Usually when I write my newsletters, I try to stay entirely based in fact. This week, my goal is to stimulate thought and speculate around an intangible thing called entrepreneurial recycling.

It’s something I’ve had on my mind the past few weeks, and I thought it would be more fun to write about than something resembling the half-assed “thought leadership” I’m sure we all get a healthy dose of on LinkedIn that goes something like this:

What is Entrepreneurial Recycling?

Local investment in startups by both angels and VCs creates financial and intellectual wealth in local economies. It attracts residents with entrepreneurial tendencies and specific technical talents, and generates economic benefits by creating jobs. It also ultimately (and handsomely) rewards the local founders and investors who took the risk on the business when it exits.

These founders and VCs can end up pouring social and financial capital back into their local startup communities. This is entrepreneurial recycling and it happens not just at exit, but at every stage of startup.

Intellectual capital is recycled, for example, when founders and early team members of top tech startups leave to create hype around an adjacent startup of their own that also goes on to raise capital. Post-exit, these founders often become leaders in their community, writing books, and influencing thought in the VC/startup world.

Financial capital is recycled mostly post-exit, when those holding the largest portions of equity in a company reinvest in their local communities through angel investment, creation of nonprofits and other programs, launching new VC funds in their communities, donating generously to university endowments, etc..

My position is that the recycling of financial (versus intellectual) capital has the largest impact on a local community. First, and most obviously because it provides direct and indirect investment to new startups and the infrastructure surrounding them. Second, because financial capital that is reinvested in this way draws in more talent from other geographies looking to raise money and participate in local programs. Founders, like everyone, like to be around others who think like them.

I think it’s also important to note that a factor that contributes to where a newly-exited founder recycles their capital is the geography where both the founder and their business are in when they exit. This is why a startup community must have the funding infrastructure to support startups from idea all the way to IPO in order to recycle as effectively as possible.

What Interrupts Recycling?

This is the part where I start to speculate. What kinds of mistakes/shortcomings might a startup community make/have that results in inefficient recycling of intellectual and financial capital?

1) Excessive founder dilution

Obviously this can be caused by VCs and later stage investors being “greedy” through super pro-rata rights, liquidation preferences (not technically dilutive, but can take money from founders at exit), or just by virtue of having to raise more dilutive capital.

I want to think about this last point more. Depending on the startups a geography creates… does this affect the recycling process?

Founders in the biotech, medical devices, and deep tech verticals typically own much less of their companies post-Series A compared with SaaS, E-comm, and consumer startups. This is simply because of the amount of capital required to launch such businesses. They get diluted.

Let’s assume two different startup communities, one creating deep tech startups and one creating SaaS startups. They have equal exit volumes (in dollars). Founders in capital intensive verticals will have less financial capital to recycle upon exiting because of the nature of their industry and their dilution.

Or that’s the theory at least… right?

Colorado has a high density of deep tech founders in verticals like aerospace, biotech, and quantum.

What could this mean for Colorado’s startup ecosystem? I have no idea, but I think it’s something interesting to ponder.

2) Brain drain

The second thing that effects everyone in a startup community is when their best companies end up leaving to relocate their businesses to places with better investment terms, more plentiful capital, and more supportive communities for their area of expertise.

It’s not too much of a hot take to say that Colorado could use more late-stage capital for Series B through exit to keep the fastest growing companies local through exit. This combined with the fact that Colorado is home to many early-stage capital-intensive startups might add to the struggle to keep startups local.

What Colorado Has

As someone who makes money by convincing people of the quality of Colorado deal flow, it’s counterintuitive for me to share some of these ideas. But I really like to speculate, so maybe I’m more of an economist than a salesman…

I don’t write any of this to say that Colorado isn’t one of the best places in the world to create a startup. I really do believe that it is.

I wrote wanted to share this to inspire thought and conversation in the community, not to say that Colorado is lacking in any way.

Colorado has for decades created a powerful culture of giving back to the startup ecosystem through the recycling of financial and intellectual capital.

There are countless groups dedicated to supporting entrepreneurs here like angel networks (wink wink), nonprofits supporting rural founders, providers of grants and interest-free loans, accelerator programs of all kinds, and early-stage VCs investing in every category you can think of. We really do have it all.

What I want from you

If you’ve read this far, please respond to this email with your thoughts. I always love to hear feedback, even if you just want to tell me I’m full of shit and should go be an entry level analyst somewhere.

Boulder Angels is still growing as an investor network, and I’m running a deal for any investor member that joins before we hit 10 members.

If you are a Buff that is an angel investor or founder, a founder based in Colorado, or otherwise want to get involved, reach out to me anytime.

[email protected]

- H