CORTADO VENTURES
Revisiting Venture Capital as the New Oil and Gas in Oklahoma
It’s been three years since I proposed the idea that venture capital was a lot like the oil and gas business. This article resonated with many in Oklahoma and Texas, the same places three generations and eight members of my family scratched out a living in the oil patch over nearly 70 years. And where we’ve now built the largest venture capital firm of its kind in state history.
Oklahoma City was founded in one day during the 1889 Land Run. This pioneering spirit still pervades, defined by fierce independence and a can-do attitude. The last 100 years of our state’s history have been shaped by oil and gas (our State Capitol still has a functioning oil well on the premises). But I speculated that the next 100 years would be quite different, defined by a new breed of innovation and entrepreneurship. At the time, that was a bold statement. There was just one venture capital firm operating at the time, by most definitions. We’re used to oil booms (and busts), but this one is harder to see without oil derricks dotting the landscape. Now, there’s a new boom — this one is digital.
Vaccines without needles, artificial intelligence for drilling, Jetsons-style underground hyperlogistics, smart connected prescription bottles, a cure for diabetes, an operating system for augmented reality, pulsed laser sensors on satellites — these are all technologies by companies started in Oklahoma and by Oklahomans. These companies didn’t exist when we started Cortado Ventures, but are now in our portfolio and growing at breakneck speed. Because of our work organizing capital to invest in high-tech and high-growth companies — and the work of others like Atento Capital, Plains Ventures, 46VC, OLSF, VEST Her Ventures, and Boyd Street Ventures — there is now ~10x more capital seeking and supporting these companies than at the beginning of 2020. We estimate >$150M/year is being put to work, creating and attracting high-paying tech jobs. And it’s working. Cortado’s fund performance puts us in the top 10% of all similar maturity venture capital funds in America.
This kind of growth pays dividends in many ways. When a tech company has a big liquidity event (sells, goes public, or just starts throwing off free cash flow), it produces newly minted millionaires. These successful entrepreneurs are hungry for more, who plow back into the community by investing or donating their new wealth. We see hundreds of highly skilled founders and employees who attract more talent and opportunity. And there are hundreds of investors who now know how to make money in tech, and convince their friends to join them so they don’t miss out. This diversifies the economy in innovative ways, even ones yet imagined.
So how is venture capital like the oil and gas business? Let me revisit some of my claims from 2021:
Fund = Drilling Program
A fund is a portfolio of dozens of companies, just like a drilling program is a portfolio of dozens of wells. We’ve had fleetingly small losses (“dry holes”) and so far more than half are successful (>20% IRR), with several experiencing wild success (“gusher”).
Capital Calls = Pre-paying AFEs
Venture capitalists call capital when needed to meet investment obligations, just like a drilling program. The goal is efficient use of capital and maintaining the flow. We had 100% compliance on our capital calls, and averaged 98% quarterly utilization of called capital. Our efficiency and execution speak for themselves.
Cap Table = Working Interest Partners
The list of investors in a tech company is called the “cap table,” just like the investors in a well are working interest partners. Having smart co-investors on your cap table is a great sign, meaning you’re around “smart money.” Cortado now has over 75 institutional co-investors, including some of the biggest names: Mayo Clinic, Raytheon, Google, and Techstars.
Variability of Results
The performance of oil and gas wells cluster around a mean, with many flops and some outsized performers, but none that really do much better than 80% IRR. In venture capital, you have losses but they’re with small investments, whereas you plow in more capital to the winners. Our top performers have IRRs of 100%, 200%, and even 400%.
Valuation
Many Oklahomans know how to value a producing oil or gas well — some multiple of recent revenue, typically 3–6 years. Tech companies also are valued on revenue, but more like 8–20x. This is because the upside is massive with high margins, scalability, and global market. Our average company doubles revenue every year, unlike wells that decline every year.
Liquidity and Transferability
You can sell your interest in a well more or less when you want, if you can find a willing buyer at an agreeable price. You may also collect revenue, depending on the nature of your ownership. In venture capital, liquidity comes in big chunks when companies sell or go public. But we have other tools in our toolbox as seed investors: we can sell our shares in secondary markets. And Cortado is the only firm in Oklahoma that offers on-demand liquidity for our investors, and a method to create dividend-style payments over time.
Control
Unless you’re the operator, you don’t control wells and you don’t control tech companies. As we are often lead investors, we provide executive coaching for free to our portfolio company CEOs and can exert influence while offering guidance.
Taxes
This is a fun one. When I originally wrote the predecessor to this piece, I pointed out that oil and gas drilling has tax advantages (deductibility) and teased that venture capital in Oklahoma soon would too. I was wrong: I said VC investments would be 60% tax deductible; but they’re now 100% tax deductible. There are also IRS Qualified Small Business Stock (QSBS) rules for funds. This means that any gain on tech companies is eligible for zero tax. This is huge and still largely unknown in our market.
If you grew up in Oklahoma or Texas, or live here now, you probably know a lot about the oil and gas business even if you never worked in it. The boom happening now in venture capital and tech entrepreneurship is new to us but the feeling should be familiar, and the signs are unmistakable. Even though venture capital activity has grown tenfold since my last writing on the topic, we still have 10x more to go, and that’s just to be on par with places like Columbus, Ohio. The growth we’ve seen and the room to grow more is staggering. And I have a feeling that in one generation people here will be just as comfortable talking about tech and VC as they are about oil and gas.
At Cortado Ventures, we invest in pre-seed and seed stage startups with a focus on energy & logistics, life sciences, and the future of work. If you are a Midcontinent startup or looking to invest in these startups, contact us to learn more.
