TKC SATURDAY SPECIAL GUEST POST!!! Advice For Midwest Entrepreneurs And How Kansas City Lags Behind Boulder, CO In The Venture Capital Game!!!

TKC: Check this informative guest post from a Pete Thomas regarding local biz and the Kansas City venture capital scene. Check it:

Data from MoneyTree lets us see our region’s access to venture capital. We can for example look at the period from mid-2008 through the third quarter of 2011 and compare our access to Boulder’s over the same period.

To keep things simple here we won’t worry about deal stage or business type or fret over anomalies that may lurk in the numbers. Instead we’re shooting for a basic view into the recent trends.

By deal count, KCK holds its own compared to Boulder:



But by deal dollars, Boulder predictably dominates:



The sheer volume of venture capital that cities like Boulder now enjoy compared to Kansas City, Des Moines, and Omaha means that these cities get some bites at the VC apple but not very many and the bites are smaller. Put another way we don’t as often get to attempt the big flanking and guerrilla maneuvers that aggressive start-up founders like to perform in order to disrupt their target markets.

To our region’s credit we do encourage other avenues to fast growth and even entire alternatives to fast growth through a steady stream of articles, conferences, contests, experts, incubators, mentors, retreats, speakers and workshops that offer advice, hacks, strategy, tactics and tips along the lines of three broad categories: Get traction, Get connected, or Get lost. We’ll briefly describe each category from best to worst.


Get traction

We typically hear Get traction from either local corporate executives, people who founded a small business and managed to progress it from bootstrap mode into one or more growth stages, or visiting startup veterans hailing from, for example, San Francisco.

Assumptions embedded in Get traction include that this a conservative part of the country, that businesses here will probably need to demonstrate some steady revenue before they attract quality local angels, and that once those angels are attracted to a business, their connections plus continued enthusiasm will be key to readying the business for larger rounds.

Get traction works pretty well, both as theoretical advice and as proof out in the wild. To name just two examples, Des Moines’ Dwolla recently evolved from seed funding to closing an impressive venture round and earlier Kansas City’s AdKnowledge, after making a respectable amount of money more or less on its own for seven years, raised a relatively huge private equity and corporate investment round. We should learn from and be inspired by examples like these while at the same time try to figure out how we can book, say, 45 remarkable investment deals every eight years, instead of six or seven. If we’re doing 45 every half decade, though, maybe suddenly not so many are remarkable. That would be a good thing.

Get connected

Get connected is advice more likely heard in a private conversation than in a public forum, or if it is brought up in public the dirty details are typically glossed over. It hints to the intrepid Midwest startup founder that they should clean up their act a little (ok, a lot...), buy some nicer clothes, throw down for an expensive car and some luxurious office space, and then impress enough people to get invited to elite and exclusive cocktail or dinner parties. If the image is crisp and polished enough, if the overall effect is persuasive enough, new doors could be opened that increase the chance of meeting the right local angels who will love and trust the charismatic founder so much that they won’t care so much about traction.

“Fake it ‘til you make it” by trying to enter a monied social circle is questionable advice for many reasons and although running with the right crowd to try and connect with deals has historically worked out for some, a startup founder in this part of the country who spends lots of energy working to fabricate those connections - unless maybe they already have a great start - is in for a long climb up a steep hill. That energy could probably be put to better use.

Get lost

There is serious, avoidable, additional business risk involved when a startup founder aims for large VC rounds yet chooses to found in a city with a relatively desolate funding climate.

Get lost is a depressing but practical category of advice and again we’re more likely to hear it discussed privately, in hushed tones, than out in the open where we prefer to cheer-lead our local start-up heroes. The ugly fact is that until our region finds ways to provide a more venture-friendly environment, or increases the use of alternative funding mechanisms like private equity, our marvelously motivated, unfortunately rare, big-dreaming startup founders shouldn’t waste time keeping their headquarters in one of our cities.

Our region’s efforts to support these entrepreneurs in ways aside from capital investment, separately or in aggregate, have at best an incremental impact compared to the game changes that venture capitalists bring to a city like Boulder when they deploy not only strategic advice and connections but also substantial amounts of cold hard cash.

Get better?

The biggest challenge in front of our region right now is to solve what has evolved into a currently intractable chicken and egg problem: In order to create a cluster of AdKnowledge-like and Dwolla-like successes we need capital but to get that capital we need to prove that we can reliably generate a string of AdKnowledges and Dwollas.

At some magical, luck-infused inflection point we may suddenly command one or more VC’s rapt attention for a decent duration and get one or more funds to put an office here and deploy capital. Until then, though, to summarize:

* Get traction is the most sensible (if currently paradoxical) approach.

* We’ll continue to run into hapless pretenders trying to pull off a modernxt version of the Jay Gatsby mystique.

* We’ll still leak lots of great entrepreneurial talent out to other cities.

So what can a growth-seeking Midwest city do in 2012 to authentically foment the traction required to attract capital? At this stage it seems likely that all our combined conferences, workshops, incubators, etc. will grease the wheels but fail to totally repair what amount to fundamental economic, geographic and cultural issues inhibiting the formation and sustainment of high-growth clusters. We need to therefore “dig deep” as a region and aggressively tackle the capital deficit by cranking out compelling startup after compelling startup. How? We’ll put forth one possible approach in Part II.

P.S. In case you are wondering like I was regarding what Des Moines had going on in the third quarter of 2010 to book a $50mn VC investment, that was McCarthy Capital Corporation’s funding of Life Care Companies.
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