Mycroft co-founder Joshua Montgomery recently appealed to the 1 Million Cups community to launch Initiative Six to foster more early-stage investment in Kansas City. The opinions in the commentary are the author’s alone.
I recently read yet another article lamenting the lack of investment by Silicon Valley in the Midwest.
The author stated how great the Midwest is for startups — low rent, great talent, reasonable salaries — but highlighted how little of the $49 billion in annual venture capital investing is landing in the Midwest (only 5 percent).
The reality is that Silicon Valley investors invest locally. They know the business environment in the Bay Area. They know which local accelerators turn out viable startups, which local VC firms would be a good fit for their entrepreneurs, and which established firms in the area would be great partners. They don’t know anything about the Kansas City scene, so they don’t invest here.
If we are going to have a venture capital community here in Kansas City, we are going to have to grow it ourselves. But how?
First off, let’s stop sending all of our investment capital to Silicon Valley and New York City. Seriously, take a look at your personal investment portfolio. You probably invest in some index funds, maybe some managed funds, but how much of your money is invested in early stage companies in the local community? None. Why would we expect sophisticated Silicon Valley VC firms to invest in us when we are unwilling to invest in ourselves?
If we want our local startups to be adequately capitalized and if we want them to win in a fiercely competitive international marketplace, then it is time for us to start investing locally.
Any competent investment adviser will tell clients to keep 5 percent of their portfolio in high risk/high reward investments. Investing in early-stage companies is a great way to meet this objective. As many area investors can tell you, an early investment in EyeVerify would have returned a healthy multiple. The same is probably true for Blooom, C2FO and many others.
Investing in early-stage, private equity, however, isn’t something that’s easy to do. These companies aren’t publicly traded; investment vehicles are complex; and in most cases they require investors to be accredited. It is also difficult to figure out what companies are destined to dominate their industries and which ones will soon be nothing but smoke.
Enter Initiative Six. It is an idea that I’ve been thinking about for a while, but haven’t had the time pursue. I’m laying it out here with the hopes that someone else will take it and run with it.
The idea itself is simple: Give Kansas City residents the opportunity to invest a small percentage of their IRA or 401(k) in local startups. The execution is a bit more complex and will require cooperation between investors, legal advisers and local government, but here’s how it can work.
To take funds directly from 401(k) and IRA accounts, the community will first need to set up or purchase the shell of a publicly traded entity. Let’s call this company Init 6, Inc. A publicly-traded entity will make it easy for folks with their savings in traditional IRAs and 401(k)s to invest. It will also provide small investors with liquidity, and they’ll be able to enter and exit as needed.
The publicly-traded company will become a limited partner (LP) in local venture funds that are focused on seed and Series A stage companies. Right now, there are very few of these in the area: Firebrand in Kansas City, Dundee VC and Router Ventures in Omaha. But there are a lot of quality associates and junior partners at big Silicon Valley firms that would be great general partners for new VC firms in KC. Funding from Init 6 could help to bring talented and connected VC players to the region to start their own funds focused on investing in our geographic region.
It could also act as a vehicle for established area endowments to support the graduates and entrepreneurs that will someday become their donor base. The University of Kansas endowment makes no serious investments in early-stage companies in the local area. The same is true for the University of Missouri. Init 6 can help to change that. By becoming shareholders in Init 6, area universities can both support the entrepreneurial ecosystem and reap the rewards of successful startups.
In 2006, there was no startup ecosystem in KC. Ten years later we have multiple accelerators, dozens of early-stage companies and the community is starting to generate high-profile exits. By building an investment vehicle that allows area residents to invest in, this ecosystem we will ensure that we are not only supporting local entrepreneurs but also sharing the rewards throughout our community. It is time for us to reboot our investing. It is time to Init 6.
We’ve set up a Facebook group to discuss the idea and have already fielded questions from some experienced investors and executives. If you’re interested in leading, funding, or simply commenting on this concept, join the discussion here.
Joshua Montgomery is a co-founder at Mycroft, an open-source version of Amazon Echo. Connect with Joshua on Twitter at @oojoshua