Arthur Ventures looks to provide capital lift to local innovation
As the chairman and CEO of Great Plains Software, Doug Burgum helped transform the company from a small software shop in Fargo, N.D. in the early 80s into a booming business that Microsoft bought for $1.1 billion in 2001. But what ended with a billion-dollar exit started as an idea that Burgum (below, photo from microsoft.com) had to bet the farm — literally — to fund.
"He had inherited some ground, inherited some land," said James Burgum, Doug Burgum’s nephew and one of his partners in Arthur Ventures, a venture capital firm they founded in 2008. "He mortgaged that land to invest in a software company."
That wasn’t all. It took other creative funding to get Great Plains off the ground. "When he raised money for Great Plains back in the 80s, he had to go to the local (grain) elevator to get his risk capital," said Tadd Tobkin, another of Burgum’s partners in the firm. "Here we are in 2011, and not much has changed."
But Arthur Ventures is trying to catalyze that kind of change. As Tobkin puts it, "We want to be the new grain elevator to regional startups."
Arthur Ventures targets what it calls "post-angel, pre-institutional" startups. "Our goal," Tobkin said, "is to try to get them some lift to get them to a run rate of $3-5 million where these next sort of guys take a look at it."
The Fargo-based company, whose core team consists of five people — the Burgums, Tobkin (left), Kathy Laney and analyst Andrew Christensen — has a focus that is decidedly regional. Its operations are governed by a general geographic rule of thumb: if a startup's within a day trip of Fargo, it's fair game. Arthur Ventures is in the process of lining up partners for its second fund, which Tobkin said includes four partners — the Burgums, Tobkin and Dave O’Hara — and should be at least $35 million. With the possible addition of a fifth partner, the fund could exceed $50 million.
The firm’s first fund included eight partners and $11.3 million. The bulk of that money has been spent on six partner companies — more on the meaning of "partner" companies in a moment — and the remaining money will be used as follow-on funding.
Tobkin estimates Arthur Ventures saw 130 deals in the first two months of 2011. The company reviewed 352 last year. "We track every deal we see," Tobkin said, “and we respond to every deal we see."
Still, they frequently find themselves forced to pass on appealing deals. That, in part, explains why the resolve remains so strong to alter the region's venture capital landscape.
"We wish there were more firms doing this," Burgum said, "because we have to turn down a lot of great opportunities just because we don’t have the bandwidth."
Picks and shovels
The firm avoids what Tobkin calls "me too" deals and tries to steer clear of noisy industries that have undergone commoditization and feature big industry players. Tobkin says the firm looks for companies with "ROI and leadership and all that kind of stuff" but is especially keen on IT companies. That’s not to say a startup outside that sector is out of the question, but the firm prefers to stick to what it knows — information technology, life sciences and clean technology.
Using the analogy of a gold rush, the Arthur Ventures team expresses a preference for companies that are "picks and shovels" over ones that are "prospectors."
"Everybody runs out there to dig for gold," James Burgum said. "And some people will find gold. Most won’t. But we would like to look at the platforms, the tools, the enabling technologies that are allowing people to actually look for gold."
That philosophy is reflected in the six companies in Arthur Ventures' first fund: AltraVax, a vaccine-development company; Workface, which builds and markets enterprise profile technology; Loyalty Builders, a web-based consumer-analysis company; Intelligent InSites, which provides enterprise visibility solutions to the health care market; Hardcore Computer, a firm that designs and manufactures top-tier computer systems; and Preventice, a producer and distributor of mobile health systems.
Arthur Ventures' first fund included six partner companies.
Rolling up the sleeves
Arthur Ventures makes an important distinction regarding those six companies: they’re "partners," not "portfolio companies." That is to say, the firm takes a very hands-on approach to its business.
"We’re not a transactional venture firm," James Burgum (left) said. "I mean, we’re probably the furthest thing from it. The way that we look at doing deals is we’re going to do a smaller number of deals and get more heavily involved."
Added Tobkin: "We kind of look at ourselves as venture capitalists second and operators first. We like to roll up our sleeves and really help with the strategy."
With its roots in an elevator-to-exit startup success story out of the upper Midwest, Arthur Ventures hopes to provide the lift local companies need to follow trajectories similar to that of Great Plains Software. And lest the firm ever lose sight of that, the goal shouldn’t be tough to bring back into focus: it's right there in the name. Arthur Ventures derived its moniker from, Arthur, N.D., the tiny town with the grain elevator where Doug Burgum found funding for his big idea.
"I think the common thread amongst all the people that we’re pulling into the general partnership is that they want to have an impact on the region, and I think they go back to this idea of, you know, early stage venture capital is local," Tobkin said. "I think they go back to this idea of not only do we need to recycle local capital but we need to recycle local knowledge."