then there’s a problem. Of course, that’s part of the discussion and concern in the Valley where while you have to work to get money, it’s gotten a little silly again.
So when I say money is not a problem, I mean that in the sense that if you are good company and you’re doing the right things — you’ll have to work hard to get the money — but money, as you can see, is coming in here and it’s coming in here for a lot of reasons. Some of it has to do with the ‘experiment,’ where money follows money. But a lot of it really is that we are now the most capital efficient city on the West Coast. So the old tapes that used to get played about, ‘Well developers are great, the quality of life is great, but you can’t build a team and can’t scale a company’ — that’s a bunch of bull. You can build great teams here, you can do them in very large markets, you can have an outstanding environment for growth and you can do that in a highly capital efficient environment — which, to be honest with you, is a beautiful thing.”
GW: Tell me more about the “experiment.”
Fraiman: It’s a group of about ten companies we’ve been watching for eight years. I always laugh when someone says in the last year, “What has happened to this city?” We’ve busted our tail to basically believe in this city and bring together the resources to have the conversations with the city, state, and the local ecosystem to build out the relationships that are needed and to put that first money in so others will follow.
The experiment, from a venture standpoint, is all about making money. So, yes, we want to build great companies and have great entrepreneurs and do a lot for community, city and state. But at the end of the day we also have to make money, so the “experiment” is going to play itself out with this graduating class. There have been some good exits already in certain areas and we’ve begun to see it. Simple was a really good exit. But I think we’re going to have some home runs. I’m quite bullish on it. I think the home runs will just elevate us to that next level of both recognition and sophistication in terms of what we can expect.
I would argue that we now have several companies here in town that are as good as anything you’ll find anywhere in the country and yet because of the capital efficiency of marketplace, we can put a lot less money to work to grow really big companies with really great outcomes. But we’re going to have to prove that. You can’t rush that. The growth of a company has its own life and it has its own life cycle and you are going to have to basically let it take its time to give you the outcomes you expect. I think we are now in that 12-to-24 month window where we will see some great outcomes. As I said, I’m very bullish, and everyone knows that. But I also think I’m right.”
GW: What exactly is a capital efficient marketplace, and why is that advantageous?
Fraiman: “You can build a company here in the early stages, pre-Series C, for about one-third the cost compared to the Bay Area. It’s based on economics — rent, salary, living costs, expectations. Once you get the Series C, things begin to equalize themselves out. But if you can get a company to series C, which is still sub-$20 million in revenue, and you can do that at a third of the cost than you can do in Bay Area, the valuation will still go up by the Series C and equalize with the marketplace — but the money in is substantially less, so, in all honesty, everybody wins.”
GW: That sounds nice. Why doesn’t every entrepreneur come to Portland?
Fraiman: “The growth has been phenomenal here. The really interesting thing is VCs down in the Bay Area who are now telling entrepreneurs to move up here. Another interesting thing that I find is how many East Coast entrepreneurs, when they choose to start a new company, are choosing Portland. We have as much East Coast people moving out here, probably even more, than people from California. To me, that’s fascinating.
Again, the growth is amazing. Every week, I probably meet three-to-five super talented people who move here with no job and are basically just saying, ‘show me the money.’
Now, the trick is, we are a city that networks. You’re about two degrees of separation from anyone you want to meet. We pride ourselves in being able to mentor and network and help people along. I personally hope we never lose that. Some folks may think that’s too nice. I personally think it’s a key differentiator, and I think it’s attractive to entrepreneurs coming here. I think the reason why some of these entrepreneurs here have gotten as far in this town as they have is because a lot of people give up their time and service and experience.
Now, that doesn’t make you weak. The old rap that used to be played in Portland of being full of lifestyle CEOs and a place where you can’t build a team — that’s a bunch of crap. You can be a human being and still eat trees for lunch and build a great company. You can be a venture capitalist here and be tough and direct and make hard decisions — but still not be a jerk a la some of the Sand Hill Road folks. You can actually sit on the same side of the table as the entrepreneur for the life of that company and mutually succeed together.
GW: Did you not realize that until you came to Portland?
Fraiman: I did not understand that until I got out of the Bay Area. One of the things that attracted me to Voyager in the beginning and that I still love to this day is the culture of collaboration with the entrepreneur and the company. When we invest, we invest to marry this team and to be with them through thick and thin to success. That doesn’t mean hard decisions won’t get made. But it basically means we get in to stay in and that’s through all the network effect required, all the mentoring required, all the coaching required. That’s something that we truly believe in and I think that it is much more a regional VC culture than it is a Sand Hill Road culture.
