Dear Investors: If the Rent is Too High in Silicon Valley, Come to Ohio.

Earlier this week, the famed Y-Combinator accelerator had its Demo Day 2-Day Demo Event to showcase its startups’ wares to eager investors who couldn’t wait to sign a term sheet to fund their companies.  Y-Combinator Demo Day tends to attract all sorts of high-profile investors.  Even Ashton Kutcher was present for the big day in Mountain View.

Around this time of year, it’s not uncommon for investors to submit their own Twitter rants or blog posts centered squarely around one topic:  startup valuations

This year is no different.  Investors like Dave McClure proclaim that “the rent is too damn high” and startup founders have simply become too overzealous with the ways that they value their companies.

Then again, as Sam Altman — the head of Y-Combinator will note that it’s not as if it’s all on startup founders:

Regardless, Chris Sacca (whose wealth has largely come from his investment in the very platform I’m embedding on this blog: Twitter) has thoughts that are a bit more ominous as it relates to seed stage valuations:

A day of reckoning in the seed space? This is starting to sound like a James Cameron thriller in the making.

So what are these investors to do? Demo Days put on by places like Y-Combinator are seeing valuations in the $8-12M+ pre-money range. These valuations are getting to be much too high for many investors’ tastes — including the influential investors like those we’ve seen in this post. Some investors have come up with alternatives. Cut them a special deal in exchange for the influence and value that they bring to the table.

Of course, whether it’s a lower price (which can be extremely tricky and unless done at distinct stages, could just lead to trouble) or granting advisory shares, this only solves the problem for the investor that’s getting a special deal.

My solution for these investors? Get your ass to Ohio.

Of course, it doesn’t have to be Ohio. This is where I’m based and have lots of friends building amazing companies. But it could very well be Pennsylvania, Missouri, or any other location that usually gets referred to as a “Flyover State.” I can assure you that the grass is pretty green here.

Founders don’t feel entitled to 8-figure pre-money valuations. In fact, we fight tooth and nail to get noticed by investors and are more than willing to accept reasonable valuations.

Most other investors largely ignore startups in these markets, leaving a huge untapped opportunity. The opportunity is so big, in fact, that Silicon Valley mainstays like Mark Kvamme and Chris Olsen put their flag into the ground in Columbus, Ohio with Drive Capital to specifically invest in Midwest startups.

And make no mistake: Amazing companies are being built in these places. There are interesting early-stage companies like Tackk, ExpenseBot, FarmLogs, and plenty of others that exist in these flyover states. Not sure about the growth potential? Companies like Belly, Dwolla, and GrubHub got their start in these places and have seen immense growth.  GrubHub eventually saw an IPO and its stock is currently at an all-time high.  That said, there are other exits that happen here, too. Just in my hometown of Cleveland, we’ve seen two $500M+ acquisitions of companies like TOA Technologies and OverDrive (with respectable suiters Oracle and Rakuten, respectively, buying them up).

So if the rent is too high for you in San Francisco and Silicon Valley, I get it.  I see those prices creeping up, and I feel for you.  But allow me to extend my personal invitation for you to visit Cleveland, Ohio (or Columbus, Pittsburgh, or any of my neighbor cities).  I’ll link you up with some of these interesting startups.  I’ll make sure you connect with Morris Wheeler, one of the most active seed-stage investors in the entire U.S. who has lots of experience in Cleveland, among other places.  I’ll be sure to show you a good time.

And “the rent” is a lot lower here, too.

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  • Matt Kruza

    Amen to that Mike. I really think the 5-7 Midwest cities (Cleveland, Columbus, cinncinnati, Detroit, Indy, Pittsburgh, St. Louis, Kansas city) are the best places for all but the hottest startups to launch. If you need to / can raise $20M 12 months in from KPCB, Sequoia, ANZ, USV etc. then I would do that, otherwise the incredibly lower cost of rent and talent (combined with way more loyalty from employees here) makes it the right place to start for both investors and employees.