A new report on Kansas City’s venture-backed companies showed year-over-year growth in multiple areas — impressing industry experts who identified key investment trends in the data.
More companies with venture capital backing; higher employee counts; a 58 percent boost in fundraising.
Yet growth was not universal. Despite gains in top-line figures, the number of Kansas City-based employees detailed in the report decreased by 21 percent, and money raised from KC investors dropped 28 percent.
Although that might raise some alarm bells locally, industry experts cautioned that increased outside funding benefits the ecosystem in Kansas City — even if 90 percent of the money flows in from elsewhere.
“It’s a testament to how the pandemic has changed the way investors view the world and how much easier it is to invest in companies outside of the coasts,” said Canem Arkan, managing director at the Endeavor Heartland division in Northwest Arkansas and Tulsa. “I also think it’s a testament to the quality of the companies that are being grown in Kansas City.”
Click here to check out Startland News’ full 2022 Kansas City Venture Capital-Backed Companies Report.
Victor Gutwein, managing partner at the Chicago early-stage venture firm M25, agreed that the pandemic has helped Midwestern companies receive more funding from coastal investors.
“The hurdle to getting a deal done is a lot lower than it used to be,” Gutwein said. “It used to be almost impossible to get a Series A or seed round done [in the Midwest] by a coastal investor. They’d want [companies] to move out — it was a hurdle. And now it’s not, because Zoom has really leveled the playing field.”
That influx of outside funding promotes a culture of healthy competition and encourages KC investors to support emerging local companies, he added. M25 has itself invested in such Kansas City companies as Whipz, backstitch, Super Dispatch and Zohr.
“I think it does put a little pressure on local capital sources to be a little more aggressive if they want to continue to stay in the game, if they want to continue to be able to invest in the best companies — which is healthy,” Gutwein said.
Jeremy Tasset, managing partner and CEO at Nueterra Capital in Leawood, said that he believes COVID-19 “accelerated” a pre-existing trend of coastal venture capitalists investing in companies outside their direct geographic footprint.
Tasset lamented what he sees as a hesitancy on the part of local investors to put capital into early-stage companies in Kansas City.
“We could be doing so much more, I think, as Kansas City-area investors than what we’re doing right now,” said Tasset, whose firm previously partnered with LaunchKC on an accelerator aimed at developing healthtech startups from the Kansas City area and beyond. “I don’t think there is enough capital going into earlier-stage companies. There’s a lot of it sitting on the sidelines, waiting to come into these later-stage deals when there’s less risk.”
“I think that’s unfortunate for Kansas City, because I think we’re missing a real opportunity to do something to really spur economic development and job creation, and to build good businesses here,” Tasset added.
Gutwein agreed that Kansas City investors should be “aggressively investing” in local startups and early-stage companies, but maintained that the influx of outside capital is a net positive for — and in many ways, a validation of — the Kansas City ecosystem.
“There used to be this argument that places like Kansas City didn’t have as compelling of companies,” Gutwein said. “One of the reasons people pointed to was, ‘They’re not getting coastal money.’”
“I would always say, ‘I think they’re not getting coastal money because it’s harder for somebody to fly here than it is to do a deal in their own backyard,’” Gutwein continued. “And this is kind of proving that right.”
Arkan believes more non-local VCs will invest in companies without forcing them to relocate — something that previously has been more the norm than the exception, especially in the Heartland, she said.
“In Northwest Arkansas — and I’m sure this is true in Kansas City — we lost great companies over the last 10 years to hubs and larger areas, because that’s where the capital providers were,” Arkan said. “They were told, ‘If you want this check, you have to move here.’”
“That still happens, and I’m not saying there’s anything wrong with that,” Arkan continued. “But if we want our cities to succeed in that reverse brain drain, we need outside capital to come in without forcing or requiring our companies to move.”
While Tasset celebrated the overall growth among VC-backed companies in Kansas City — including the “pretty spectacular” 16 percent bump in employment — he emphasized that local capital sources must redouble their efforts close to home, or face the consequences.
“The one thing that we run into frequently, whether it’s a white founder, a Black founder, a Latino founder, or a woman founder, is that getting their first check from Kansas City is difficult,” Tasset said.
“We’re on a mission to change that,” Tasset added. “I don’t know how we’re going to change it quite yet, but we’re going to change it, and we have to change it. Otherwise, we’re going to continue to lose talent to other cities. Kansas City has gotta do a better job of investing in our own.”
This story is possible thanks to support from the Ewing Marion Kauffman Foundation, a private, nonpartisan foundation that works together with communities in education and entrepreneurship to create uncommon solutions and empower people to shape their futures and be successful.