Again, for Voyager specifically, when we invest in a company, we invest in the initial team, the initial CEO. It’s as much about team as it is about anything else. In the Bay Area, they could love market and love the technology, but not be so crazy about founding team. They’ve got a resource base down there that if they don’t like the founding team, they can switch it out relatively quickly. We don’t have that luxury here — well, I’m not so sure it is a luxury, but it’s definitely a reality.
So at end of the day, the team we invest in is the team we’re betting on. That doesn’t mean at some point if that team can’t scale, you don’t make start making changes as would be expected. But that first money, which is when we come in, is on a team that’s going to stay there. That’s different than the Bay Area. There is a bigger base there, no question. But having said that, that bigger base doesn’t mean that it is a more successful outcome.”
GW: That’s an interesting point about the differences in VC culture. There also definitely seems to be a unique culture among Portland’s entrepreneurs and startup CEOs.
Fraiman: It’s not that any of these guys — Sam, Luke, Eric, Raghu — are working any less than anyone else just because they treat their family lifestyle as an incredibly strong and important part of their life. They are all working way too many hours and missing way too many birthday parties.
But there’s an importance to being a human being, and you see that in the culture of the companies here. Employees don’t pick up and run to the next shiny object after six or 12 months, or leave because your boss looked at you cross-eyed or you didn’t get an undeserved promotion. You see that people here commit to join a company and they are on board. Granted, there is a lot of rotating around with developers, but that commitment level is something you’d find with all these CEOs who are building a company based on culture and they want to start from the beginning. It’s not always easy, and there are really difficult times and decisions to be made. But you can do that and still be a human being.”
GW: What about the lack of a tech giant here? Seattle and San Francisco certainly have them, and it’s helped grow the ecosystem in those places. What about Portland?
Fraiman: It’s a problem. There has been a real gap here for last 10-plus years. The days of Sequent, Mentor Graphics — companies that did about $500 million to $1 billion in revenue organically — you can count the number of those kinds of companies on your hand right now. That is a problem for many reasons — not only for a tax base, but for total stability of the whole market.
There are two ways you can fix that. You grow them, or you move them in. It may be a problem to move them in, although there’s obviously some precedent for doing that. If you talk to folks at the city and state level, there’s a whole lot of work going on constantly to do that.
Then there’s growing them, and that’s clearly where we’re at right now. But again, you can’t rush time. So can Elemental be that next $500 million to $1 billion company? Absolutely. Can Puppet Labs? Absolutely. But you can’t rush that. It’s going to take time. So that is an area of weakness.
GW: So time is one solution to that problem. Is there anything else missing?
Fraiman: “While money is not an issue at the VC level, the angel community is probably still not where it should be. But it is so far improved from where it was. It is night and day in terms of the available angel money. You have Oregon Angel Fund, TiE, individual angel investors that are putting in money, all the incubators and accelerators — it is night and day from where it was.
But this problem goes hand in hand with the gap of high net worth individuals who made money on other outcomes with their companies, putting money back in. We really generation-ed out a lot of the older high net-worth individual from the Tektronix and Mentor Graphics days, and we’re building them up again.
One can hope that with great exits comes additional angel money, as well as existing angel investors making their money back and putting money in. If you at cities like Seattle, there is just a larger base of higher net worth individuals who are basically putting more angel money to work. Again, this is a conversation getting a lot of attention at city and state level to see what you can do, whether it’s tax benefits, joint programs, etc.
As I said, in the last three years at least, it is night and day from where it was. But if there was one area in the funding life cycle that would be great to see increased, it’s at the top of the funnel and the really early angel money. That’s key to me, because you have to get these guys far enough down the runway in order for me to get there.”
GW: What does Portland’s startup scene look like in five, ten years? Is it the next Silicon Valley?
Fraiman: Having been there, I hope not. In all honesty, I hate to put labels on what we want to be. I think we want to be Portland. I think what we want is a very healthy, thriving, economically successful community overall — of which tech is a very key component. It’s a city where there are ideally companies doing $500 million and above, and we start to spawn companies from those companies that we can economically grow and sustain that growth with the ecosystem.
I truly resist labeling who we want to be like. I think we want to be Portland. I think others are looking and instead of wanting to be like Silicon Valley or Austin or Boston, other cities are saying that they want to be like Portland. What Portland looks like is being defined now, but I think its story is yet to be fully created.”