Welcome back to part two of our roundtable discussion on the early-stage investment sector in Kansas City.
For a more formal introduction on this series and its five participants, please refer to part one on Kansas City’s investment culture and evolving economy. Check out the third and final installment of the series with the entrepreneurs’ advice for startups looking to raise capital here.
Below are excerpts from the founders’ conversation on their observations while raising funds both in Kansas City and outside the area. Collectively, this group of entrepreneurs have raised more than $20 million for their ventures in the last three years.
On differences of the Kansas City early-stage investment scene compared to elsewhere …
“There are other factors that you could put value into, outside of just revenue.” – Brock Stechman, co-founder of DivvyHQ
Jeff Blackwood, CEO of ABPathfinder: The local angel groups are great, but the people that are quote unquote running the groups are administrators. They’re not actually driving the groups. They’re not making any requirements of the groups to actually do funding as part of an angel network. When you look at other (angel investment) groups like the Dallas Angel Network, the guys down in Northwest Arkansas (Northwest Arkansas Angels), they have professional, former entrepreneurs in charge of those groups that drive people to actually make a decision, basically shit or get off the pot, are you in this angel group or not. If you are, this is how much you need to invest on an annual basis and make a decision.
Brock Stechman, co-founder of DivvyHQ: It’s a different line of thinking at the Dan Fund in Dallas, at Gravity Ventures or the Northwest Arkansas Group — they have experience dealing with entrepreneurs and know it’s a risky investment. Revenue numbers are really important to any investor, but they have the ability to look at all the factors that are going to be part of the success or show a path to success outside of what your current revenues are to date, whether it’s the founding team, the product or the markets. There are other factors that you could put value into, outside of just revenue. They have the ability to look through that and understand that and say, ‘OK they’re checking the boxes in all these other areas. The revenue numbers track the way we see other companies track. They have other benchmarks they can work off of, if that makes sense. As opposed to just taking a look at the hard numbers.
Callie England, founder of Rawxies: When we first entertained raising money, I didn’t pitch in hopes to take money from (investors in the San Francisco and New York City area). I pitched to kind of get that network, because I knew that they were all minimum $5 million funds. But they all said they loved it. They loved the brand, (but) can you relocate to New York City? Because they wouldn’t touch it. The thing I heard the most was you’re not going to find the right help or your talent pool sucks.
On the idea there’s no quality early stage investments in Kansas City …
Brock Stechman: That’s false. I think that’s not true at all. I think there’s probably a flood of deal flow that’s coming in. One thing about Kansas City that people don’t realize is we have a lot of really smart, innovative and creative people. It’s always been that way. In fact, Kansas City itself has been known nationally, it’s like the creative pocket, going to come out of the digital agency world. … There’s a lot of great, smart founders, good companies that are popping up. I don’t think it’s absence of deal flow.
“The downside of it is, it forces all of us to think small. I can’t blow this idea up if all I’m going to get is $500,000 coming in.” – Jeff Blackwood, CEO of ABPathfinder
Jeff Blackwood (in response to Stechman): As far as where we were at ABPathfinder, if you look at the stage we were at when we first sought capital, we had a product we could demonstrate that was working. It was actually in use with customers and we were revenue generating. … If you look at where we were compared to where the typical company in a Silicon Valley or New York is at that stage, they should have been throwing cash at us, at that point. To me, it’s the work ethic of building like you know you’re never going to get any cash. The upside of that is you get solid business models, you get working products, you get people that are working their asses off for it. The downside of it is, it forces all of us to think small. I can’t blow this idea up if all I’m going to get is $500,000 coming in. I can’t hire 20 developers to come and do something. I don’t have that luxury.
Nick Franano, CEO of Flow Forward and Metactive: There’s a thing to be said for capital being too easy and capital being too hard. It’s a Goldilocks thing. If capital is too easy, your company has spent too much and you can become sloppy. Then there can be too little capital where you literally starve to death. You need some middle ground where access to capital is hard enough to reward the winners, but available enough that you can scale a business when it needs to be scaled. I would say in the Valley right now, there is probably too much capital. A lot of stuff is getting funded, this back of the envelope stuff at crazy valuations. But here, we’re on the other end of the spectrum. It’s too hard to get money.
On the advantages Kansas City’s limited access to early-stage capital and area talent …
“In Silicon Valley, people are just flying around. … You’re just constantly retraining a new person on your project. We don’t have a lot of turnover in Kansas City because there’s not a lot of people poaching our talent. That’s a bit of a silver lining.” – Nick Franano, CEO of Metactive
Jeff Blackwood: You build your company as if you’re never going to get another dollar of funding. The result is companies that have a solid business foundation, getting to revenue as quickly as possible. We have an impressive work ethic, and when companies from Kansas City present to funders, the funders are shocked that we’re not just presenting a concept, but a working business model with revenue. The downside of that is that startups often feel constrained to the point where they don’t make bold decisions, ultimately limiting the size of their business.
Brock Stechman: I had a conversation with a firm yesterday in Silicon Valley and they were asking what do you think about running the company here in Kansas City? There are a lot of advantages. There are lots of competitive advantages, operating in a city here in the Midwest, or operating a company here in the Midwest. Everybody knows that the cost of living is so much cheaper, and just our hard work. … People are conscientious, relatively hard working. Not high turnover.
Nick Franano: I have two contractors at one of my companies right now. One is in Silicon Valley. One’s in rural Wisconsin, an hour outside of Minneapolis. In the three years I’ve worked with them, I’ve had 90 percent turnover with the Silicon Valley consultancy and zero percent turnover in the rural Wisconsin group, because there’s no place else to go. In Silicon Valley, people are just flying around. That’s a little hard. You’re just constantly retraining a new person on your project. We don’t have a lot of turnover in Kansas City because there’s not a lot of people poaching our talent. That’s a bit of a silver lining.
On the strengths of Kansas City’s resources and opportunities …
Callie England: Kansas City, compared to large metropolitan areas, is just easier. I know, given that I started Rawxies in the Bay Area. It’s easier to find resources, it’s easier to network, it’s easier to pay your bills, and it’s all around just easier to navigate. Kansas City has allowed me the opportunity to build a solid business base without the noise, pressure and competition of the coast.
Laura Steward, CEO of Video Fizz.: From my perspective one strength is the open door (mentality) in Kansas City. The willingness of others to help get meetings. I owe any success I’ve had to the generosity of people I’ve met along the way. Also I would say the state programs are supportive — Missouri Technology Corporation and LaunchKC — for new business creation.
Nick Franano: I agree with Laura. Would also add that the Kansas Angel Investor Tax Credit program has been a key element. Would be very helpful if that was renewed for another five years in 2016.
Brock Stechman:Though we didn’t really have the opportunity to pitch to a lot of institutions or investors here in Kansas City, we do have a few. We have three great Kansas City based investors. Two are really great angels and another is a local company who invested in us. These investors have been amazing partners and were willing to take the risk in our company early on. They ultimately invested in DivvyHQ because they believed in our team, our vision, and the product we are building.
Jeff Blackwood: Kansas City is a relatively small community, so connecting to funders to opportunities is easy if you make the effort and use your network. And with great organizations like Pipeline, HEMP, the Kansas City Startup Village and Kauffman FastTrac, you have plenty of chances to expand your network and fill in gaps where other entrepreneurs could help you gain the access you need.