Tech Between The Coasts 027 | Wednesday, November 6, 2019
Midwest investor grab bag, P&G for D2C, “The world has gone mad!”, margin matters, an Airbnb caper, Indy’s Kenzie, clothes for short guys
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TL;DR
What We’re Thinking: Midwest investor grab bag
What We’re Reading: P&G for D2C, don’t put retention in the corner, “The world has gone mad!”, margin matters, an Airbnb caper
Deals & More: Indy’s Kenzie, sparkling yerba mate (huh?), esports are big biz, clothes for short guys
What We’re Thinking
I’m writing this week’s newsletter from Madison, Wisconsin, where I’m experiencing snow much earlier in the season than I’m used to. I’m meeting with investors and founders from Wisconsin and surrounding areas at the Wisconsin Early Stage Symposium.
One of the panel discussions held during the afternoon covered out-of-state investors’ perspectives on venture dynamics in Wisconsin and throughout the Midwest, which is about the most appropriate #BetweenTheCoasts topic I can imagine. So I thought I’d share a few of the more interesting remarks from the conversation.
Funding Gap. Funds have largely arisen that can fill the funding gap at the seed and A stage in most major metro areas in the Midwest, but it’s still generally necessary to go to the coasts for follow-on funding. But there’s one complication — over the past few years, the coasts have started to spend more time looking for deals outside of the coasts, even at the seed/A stage. They’re often in a position to “skim” the highest potential companies, which means Midwest investors have less of an opportunity to invest in “fund returners.” This, in turn, makes it more difficult for VCs to generate the returns that enable them to raise future funds big enough to write later stage checks.
Talent Gap. The investors had different perspectives on whether or not there’s a significant talent gap between the Valley and the Midwest. One panelist gave an anecdote of trying to hire for a senior data scientist while offering much more than the CEO’s salary, and still being unable to find a single qualified applicant in Minnesota. But there was unanimous acceptance that widespread jadedness with Silicon Valley culture (and costs) is making it easier to recruit, particularly for folks who have a family or other connection to their city. The rise of the remote work (drawbacks notwithstanding) is obviously another key component of these changing dynamics.
Corporations. The Midwest has the highest concentration of Fortune 500 companies across a wide variety of industries, but the relative paucity of successful B2C exits #BetweenTheCoasts means the region lacks consumer expertise. Setting that weakness aside, these big corporations present a massive opportunity given the recent resurgence in corporate venture capital. The panelists agreed there can be downsides to corporate VC (for everyone involved), but some types of investing wouldn’t not be possible without it — “hardtech,” for example. One piece of advice for corporates deploying venture capital: don’t confuse your equity investment with other parts of your relationship with a startup. In other words, don’t try to wrap up vendor agreements, channel sales agreements, etc. into your deal docs. Those need to be negotiated independently (and priced appropriately). Otherwise, you’re getting a “sweetener” that other investors aren’t, which is sure to create conflict.
Returns. This won’t be a surprise to anyone who’s read our Tech #BetweenTheCoasts report, but once you consider investors’ entry point, exit timing, and total capital needed to scale up, returns in the Midwest (and #BetweenTheCoasts broadly) are competitive with Silicon Valley over the past 10 years or so — and in many years they’re actually superior.
What We’re Reading
Anna Hensel (the former manager of the sadly canceled Heartland Tech newsletter from VentureBeat) takes a look at the interesting trend of startup holding companies bringing together the new vanguard of D2C brands. It’s a fascinating trend, since these companies largely gained traction by contrasting with the legacy holding companies like P&G.
Customer acquisition tends to get more attention than retention, but both are crucial to the survival of any startup. This blog post has commentary from a number of thought leaders in the retention space on how to balance the two, from both a high level and tactical perspective.
Principles author and hedge fund billionaire Ray Dalio has a must-read post on LinkedIn where he argues a massive shift in the way we think about capitalism is imminent. “The world has gone mad and the system is broken,” he writes, arguing that a complex combination of a widening wealth gap, unfunded pension liabilities coming due, huge (and growing) government debt around the globe, and deployment of massive amounts of capital into unsustainable business models have brought us to the brink of disaster.
