Back to the Future? Venture Investing in Flyover Country

The term “Venture Capital” covers a lot of ground, even when confined to the traditional institutional funds at the heart of the industry. Funds come in many flavors based on factors including stage of investment, industry focus, geography, and propensity to lead or follow in deals.

I’d like to suggest another basis for classifying venture investors, one that I think is absolutely critical when considering the unique opportunities – and challenges – of investing in places outside of the major established centers of venture capital investing. Places like where I grew up, and after twenty years in Silicon Valley and North Carolina, returned to some years back: Wisconsin.

My classification is based on two alternative paradigms for investing capital and managing investments: Nurturing and Managing.

The Manager Venture Investing Paradigm

The Manager paradigm dominates the venture business today (certainly in terms of capital deployed and public mindshare). It is characterized by large funds, many in the billions of dollars (see Softbank’s $100 Billion fund for the current outer limits of the industry) with multiple levels of investment professionals, many of which do not have early stage operating experience or even STEM educational credentials. The “value add” Manager investors provide is largely in terms of the later stages of expansion and exit planning and execution.

The Manager paradigm is ideally-suited to the contemporary Silicon Valley venture capital scene and in terms of number of deals and capital deployed the large majority of Manager paradigm investing occurs in Silicon Valley and a handful of other major venture capital hubs. Today’s large funds simply can’t efficiently make and manage smaller deals. Even those that operate affiliated “seed” funds typically make larger initial investments than their traditional seed fund peers, and limit those investments to deals that they perceive as having mega deal potential (and capital needs) going forward. As a result, the Manager paradigm funds are much less likely to invest in raw entrepreneurs who need a lot of hand-holding on basic operational blocking and tackling. Their deep pockets also make them more likely to focus on capital intensive growth/brand-driven exit metrics than profitability.

Now, the Manager paradigm may get all the headlines, and skew the statistics such that Silicon Valley round deal sizes and valuations or as much as an order of magnitude or even more than the comparable figures in flyover country markets, but it is not the only venture investing paradigm. In fact, it was preceded by a very different and still important, if no longer as publicly prominent, paradigm.

The Nurture Venture Investing Paradigm

The modern venture capital era began in the late 1940s and hit its stride in the 1970s.  Throughout that period, and into the 1980s, even the largest venture capital funds seldom exceeded $100 million and most were only a fraction of that. The prototypical Nurture VC was someone with industry operating experience as well as a STEM education. Further, these smaller funds had minimal junior staff compared to the layers of analysts, directors, junior partners, etc. that make up the bulk of the investment professionals at today’s larger venture funds.

The early decades of the venture business were characterized by something else, besides smaller funds: less experienced entrepreneurial teams. With the industry’s small size, and even with fairly rapid growth in the 1970s, it took awhile for the “serial” entrepreneur to emerge as a regular part of the deal flow. It was probably not until well into the 1990s that most venture-backed Silicon Valley startups included founders and senior managers well-versed in the art of building a high impact company from experience at prior venture backed emerging companies.

When you put all of these factors into a pot and stirred them up, you came up with the Nurture venture investing paradigm. An investment model based on VCs focusing on startups where they could add a lot of value to the deal in terms of the basic nuts and bolts of defining and building the business. Indeed it was a time where the venture investor was often involved – as for example Brook Byers and Genentech – in the actual conception of the business, recruitment of the founding team and formulation of the business plan. Sometimes well before it was even clear there would be any resulting investable deal.

The industry’s structure during the ascendancy of the Nurture paradigm had other implications, among the most prominent of which was the emphasis on profitability as an exit metric. This was not because Nurture investors were any smarter than today’s Manager investors, who by comparison are far less concerned with early profitability. Profitability was part of the Nurture paradigm simply because the typical Nurture fund – even when factoring in syndication of investments – simply did not have sufficient capital to support a portfolio company burning tens or hundreds of millions (or as per Uber recently billions) of dollars of capital a quarter.

The Nurture paradigm led to venture capital’s first golden age in the 1980s. It also sowed the seeds of the Manager paradigm which arrived on the scene in the later half of that decade. The Manager paradigm was launched, ironically enough, when some of the great Nurture firms started raising the first wave of mega funds with hundreds of millions of dollars and, before long, even billions of dollars to deploy.

