Firm tar­gets fund­ing gap for star­tups

In­vest­ment cap­i­tal in state be­yond seed money is goal

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - EMMA N. HURT

Jeff Stan­dridge of the Con­duc­tor An­gel Net­work in Con­way and Jeff Amer­ine of Fayet­teville’s Startup Junkie are form­ing Cadron Cap­i­tal Part­ners to fix what they see as a fund­ing gap that pre­vents many Arkansas star­tups from tak­ing their busi­nesses to the next level.

“We’ve seen this gap now for two years plus,” Amer­ine said of what is known as a “Series A gap,” re­fer­ring to the round of fund­ing a startup gen­er­ally raises af­ter ini­tial seed money.

“We’re not go­ing to wait for some­body else to parachute in and fix it,” said Amer­ine, whose son Brett is also a found­ing gen­eral part­ner of Cadron Cap­i­tal. “We’re go­ing to fix it our­selves.”

Arkansas’ an­gel in­vestor net­work has grown con­sid­er­ably since 1999 when an early-stage in­vest­ing club — Ven­ture Cap­i­tal In­vestors of Lit­tle Rock — was launched.

“I think you could get $50,000-$100,000 in a cou­ple weeks. An­gel and seed money is fairly avail­able,” Rick West, co-founder of Field Agent, said of young star­tups to­day. Field Agent is a mo­bile mar­ket re­search com­pany in Fayet­teville.

“If you want to be a startup and you’ve got an idea, there’s an in­fra­struc­ture here,” West said. “There’s a very healthy startup en­vi­ron­ment, but there’s noth­ing to take you to that next level.”

“If you need $1[mil­lion]-$1.5 mil­lion, there’s no one. You’ve got pri­vate eq­uity firms that want to be at a $5 mil­lion num­ber, and then you have [ven­ture cap­i­tal firms] that want to give you $10 [mil­lion]-$25 mil­lion. Be­tween seed money and $1 [mil­lion]-$1.5 mil­lion there’s re­ally no one here,” he said.

Field Agent is one of the few Arkansas star­tups to have raised a Series A round of $2.5 mil­lion, though it came from Five Elms Cap­i­tal in Kansas.

Amer­ine said that when Arkansan star­tups reach the Series A stage, “we want to be able to pro­vide it and not have to send them some­where else.”

Cadron Cap­i­tal Part­ners will aim to raise about $20 mil­lion to fo­cus on the amount that Arkansas com­pa­nies have had trou­ble find­ing — around $250,000 to $1.5 mil­lion. These are of­ten too small to in­ter­est largescale ven­ture cap­i­tal firms and gen­er­ally too large for an­gel in­vestors to take a risk on.

Last year, NewRoad Cap­i­tal Part­ners in Ben­tonville part­nered with Los An­ge­les’ Kayne An­der­son to cre­ate a ven­ture fund of about $100 mil­lion, which, Amer­ine said, left a void.

“[NewRoad] solved the back end of the prob­lem, not that gap. They left that gap wide open, so that’s what we hope to fill,” she said.

SUC­CESS HELD BACK

Jerry Adams, pres­i­dent and CEO of the Arkansas Re-

● search Al­liance, said the gap is hold­ing back the chance of a suc­cess­ful startup story.

“You’ve got gas or elec­tric­ity in your car. You have enough to get it go­ing, but you need more fuel to get to the next thing,” Adams said. “”That more fuel right now is re­ally the next big step for­ward in Arkansas, and I call it ex­pan­sion money. Some peo­ple are do­ing it, but the net ef­fect is not here.”

Lineus Med­i­cal, a med­i­cal de­vice startup in Fayet­teville, re­cently dealt with the gap while it was try­ing to close out a round of Series A fund­ing.

Jor­dan Myk­leby, the com­pany’s direc­tor of en­gi­neer­ing, said it took far longer to raise the funds in Arkansas than it would have on the

East or West coast. “It’s newer here, and peo­ple are more risk averse,” he said.

De­spite that, the com­pany even­tu­ally man­aged to se­cure the funds it needed and re­mains com­mit­ted to Arkansas.