David Sacks writes at Medium on how the recent troubles at WeWork, Uber, and others prove that tech companies and tech-enabled companies are not the same. The two-second takeaway: margin matters.
This article isn’t directly venture related, but I couldn’t tear myself away from this deep dive at Vice into the author’s accidental discovery of a nationwide Airbnb scam.
Deals
Indianapolis-based Kenzie Academy — a coding bootcamp — raised $100M of debt from Community Investment Management.
Atlanta-based LeaseQuery — a maker of lease accounting software — raised $40M from Goldman Sachs.
Chicago-based Ascent — an AI-powered regulatory compliance platform for the finance industry — raised $19.3M led by Drive Capital; other investors included ING, Wells Fargo, Alsop Louie, and The University of Chicago.
Arlington, VA-based Stardog — an enterprise data unification platform — raised $9M led by Tenfore Holdings; other investors included Grotech Ventures, Boulder Ventures, and Core Capital.
Austin-based Clean Cause — a beverage brand with a sparkling yerba mate product — raised $7M.
Boulder- and New York-based Link3D — an additive manufacturing execution system — raised $7M led by AI Capital led the round.
Houston-based Mainline — maker of an esports tournament technology platform — raised $6.8M led by Work America Capital.
Kansas City-based Simplifyy — a multifamily property management platform — raised $4.75M from its cofounders.
Austin-based Sana Benefits — a health benefits provider for SMBs — raised $3.6M co-led by Gigafund and Trust Ventures; other investors included Greenlight Re and Mark VC.
Detroit-based Ash & Erie — a D2C ecommerce apparel company focused on clothes for shorter men (like me!) — raised $1.2M led by Irish Angels.
Funds
Chicago-based ARCH Venture Partners — a seed/early stage VC firm focused on life sciences and health-tech — raised more than $636M for its 10th fund, surpassing its $600M target.
Columbus-based Drive Capital — a VC fund focused on the Midwest — closed its third fund at $350M and raised $284M towards its $400M-targeted Overdrive fund.
Raleigh, NC-based NovaQuest — a midmarket healthcare PE firm — raised $275M for its new fund.
Lehi, UT-based Album VC (formerly known as Peak Ventures) — an early-stage VC firm — raised $75M for its third fund.
Exits & Acquisitions
Dallas-based ITBoost — an IT documentation platform — was acquired by ConnectWise.
Austin-based JASK Labs — maker of a hybrid on-prem/cloud cybersecurity analytics platform — was acquired by Sumo Logic.
Atlanta-based SalesLoft — a sales engagement platform — acquired Indianapolis-based sales CRM and playbook provider Costello. A #BetweenTheCoasts double whammy!
Ames, IA-based Smart Ag — a developer of autonomous agriculture solutions — was acquired by Raven Industries.
Events
This year’s Startup Connection, which facilitates informal interactions among early stage startups, investors, and other members of the innovation community in the St. Louis region and beyond, will be held in St. Louis on November 6. The event, in its 11th year, is the anchor event of the inaugural STL Startup Week, which runs through November 9.
The 2019 Wisconsin Early Stage Symposium, which brings together investors and early stage companies from Wisconsin and the surrounding areas, will be held November 6–7 in Madison, WI.
The first-ever 2019 Flyover Fintech conference — “a conference bringing innovators, financial services leaders and policymakers to the center of everything fintech” — will be held in Lincoln, NE from November 11–12.
FreightWaves Live, a conference bringing together freight logistics and supply chain experts, investors, startups, and legacy players, will be held in Chicago from November 12–13.
The OnRamp Manufacturing Conference, which “brings together the manufacturing industry’s leading corporations, investors and startups,” will be held in Indianapolis on November 14.
Parting Thought
The Wisconsin Early Stage Symposium is being held at Monona Terrace in Madison. Since I’m an architecture nerd, I was thrilled to learn it’s a Frank Lloyd Wright-designed building (he was from Wisconsin, don’t’cha’know). The development history of the building is fascinating and I recommend reading up on it if you’re into that sort of thing.