Implications for Flyover Country Venture Investing

If there is still a meaningful role for Nurture funds in Silicon Valley, there is very little room – today – for Manager-modeled funds outside of Silicon Valley and a handful of other of the larger venture investing centers. And that is something that too many folks in flyover country just don’t understand. And something that is making it even more challenging than it needs to be to foster the emergence of a meaningful high impact entrepreneurship and investing sector in still nascent and emerging flyover markets.

I saw the problem in North Carolina circa 1990, and I see the problem in Wisconsin, today. Regional folks who want to foster a vibrant high impact entrepreneurship and investing community look to Silicon Valley and, seeing how the Manager venture investing model dominates the headlines, conclude that we should be doing the same thing here. That we should invest as if our entrepreneurs had the same kind of “been there, done that” startup experience and networks that their Silicon Valley counterparts enjoy.

Well, they don’t. The opportunities and challenges of venture investing in Wisconsin in 2017 are indeed comparable to the opportunities and challenges of venture investing in Silicon Valley. But Silicon Valley circa 1975, not 2017.

What places like Wisconsin need, in terms of venture investors, is Nurture VCs, not Manager VCs. We need small funds, run by hands-on partners who bring their own “been there, done that” high impact startup operating and investing experience to the game. People who are willing to get down in the trenches with entrepreneurs to help shape raw talent and ideas into fundable deals; and who are willing and able to start doing that even before making an investment. Venture investors who can proactively help their portfolio entrepreneurs achieve profitable operations supporting attractive exit opportunities with lifetime risk capital needs that don’t exceed even the average A round in today’s Silicon Valley.

Unfortunately, instead of Nurture funds led by experienced startup entrepreneurs and hands-on investing professionals helping raw entrepreneurs with good ideas build modest companies that offer solid investment returns with limited capital, what I’ve seen here in Wisconsin is mostly investors with little or no venture backed startup operational or seed/early stage risk capital investing experience casting about for the kind of startup teams and capital-ready deals that fit the Manager venture investing paradigm.  Teams and deals that we just don’t yet have enough of in Wisconsin to support a sustainable high impact venture-driven startup community.

Don’t get me wrong. I think – know – that Wisconsin and places like it have the raw entrepreneurial talent and capital to become small but important and sustainable centers of high impact entrepreneurship and investing. But getting there is not going to happen unless and until the folks who want that to happen understand that right now we need Nurture venture investors, the kind that built Silicon Valley, not Manager venture investors in the mold of those who get the headlines in Silicon Valley today.

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gener8tor: The Gift That Keeps on Giving

It’s been a few years now since I wrote my first appreciation for the folks at gener8tor.  Back then, they had just launched, and yours truly was surprised (albeit very pleasantly) that they had gotten not just off the ground but had achieved some sort of seemingly stable orbit.  Which surprised a bunch of people, I think.  I know it surprised me.

Well, here we are in November 2017 and they have flown well beyond Madison and Milwaukee to places as far afield as Minnesota, Illinois and even my own neck of the woods up here in Packerland.  Recently, it was my good fortune that a scheduled speaker for a OpenBETA Lunch program in Oshkosh had a last minute scheduling conflict.  My good fortune in that I was offered an opportunity to substitute as the headliner for the event.

The Oshkosh event was a lot like my first time at gener8tor way back when in Milwaukee.  Quirky space, a roomful (well, ok, maybe a half-dozen plus) of raw but passionate and very early-in-the-process entrepreneurs.  Who asked good questions, and shared some good ideas.

What was most interesting about the event, for me, was in fact how it took me back to those early gener8tor classes, where the entrepreneurs were rawer than raw, and the ideas sketchier than sketchy.  And, in fact, what amazed me about gener8tor then – and caused me to write my initial blog about the program and team – was how over the couple of months after I saw that cohort of newbies the gener8tor folks had somehow worked some magic to turn them into that rarest of commodities hereabouts, fundable high impact entrepreneurs.  (And, yes, they all got funded.)

Since those times, gener8tor’s flagship program has expanded to new places and moved a bit downstream in terms of appealing to less raw, even semi-polished entrepreneurs (often hailing from well beyond Wisconsin).  And I’ll admit, I had (and to a limited extent still have) some doubts about whether they can sustain their success across multiple markets and with later stage entrepreneurs.  But the results continue to speak for themselves, and if we – that is those of us who are serious about growing the high impact entrepreneurship and investing community in our little corner of flyover country – are lucky gener8tor has a lot of fuel left in the tank.

