The Five Elms Capital team includes (from left) Fred Coulson, Thomas Kershisnik, Joe Onofrio, Ryan Mandl and Paul Gregory. Photo by Michael Stacy.
After spending years on the East Coast and overseas working stints with TH Lee Putnam Ventures, Morgan Stanley and Citibank, Fred Coulson returned to his Midwestern roots in 2006, moving back to the Kansas City area to start Five Elms Capital. Five Elms, which makes investments of $1-10 million and works heavily with Midwestern businesses, made its first investment in 2007 and, Coulson says, has made 4-5 per year since.
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Five Elms has invested in 14 companies with its first fund, for which it raised about $21 million. Coulson says the firm will begin deploying capital from a second fund in 2012. “Our portfolio has performed well, and we’re excited about the future,” he said. “We plan to be investing in the Midwest for decades to come.”
In a sit-down interview with Coulson last month at the Five Elms office in Prairie Village, Kan. and through follow-up emails, we learned more about the five-year-old venture capital firm.
Silicon Prairie News: One thing that stands out about Five Elms is the regional focus. You will invest in companies out of the region, but the Midwest is kind of your wheelhouse. What drives that regional focus for you?
Fred Coulson: Our Kansas City location gives us an advantage. I think entrepreneurs like to work with investors, partners and board members that are local because personal interaction in solving problems (both good and bad) is just so much more effective. Certain entrepreneurs in the middle of the country have a strong preference to work with local partners who share the same values and mindset. We are fairly unique given the capital concentration on the coasts. (Above: Coulson at his desk. Photo by Michael Stacy.)
SPN: I also noticed the non-control philosophy that you take. You prefer kind of letting entrepreneurs operate on their own, I guess?
FC: Typically we’re very active board members, so if an entrepreneur wants somebody with no voice, we’re not the right fit. While we sometimes do full company buyouts, the majority of our investments are minority ownership stakes. We seek to influence rather than mandate.
SPN: What drives that philosophy?
FC: We like backing entrepreneurs with skin in the game. We like teams that have a significant equity position so they are driving to increase the value of their personal stake as well as our capital. We have found that a lot of great teams with a strong past and exciting future prospects don’t want to give up a majority stake, especially given that many of the businesses we partner with are already profitable and want to get bigger, faster.
SPN: Can you talk about that portfolio of companies in your first fund?
FC: We’ve invested in 14 companies. In some, we provided traditional expansion capital. In others, we provided liquidity to existing shareholders several years in advance of the company being able to provide it in the form of a sale or recapitalization. We are highly flexible as to what situation drives our investment; we just like companies that are growing.
As far as geography, roughly half of our investments are in the Kansas City area and half are coastal. We’ve been increasingly spending time in Des Moines and in Omaha and are in preliminary discussions with a few companies in both cities but haven’t made any investments just yet. The Silicon Prairie is a huge focus for us – we plan to double our efforts to get to know the regional influencers over the course of 2012. (Left: Some of Five Elms’ investments. Screenshot from fiveelms.com.)
SPN: For people out there who are looking for funding who think they might be a good fit, what would you advise as far as what makes a good fit for Five Elms investment?
FC: I’d say any company that is growing and needs expansion capital to support a proven team and business model is somebody that we’d like to talk to. We’re not a formulaic shop with a cookie cutter investment process. We are highly opportunistic and like to help teams solve problems and accelerate growth.
SPN: What kind of intrigues you or excites you at the moment? Is there any type of company or space that really intrigues you?
FC: I’d say that we are more interested in the users of technology than deep innovators of technology. The technology industry is six percent of GDP, yet services are almost 50 percent of the U.S. economy, so we spend most of our time looking at service-based businesses and how they can creatively use technology to grow faster, reduce their costs and simply provide a better value proposition to their end client. We think that’s a much bigger opportunity and one that the Midwest is better catered to serve because of our low-cost infrastructure. We love old, boring industries that people within the industry get frustrated at the inefficiencies of that industry and say, ‘OK, I’m going to start a new company, we’re going to address this marketplace in a new way that’s more efficient in using technology to disrupt incumbents.’ We are investors in three Kansas City-based logistic companies that are doing just that: Smart Warehousing, Catapult International and Mango Moving.
“The technology industry is six percent of GDP, yet services are almost 50 percent of the U.S. economy, so we spend most of our time looking at service-based businesses and how they can creatively use technology to grow faster, reduce their costs and simply provide a better value proposition to their end client.” – Fred Coulson
SPN: Having been on the coast, what observations do you have … just on the region as a whole and the potential for capital investment in some of these companies? Are there any trends or any things that really stand out to you?
FC: The density of ideas has increased in Kansas City over the last four or five years. Just as recent as a few years ago there were a lot of really smart people doing really cool things but nobody really knew what others were doing. Everyone was on their own island thinking they were the only one doing something interesting in the area because of the lack of density that our communities have. That lack of density provides for a great lifestyle— but it doesn’t facilitate the level of interaction that Silicon Valley, New York, or Boston have. That is changing. Both the Google (Fiber) project and the Kauffman Foundation have brought a lot of people in the region together. A huge side effect of Google’s fiber plan is just getting people together to talk about things and share what they’re doing (whether it has something to do with Google fiber or not at all). Just getting people together to share ideas and share what they’re doing is a very positive step.
SPN: What’s on the horizon, that you can speak to at least? What does the future hold for Five Elms?
FC: We are well capitalized and are looking to partner with 4-5 growing companies per year for the foreseeable future. As time goes on we’ll be seeking liquidity for our fund one portfolio as the companies mature and we will begin investing out of our second fund in 2012.
