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Some of the biggest Heartland success stories in recent years, from Utah’s Qualtrics to Indiana’s ExactTarget, have been enterprise software companies. Middle America has a high concentration of Fortune 5000 companies, giving these startups crucial proximity to necessary customers while being able to keep costs low by operating in a cheaper part of the country.
So it shouldn’t come as a surprise that Salesforce Ventures, the investing arm of the cloud-based software giant, is now investing more outside of Silicon Valley than inside it. Managing partner Matt Garratt told VentureBeat that of the 53 investments Salesforce Ventures made in U.S.-based startups last year, 65 percent were outside of Silicon Valley. Recent investments include North Carolina’s Ncino, which sells cloud-based banking technology, Tennessee-based health care tech company Virsys12, and Denver’s Guild Education, which has created an educational platform for companies to help their employees skill up.
Garratt spoke with VentureBeat about what he thinks is driving startup growth outside of the Valley, as well as what types of enterprise cloud companies Salesforce Ventures is looking to invest in right now. Answers have been edited slightly for clarity and length.
VentureBeat: Looking at your U.S.-based investments from the past year — what states and areas did you invest in, and how did it compare to years prior?
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Matt Garratt: This has been a trend that we’ve seen in our portfolio that’s continuing to increase. This is the second year in a row where within the U.S., over half of our investments have been outside of Silicon Valley.
Just a snapshot of where we invested last year — we invested in Guild Education in Colorado, we invested in Illinois, we have three investments in Indiana, which isn’t too surprising because ExactTarget (which was acquired by Salesforce for $2.5 billion in 2013) was headquartered there, and became a big portion of our marketing cloud, so there’s a lot [companies] spinning out of there. We have a bunch of portfolio companies in North Carolina; we made three investments there last year.
So we’re getting pretty good coverage — it’s not just like Austin and Utah, where you think of as more prominent [tech cities].
VB: What do you attribute your increased geographic reach to? Do you think it’s more that as the fund has matured, you’re just getting more deal flow from different places, or do you think there’s more entrepreneurs of the caliber you’re looking for starting businesses in these places?
Garratt: I think there’s a few things. Overall we’re very encouraged by this because it’s nice to see one of the fastest parts of the economy extending beyond Silicon Valley, and the coasts really and going into more of the middle of the country. And there’s a few things. One is I think there’s just a lot of venture capital dollars out there right now, and so those increasingly need to go elsewhere to find more investments.
I think you’re also seeing — the ExactTarget example is a good one — is you’re seeing a number of second and third generation healthy tech exits in areas outside of the major tech hubs, and that’s creating a second and third generation of entrepreneurs, people who scaled businesses, you know who have led a marketing team before or scaled a sales team. And then I’d say maybe the last piece is that you’re seeing a lot of big companies build sizable offices in these markets.
And that does two things. One, it’s a place where you can recruit talent, but it’s also — if you’re going to leave the Valley and go join a startup — that’s the only game in town, you get really nervous about ‘well if this doesn’t work out, I’ve got a wife and kids, what am i going to do, if that doesn’t work out?’
If there’s large tech companies there that have sizable offices, you can have a lot more confidence that, hey if this doesn’t work out, i can go get a job, and I don’t have to uproot where I’ve been living for the last three or four years — so i think all of those trends are combining to bring these tech jobs outside of the coasts.
VB: In regards to to the last point — bigger tech companies opening offices in other markets — are there any cities in particular that you think this trend has really helped?
Garratt: Yeah, as I mentioned, Indianapolis we’ve made a number of investments — ExactTarget was started there. If you also look at the founders of ExactTarget, they’ve started an investment fund; one of the former general manager of ExactTarget, he recently started another company. [SaaS management platform] Zylo was a company we invested in, they spun out of there.
We’ve also seen [this in] states like Colorado, other large tech companies have a big presence there. Pittsburgh — I think you’ll start to see a lot from Pittsburgh, i’m actually surprised that there hasn’t been a lot more [startups], just given the size of the offices that Google and others have established there.
VB: Is recruiting something you talk to your portfolio companies about? As anecdotally, you hear about more people leaving the Bay Area, has their location been an advantage or disadvantage for them?
Garratt: I think there’s advantages and disadvantages. For one of our portfolio companies, Classy, based in San Diego, I think that was one of the things early on they had a lot of concern around, you know, what caliber of talent they’re going to get not being inside Silicon Valley or even LA for that matter. And they’ve brought on, over the last year and a half, they’ve brought on a number of really senior executives.
Utah, Colorado, Austin, San Diego — i think in those places, there’s maybe a smaller pool of people to choose from than in Silicon Valley, but there’s also not as many companies looking. I think you’ve seen these companies become more successful at recruiting very talented executives, and I think two, three years ago it was much harder. I mean have a number of friends within the last few years that have left that have joined companies outside of the Valley, just personally.
VB: What opportunities do you see in the enterprise cloud market? What companies really excite you right now?
Garratt: We continue to focus a lot on AI-enabled companies. It’s still early days, but we’re seeing that become more standard in how companies are building their enterprise applications. We invested in a company called Highspot in Seattle that uses that to more effectively manage content.
If you look at a lot of the industry [specific] solutions we’ve invested in, many of them are outside of the Valley. We’ve invested in several in Canada, some in New York. We invested in one in Tennessee [Virsys12], as there’s a big health care industry in Nashville. In North Carolina there’s a large banking and financial industry, and so I think those industries are not [as concentrated] in the Valley, so you’re going to see more and more of those companies coming about.
The impact space is becoming much more mature — we launched an impact fund last, and one of the big pillars of that is education. And you’re really seeing as people and their skillsets are changing so rapidly, the skillsets that are needed to be relevant in the workforce, you’re seeing that change rapidly. Guild [in Colorado] is a good example of that.
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