All of that said, what really made my day at the OpenBETA event was seeing gener8tor staying true to its “rawest of the raw” roots, and doing it in the New North.  In Oshkosh even.  (They also have a new gBeta program in Green Bay.)   That means, I think, that it won’t be long until entrepreneurs and investors in Madison and Milwaukee start  realizing there are deals to be done in Wisconsin in places other than Madison (mostly) and Milwaukee.

And so congratulations to all of us in the high impact entrepreneurship and investing community across Wisconsin.  We are the lucky benefactors of the gener8tor program – the gift that keeps on giving.

Jones: Alas, here is still not there

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Jones: Alas, here is still not there” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“‘Over the course of the past two years, the median pre-money valuation for seed-stage financings was $6 million and the median deal size was approximately $2 million.’

So reports Mark Suster, partner at Upfront Ventures, in a fourth quarter 2016 venture capital market report by Cooley, LLP, one of Silicon Valley’s leading law firms. (They also reported serving as counsel for 187 venture capital financing involving $2.7 billion in the fourth quarter: yes, Virginia, the rich really are different.)

Clearly, the seed deal market in Wisconsin – where my sense is that the median pre-money seed round valuation is something more like $1 million, and the median seed deal size more like $300k – is a bit of an outlier. As are most flyover country markets. That said, here are some things these numbers got me thinking about.”

Click here to read more.

Jones: Hard truth about angel investing

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Jones: Hard truths about angel investing” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“Angel investing is a critical part of the high impact startup world, particularly outside of the big venture capital centers. A good portion of Wisconsin startup success stories achieved liftoff with critical assistance from angel investors and their capital.

But what about the angel investors themselves? How does angel investing work for them?

Well, you don’t have to look very hard to find blogs, books and speakers extolling the virtues of angel investing for the angels. And a lot of them make a pretty good case that the angel investing community makes a nice profit for its efforts. A good case, but also a misleading case.”

Click here to read more.

Stanford Offer is a Good Thing

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Stanford Offer is a Good Thing” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“So the good folks at Stanford University’s business school want to lend a hand to the ‘underserved’ folks in flyover country.

Good for them — and us.

Even way back when I was in school — we are talking late 70s to mid 80s — the attraction of Stanford was, at least in part, that it was ‘there.’ And I was ‘here.’ A ticket to Stanford was generally thought of as a one-way ticket: ‘Go west, young man,’ Horace Greeley advised; and don’t come back, he implied.

As it turns out, I did not go to Stanford, and instead got my MBA and JD closer to home, in Chicago. But my first post-education stop was in Silicon Valley, and it was a great move that I never regretted.

Montana’s Robust Startup Scene

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Montana’s Robust Startup Scene” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“Folks at the Kauffman Foundation – one of the more credible of the various organizations that track entrepreneurship activities across America – recently ranked the various states in terms of the strength of their entrepreneurial sectors. As gener8tor’s Joe Kirgues wryly noted, “at least Wisconsin finished in the top 50.” Which is to say, 50th.

I must say I am not a huge fan of these kinds of rankings. Frankly any ranking of this sort that doesn’t have Northern California at the top of the list is more than a little suspect. Still, by chance I happened to be in Missoula Montana last week, working with several startups at Montana Technology Enterprise Center, or MonTEC, the University of Montana’s technology accelerator. That Montana. The Montana that Kauffman put at the top of its list of states ranked by the strength of their entrepreneurial sectors.

In a lot of ways, Montana is a lot like Wisconsin, only more so. It is hard to get to. The climate is challenging. Not a lot of people live there. And there are no big cities (in fact, there are no cities as “big” as Green Bay). There is just one institutional venture capital investor. It’s fair to say, I think, that Montana’s challenges, in terms of building a high impact entrepreneurship sector, are even more formidable than those facing Wisconsin.”

Click here to read more.

Those Who Do it All… Shouldn’t

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Those Who Do it All…Shouldn’t” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“In more than thirty years in and around the high impact entrepreneur and investing space, I’ve come to the conclusion that every entrepreneur, even and in fact particularly the most successful, has at least one serious personality flaw.

One of the more common flaws is the “I can do it all” personality: the entrepreneur who insists that they are not only good at, but the best at everything involved with making their business a success.

What really makes the “I can do it all” entrepreneur so frustrating is not so much that they are almost always wrong about their capabilities. Rather it is that even if an entrepreneur really is the best at everything actually doing everything is still a bad idea.”

Click here to read more.