After growing demand for more coverage on Kansas City’s early-stage investment capital landscape, Startland News decided to start a conversation on the subject.
In November, we hosted five Kansas City entrepreneurs for a frank discussion on their experience raising funds in and outside of Kansas City. The aim of the conversation was to create a venue for these founders to relay their experiences, and also to share their thoughts on Kansas City’s capital scene.
This is the first of a three-part series that will focus on a variety of aspects regarding investment funding, including culture, Kansas City’s standing, the area’s strengths, advice and more. Check out the second installment here on differences between Kansas City’s investment scene and other communities here, or to read the entrepreneurs’ advice, click here.
Here are the founders you’ll be hearing from:
Jeff Blackwood, CEO of ABPathfinder. The company has raised $3.2 million to date via Omaha-based Dundee Venture Capital, Nashville-based Clayton Associates, the Angel Capital Network, Kansas City-based angel investor Matt Watson and Network Kansas.
Callie England, CEO of Rawxies. The company has raised $1 million via Stray Dog Capital, the Women’s Capital Connection and Mid-America Angels.
Nick Franano, CEO of Flow Forward and Metactive. Flow Forward has raised $6 million and Metactive has raised $7 million. The companies raised the funds via Open Prairie Ventures, the Kansas Bioscience Authority and many individual investors. He also founded Proteon Therapeutics, which raised $150 million and later had a $75 million IPO.
Brock Stechman, co-founder of DivvyHQ. The company has raised $3 million to date from Dallas-based venture capital firm DAN Fund, Dundee Venture Capital, Kansas City-based angel investor Matt Watson, Kansas City-based Spotlight Ventures and other private investors.
Laura Steward, CEO of Video Fizz. The company has raised $1.3 million to date via the Missouri Technology Corporation, a private angel investor, family and friends.
In part one of this series, here are the above entrepreneurs’ thoughts on the culture of investment in Kansas City. Below are excerpts from the founders’ conversation.
On Kansas City’s culture of investment …
Callie England: In the (San Francisco) Bay area, everyone is very focused on slow money movement. Every business there that made money put a percentage back into other businesses, whether it be for investment, startups, et cetera. We don’t have that here. People don’t understand that concept, that what you built cannot be created again if you don’t help put money into that business. I ran into a lot of that and it’s very frustrating coming from the Bay area. And that’s the reason the Bay area is what it is, is because everyone puts money back into other businesses. They don’t hold onto it. But we are a community that puts money in our savings accounts. And if we don’t, it’s (put into) philanthropy.
“That concept (of capital investment) has scared the shit out of a lot of people.” – Brock Stechman
Jeff Blackwood: I wonder if it goes back to what the origins of those businesses were. I mean, did Henry Bloch — when he was selling tax 1040 forms for $5 a piece — have startup capital from somebody else? Did Barnett Helzberg? Did Ewing Kauffman have startup capital? They built it for themselves and they don’t have the experience of where we are today, requiring funds to get things started.
Nick Franano: I agree. They don’t realize. You look at the major entrepreneurial successes in our region and they were either before the era of venture capital or they managed to bootstrap without it. We don’t have as many venture-backed success stories.
Brock Stechman (in response to Blackwood): They could grow based on cash flow. We had a startup-based company before, and we didn’t take any investment. We never had a company credit card, and had that business for 10 years and sold it. We relied on building our business through revenue growth. Technology (companies) don’t have that luxury. We tried. I mean, we tried with DivvyHQ with the first couple years. We had a little bit of success building some traction, getting some clients. But we couldn’t scale and grow as fast as we needed to, and technology moves so, so fast. All of a sudden you have a competitor that raises $45 million in Silicon Valley, or $50 million in New York. That’s a big catch-up game for us.
Nick Franano: In the era of Cerner, you could bootstrap for 10 years and still be OK. But today, you could never do what Cerner did. Uber just went out and got $200 million from venture capital markets and then beat everybody to the game. I think one of the things I’ve been trying to talk about a lot in Kansas City with people is the importance of access to capital as a competitive factor. You need access to capital to be competitive today because the economy, and the pace of the economy, is so much quicker. I don’t think a lot of people get that.
