Greater Colorado Venture Fund — The Nation’s First Rural Focused VC Fund
GCVF’s “Why”
From day one, GCVF’s mission has been to generate venture returns outside of metro environments using sustainable, repeatable, and profitable investment models. This will lead to growth, job creation, and opportunity for founders and communities regardless of geographical location.
Right now, the vast majority of capital is concentrated in a small number of metro markets, revealing a bias towards innovation and new business creation in urban zip codes. Moreover, new business creation is down, and the majority of the economic growth our country has seen over the last decade plus has been confined to just a handful of urban counties out of the 3007 counties in America.
Talent and opportunity are consolidating. We believe that many of our country’s challenges stem from the divide this creates between communities.
Creating repeatable, sustainable, and profitable investment models in rural Colorado will prove to private markets that opportunity can be found outside of metro environments and will increase the flow of capital and opportunity to rural communities.
Proving Rural Returns 101: How A Venture Fund Works
A venture fund is a pool of capital that is raised by venture capitalists from individual, institutional, and sometimes corporate entities. The venture capitalists who manage the fund (also known as the General Partners or GPs) on behalf of their investors (known as Limited Partners or LPs) are responsible for raising capital, deploying capital, managing investments, generating returns on their investments, and distributing those returns to their LPs. This is typically done over a ten year time horizon.
GPs are measured by the return that they provide to their investors. A common industry goal is to return 3x on a 10-year fund (although that often isn’t met). As GPs of GCVF, we feel that it is important to hold ourselves to the same standards as the rest of our industry. Therefore, a 3x return on our fund, comprised of companies based in Colorado’s rural communities, will increase the flow of capital into rural markets.
As a fiduciary, GPs are legally and ethically bound to act in the best interest of the LPs and their capital. This alignment is created through two functions. First, all GPs must make an investment into the fund. This ensures that GPs are treating investment decisions as if they were investing their own capital (we are!). Second, as VCs, the bulk of our “potential compensation” comes in the form of carry, which is a share of profits GPs receive once the original fund amount has been returned to LPs. If the fund doesn’t generate positive investor returns, we aren’t fully compensated. As a result, GPs must invest in companies to maximize the overall return for the fund (portfolio construction), and ultimately the investors of that fund.
To understand portfolio construction, it’s important to understand the math behind venture returns. Historically, the heuristic in the industry has been that ⅓ of companies go to zero, ⅓ return capital, and ⅓ do well. When Seth Levine, a Partner at Foundry Group and advisor to GCVF, dug into some data, he was surprised to find that, “a full 65% of financings fail to return 1x capital. And perhaps more interestingly, only 4% produce a return of 10x or more and only 10% produce a return of 5x or more.” This suggests that not only is it hard to find high returning investments, but VCs rely heavily on these outcomes to support overall portfolio returns.
Proving Rural Returns 201: How GCVF Works
Given the rural focus of GCVF, we recognize that our chances of investing in a single fund returning company is smaller than if we were investing in a metro market. Therefore, we find ourselves investing in companies that are generating revenues (often over $100K a year), have at minimum a clear path to a 3x–8x return, and the potential to provide breakout returns of 10x or more. While a $17.5M fund may sound large, GCVF is actually categorized as a micro venture fund, which is a title bestowed on any VC fund under $50M. There is data to suggest that smaller funds have lower loss ratios than larger funds, so our goal is to rely on triples and doubles (3x-8x returns) and not just focus on home run power (10x+ returns).
GCVF will invest in 30+ growth companies in rural Colorado over a five year period. In our first 18 months, we’ve met with over 250 growth companies, engaged in some level of diligence with over 75 companies, and have made 12 initial investments as of this writing.
Additionally, the math suggest that at 30 a fund has reasonable diversification to capture Power Law effects. Finally, and most importantly, we feel that 30 deep relationships is manageable for our team.
As it turns out, 30 is a common target number of investments in the venture industry. In fact, over 65% of early stage funds have a similar model.
What does this all mean for me, the founder?
First, it is important to understand if venture capital is the right “fuel” for your business. Venture capital is typically the most expensive type of capital (remember we are expecting 6–10x our money back!). It’s important to use it only for rapid growth companies…
Motorcycles are common (2018: Honda sold 18M motorcycles) Jet planes are rare (2018: 806 Boeing planes) VCs sell jet fuel, which doesn’t work in motorcycles Bad stuff happens if VCs push jet fuel on a bike owner. Or if a bike owner thinks they can fly.
- Josh Kopelman, Partner at First Round.
If venture funding is the appropriate jet fuel for your venture, then it’s important to keep a few things in mind. First, as VCs, we must say, “No.” A LOT. We will speak with hundreds of companies per fund and will only be investing in ~30. Make sure you are not speaking with only one venture fund. If you are sure you need jet fuel, then you will want to be speaking to several jet fuel salespeople to ensure you understand the market and are getting the best price!
While we recognize that our job as VCs is to sell rocket fuel, we also must acknowledge that our average flight time with founders(time to exit via acquisition) is now over six years, but sometimes upwards of a decade. We go into every investment expecting to work with founders over a long time horizon. Every time we make an investment into a company we treat it as though we are getting into a long term relationship with the founder.
For founders, this means that the diligence and investment process takes time. This is a relationship building process and we encourage founders to budget AT LEAST six months to close a round of financing. It’s important to build this into your plans as you would a new product roll-out or marketing campaign. This is not a one sided relationship. Founders should spend as much time vetting their investors as investors spend vetting founders and their companies, so that a true partnership can be formed from the get-go.
GCVF can’t be, and won’t be the only source of capital available to entrepreneurs in our ecosystem. It’s inevitable that we won’t be able to fund every great company coming out of rural Colorado. We don’t claim to hold a crystal ball and are always happy when a company we pass on goes on to build a great business, provide strong jobs for their community, and produce returns for their investors.
In Closing
GCVF is on a mission to prove that great companies and great returns exist in rural communities. As the first rural venture fund in America, we must innovate on venture practices (EG: revenue based investing), while acknowledging the practical realities of fund economics and structures. This balance will lay the foundation for venture capital in rural America.
