Start Small, Win Big: Local Business Validation Before Taking On the Major Markets
GP Note: I chat with lots of founders who have big dreams about changing an industry. But when I float the idea of using less money to try their idea in just one city first, instead of the whole country, I'm often surprised by how much they pull back. I get why they want to grab as much cash as they can, but it's a whole lot easier to get there if you've already nailed it in one city and then plan to expand to more, kind of like what Starbucks and others did.
Starting local is a sharp strategy.
Both approaches have their advantages, but VCs often favor entrepreneurs who focus on developing a specific business within a local area before pursuing national expansion with venture capital backing. Here, we'll delve into the benefits of starting locally, as seen through the lens of venture capitalists.
1. Market Validation:
Starting locally allows entrepreneurs to validate their business concept within a specific market or jurisdiction. It provides a valuable opportunity to test the demand for their product or service, understand customer preferences, and fine-tune their offerings. From a VC's standpoint, a business that has successfully proven its viability in a local market demonstrates reduced risk when seeking national expansion funding.
As an entrepreneur, securing venture capital requires market validation. Therefore, demonstrating your business's success locally can serve as a blueprint for potential international expansion, making it a strategic move to gain investor confidence.
2. Risk Mitigation:
Expanding nationally without a strong local foundation can be fraught with risks. Building locally mitigates these risks by enabling entrepreneurs to identify and address potential challenges on a smaller scale. This approach minimizes the chances of costly mistakes or setbacks during the national expansion phase, which is particularly appealing to VCs looking for sound investments.
3. Stronger Understanding of the Business:
Entrepreneurs who build locally gain a deeper understanding of their business, the local market dynamics, and the nuances of their industry. This hands-on experience equips them with valuable insights that can inform strategic decisions during national expansion.
Venture capitalists value business owners who possess a deep understanding of their operations and target market, which often begins with focusing on local markets.
4. Efficient Resource Allocation:
Starting locally allows entrepreneurs to allocate their resources more efficiently. Rather than spreading their capital and efforts thin across a vast national landscape. They can focus on achieving excellence in a specific geographic area.
Venture capitalists find this type of resource allocation appealing, as it showcases sound financial management and the capacity to optimize investment returns.
5. Proof of Concept:
A business that has succeeded locally serves as a compelling proof of concept. VCs are more inclined to invest in businesses that have demonstrated their ability to generate revenue, attract customers, and deliver value within a specific jurisdiction. This proof of concept is a strong indicator of a business's potential for success on a national scale.
6. Refinement of Business Model:
Starting locally allows entrepreneurs to refine and optimize their business models based on real-world feedback and market conditions. This iterative process of improvement positions the business for greater scalability and success when expanding nationally. VCs prefer to invest in businesses that have undergone this refinement process, as it enhances the likelihood of a profitable national expansion.
7. Attracting Top Talent:
A successful local business is more likely to attract top talent, including skilled professionals and experienced executives. These individuals are often drawn to businesses with a proven track record and a strong local presence. Having a talented team in place is a significant asset when seeking venture funding for national expansion.
From the perspective of venture capitalists, the preference for business owners to build out their ventures locally before seeking national expansion with venture funding is grounded in sound business principles. Starting locally allows entrepreneurs to validate their ideas, mitigate risks, gain a deeper understanding of their business, allocate resources efficiently, and refine their business model.
Ultimately, the local advantage is a strategic approach that aligns with the interests of both business owners and venture capitalists, leading to greater chances of success where you learn to walk before you sprint!
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