“We still think we can do it here,” said Spencer Jones, the com­pany’s founder and chief ex­ec­u­tive. “Just be­cause it’s slower or more dif­fi­cult doesn’t mean it’s not pos­si­ble or worth do­ing.”

Mark Bran­don was among the win­ners of the first ARK Chal­lenge tech in­cu­ba­tor in 2012. But af­ter that suc­cess, he strug­gled to raise fur­ther fund­ing to keep his com­pany, now known as Qbox, afloat with Arkansan money.

He worked for six years to raise $200,000 in Arkansas be­fore join­ing an ac­cel­er­a­tor in Sil­i­con Val­ley, where he raised $2.5 mil­lion in six months.

He said the North­west Arkansas mar­ket is not sup­port­ing tech star­tups at the speed and scale founders need, par­tially be­cause few peo­ple un­der­stand the kind of in­vest­ment.

“In North­west Arkansas our busi­nesses are re­tail, farm­ing and lo­gis­tics. All three of those busi­nesses are about squeez­ing your as­sets, cut­ting costs down to the bone,” Bran­don said.

“Wal-Mart has a cul­ture of squeez­ing their ven­dors that is leg­endary. And that’s right for their busi­ness, but it’s com­pletely an­ti­thet­i­cal to a tech ecosys­tem.”

Bran­don said he ad­vises Arkansas en­trepreneurs to look else­where for an ac­cel­er­a­tor and fund­ing, even though large out-of-state in­vestors of­ten de­mand that their port­fo­lio com­pa­nies move to be closer to them.

“I felt like I could get it

done [with Arkansan money], but I was very much in­cor­rect about that,” Bran­don said. “I want to be­lieve that we can do it be­cause I love this town, but I don’t think we can.”

NOT WANT­ING TO MOVE

John James co-founded Acu­men Brands, which re­ceived a “Series C” fund­ing round of $90 mil­lion in 2013. Af­ter leav­ing Acu­men, he be­came a seed stage in­vestor with Hay­seed Ven­tures and is now look­ing to raise money again for a new ven­ture, En­gine.

He said the ecosys­tem has pro­gressed “light years” from when he was first try­ing to fund Acu­men.

“There was not even a group you could get to­gether and brain­storm about the prob­lems,” James said. “And now, you could get 100-200 peo­ple to­gether to talk star­tups. We’ve built a sense of

com­mu­nity.

“Noth­ing but pos­i­tive things to say about the progress we’ve made,” he said, “but quite a bit of frus­tra­tion about what’s be­ing done to fix our fairly ob­vi­ous bot­tle­neck, which I think is cap­i­tal.”

He said it has been a “night­mare” to find fur­ther funds for his new com­pany lo­cally.

“I’ve had two dif­fer­ent peo­ple in the last two weeks tell me if I move to New York or Sil­i­con Val­ley they will fund [En­gine] with one check. The one thing keep­ing me here is, I love it here,” he said.

James added the sit­u­a­tion is bet­ter than it was eight years ago, but he is frus­trated that it isn’t chang­ing quickly enough.

Stan­dridge said ef­forts to close the fund­ing gap is “a marathon and not a sprint.”

He said the need for a gap

fund is is a mile­stone that the mar­ket wasn’t ready for three to four years ago. “And now we are,” he said.

Ryan Mandl is a part­ner at Five Elms Cap­i­tal in Kansas that has in­vested in Field Agent and Lit­tle Rock’s Appt­egy. He said that while the Arkansas startup scene is “a lit­tle bit ear­lier stage … per capita, the qual­ity of com­pa­nies we’re see­ing is fan­tas­tic.”

“We spend a ton of time in the Arkansas ecosys­tem and be­lieve it is one of the most un­der the radar, but highly promis­ing places to fo­cus on.”

Amer­ine pointed out that the Sil­i­con Val­ley startup move­ment started right af­ter World War II.

“It’s been 70 years. It wasn’t like it was overnight. We’ve got a long way to go. There are things we can do to ac­cel­er­ate it, but it’s a long march to get it to where it’s sus­tain­able.”

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