Laura Steward: That just makes me scared. That’s really the situation that I’m in. It would be very easy for somebody to come in with the same idea and innovate it with a larger raise and I would be just completely forgotten in the mix. That is really the biggest risk of our business right now. You get pretty proud of it — oh, I’ve raised a million dollars. But honestly, it could end up being not nearly enough for what I need to do.
“One of the things I think we really lack here in this region is professional (early-stage) investors.” – Nick Franano
On navigating a new, faster economy …
Jeff Blackwood: The $1.5 million that we raised last November — with our burn rate at that time — it could have lasted us three years. But you can’t just go in and not do anything with that funding. You’ve got to hire people. You’ve got to execute on the plan that you presented to the investors. Which means increasing that burn rate, which means you’re sucking down that cash a hell of a lot faster than you were going to to begin with. That’s kind of the situation we’ve gotten into and (investors) know that cycle as the venture capital model, which is cool and I appreciate that. But we’re back in the situation where we need to raise funds yet again.
Brock Stechman: And that concept has scared the shit out of a lot of people.
Nick Franano: A lot of conservative investors look at that and it terrifies them.
Brock Stechman: What we (DivvyHQ) have to pitch is we’re not worried so much about the profit right now. We are trying to build a good, sound company, but we’ve got to focus on building the value, the reputation, building traction — a lot of that requires a lot of cash. We’re dumping a lot into this company to do that. It’s a different model. It’s a different way of looking at it. A more traditional conservative investor will look at that and think it’s terrible — that it doesn’t make sense. It just doesn’t compute.
Nick Franano (later in that discussion): One of the things I think we really lack here in this region is professional (early-stage) investors. A professional (early-stage) investor looks at that situation, having lived through it before, and knows ‘Hey, I’ll put a little capital in here. Get some goodwill with the company. Get you past a critical milestone. Give you a little bit of breathing room. Then I’ll get a couple of additional people in. We’ll do another round on top of that.’
“The only way that the Kansas City economy is going to keep growing and keep getting stronger is by fostering startups.” – Jeff Blackwood
I mean, it’s sort of the norm. We don’t have enough professional investors here. We have some people who will invest, but we don’t have people who are professional investors, who understand what it’s like to run an angel- or venture-backed company and who understand that you get in the situations.
On interaction among the big business, investor and startup communities …
Nick Franano: I started off as a first-time entrepreneur without any business background. But yet I’ve been doing it long enough that I’m on the chamber board and I work with the Kauffman Foundation. I’ve done work on the Missouri Technology Corporation Board. I work with the (Kansas Bioscience Authority). … What I find is that the entrepreneurs are a bit cynical about the people who quote-unquote run things. But they have a fairly good understanding of how decisions get made and who the players are. I think the opposite (big business understanding startups) is not nearly as true. … What I try to help (others from a traditional business background) understand is that this is a completely different world. Just because you ran a big company and you’re wealthy and you’re smart and you know how to run a board meeting, doesn’t mean you know anything about startups. It’s a completely different world. There’s a big age difference, oftentimes. But it’s hard for them — it’s like they want to be part of the startup community, but they don’t want to go back to kindergarten and start there. … (But) you have to start in kindergarten, where you admit you don’t know anything. Hi, I’m Nick Franano, I know nothing about this. I’m happy to be here.
Jeff Blackwood: The only way that the Kansas City economy is going to keep growing and keep getting stronger is by fostering startups. You can’t have everybody wanting to go work for Sprint or everybody wanting to go work for X,Y and Z company. There’s got to be some other opportunities for people to branch out and do their own things here. I mean, it’s really important that that occurs for the community itself. We just don’t really see that occurring.
Laura Steward: We do have old money here. … We’re bringing biotech in and we’re starting to get into some of that but the rest of this is old money. … I really do think that it’s about the age of the investor, which you pointed out earlier, and sort of where they are in that process. If I had a bunch of money right now, that’s exactly what I would do (invest in local companies).