Silicon Prairie News

Pulse of the Prairie: Our inaugural early-stage investment report

April 8, 2014 by Silicon Prairie News

The first Pulse of the Prairie report, put together in partnership by Silicon Prairie News and Polsinelli, is a look inside early-stage financing for tech startups in our region—Iowa, Kansas, Missouri and Nebraska—with the hope that it helps entrepreneurs and investors alike better understand the landscape.

We couldn't have done it without the help of the many individuals and colleagues who provided the information in this report. Thanks go out to Dundee Venture Capital, Koley Jessen, Missouri Innovation Center, Nebraska Global, Polsinelli, Wichita Technology Corporation and several startups themselves—and the beautiful graphics courtesy our friends at Lemonly. All of them and their generosity made this a reality.

How we went about it

We know this survey can't be everything to everyone, so we kept the focus on technology startups—with wiggle room for industries we don't always cover on Silicon Prairie News. We're only interested, this time around, in the first or earliest rounds of funding—seed and Series A—where a professional investor led the round. As a result, no accelerator or program-related funding is included, but we cover follow-on funding for those companies—we wanted to find out what results have come from negotiable deals. All deals included were finalized January 1 through December 31, 2013.

To make this happen, we created an online survey that was sent out to the partners mentioned above. They sent back their answers with only a company contact attached to keep the information as anonymous as possible, but let us verify pieces when necessary. We kept the number and type of questions simple this time around, given it's a first attempt. None of the individual metrics will be disclosed—our goal is to show the region as a whole. Once we aggregated the data, we left it de-identified.

This data includes 50 deals from around the region, omitting eight deals because they didn't fit within our definition of a negotiable, professional investment in a seed or Series A round.It's unlikely every deal made it into this data, but as we continue to build upon this year, we hope to get more and more detailed data. If you would like to help in our efforts going forward, please reach out to any of us at Silicon Prairie News.

Read or download the PDF version of the report



Let's get our legs under us

by Fred Bauters 

In the middle of the country, our nascent startup community is building muscle and growing taller. It's taken a few years to put on the healthy fat of community awareness, seed funding and mentorship to get that muscle, but people on the coasts are starting to see us over the corn stalks.

We all know the "why" behind this momentum, whether it's a strong sense of community, collaboration among entrepreneurs, quality of life or low cost of living. Even national publications have picked up on the trend of high-growth startups looking to settle outside Silicon Valley. But we've never tried to quantify the benefits of working and investing in the Silicon Prairie.

This report is our attempt, in partnership with Polsinelli, to begin to get our legs under us and understand the "how" behind what's happening here. If we can inform our region's entrepreneurs and investors, as well as pique the interest of entrepreneurs and investors outside the area, we think everyone benefits. Again, we know there are gaps and pieces we need to add next year, but this is our first shot.

"It is our hope that by looking at the activity of the last year, we will be able to help 'bridge the gap' between today’s early stage company and potential investors," said Greg Kratofil, technology attorney at Polsinelli. "The closer we can bring these groups together, the more deals we will see in the future. The successes for both entrepreneurs and investors that should inevitably come will build a stronger community throughout the region."

In particular, we thought of the novice founder heading into negotiations or building out an equity strategy. We thought of the investor who may be hesitant to enter a new market without having a grasp on the environment. In the end, we hope this is an early dipping of the toes to see what we can learn from the deals happening in our backyard.

What's not important—we think—at this point is to start comparing and contrasting the Silicon Prairie to the rest of the country. They're different worlds with vastly different players, costs, attitudes and companies. That's a goal to build toward and shape that narrative, but for this moment, we want to understand our neck of the woods.

In the future, it'll be interesting to measure and follow our strengths as a region. Is it agriculture, animal health and education, or is something else on the horizon? It'll be easier to sell outsiders on our area if they realize there's a fit to be had. There are a lot of questions we left off the table this go-round to make it straightforward, but with every year we'll try to get more detailed. We also think there are opportunities for smaller surveys throughout the year to keep the topic top of mind.

What we found

It's clear that the community we all feel a part of is integral for startups' financial well-being, too. Asked how they were introduced to their investors (free to put multiple answers), 56 percent said it was a community member or someone in their personal network, 26 percent said it was through a mentor and another 26 percent found investors through an accelerator or incubator program. This was in comparison to only 2 percent that did so through a matchmaking platform like AngelList and 8 percent via an investment conference like Invest Midwest.

It may mean there's a dearth of formal opportunities to get in front of investors, but it certainly reads as a strong indicator of the bonds being made between young companies and their advocates. Community and connections, once again, are vital.

Those young companies have a lot of decisions to make about their growth and where to allocate time with limited runway. Accelerators and incubators are sprouting up everywhere right now—Straight Shot, NMotion, The Garage, Think Big, SparkLabKC, BetaBlox, T-REX, StartupCity Des Moines and the Iowa Startup Accelerator—with a lot of questions on how effective they are.

Does the value translate long term? It's hard to know precisely, but our report suggests they definitely have an upside. Thirty-six percent of funded companies attended either an accelerator or incubator, with 26 percent in accelerators, 8 percent in incubators and 2 percent completing both—defining accelerators as timeline-driven, equity-based programs and incubators as educational, resourceful programming without a clear end date.

Compared to the rest of the pool, those startups got a noticeable bump in funding. Companies that participated in an accelerator or incubator program raised an average of $1.1 million compared to the $796,000 for those that didn't. Just as telling, revenue-generating companies on average raised $987,000 compared to $754,000 for pre-revenue companies—60 percent of all were pre-revenue to 40 percent that generated revenue.

All of which makes sense for a group of mostly young companies—a median of three team members at the time of investment—looking for the fastest way to prove themselves. With a short runway, any acceleration can go a long way.

The groups leading their rounds are primarily seed or venture capital funds at 54 percent, while 32 percent of rounds were led by an individual investor and 14 percent led by an angel network. Interestingly, those led by individuals had the biggest size of investment and seed/venture capital funds the lowest—$1.2 million to $730,000. Angel network-led rounds came in at $861,000.

It's a trend we're interested in following. Are angel investors breaking off from networks to take on projects of their own, and are they putting more behind companies because they're passionate about the projects, or is something else at play here?

It all adds up to what we're probably most intrigued by: the pre-money valuations and average amount of financing. Silicon Prairie companies funded in 2013 averaged a $2.7 million valuation and raised $859,000. Somewhat surprisingly, 20 percent said they won't be looking to raise follow-on funds in 2014.

What do the numbers mean and what can we do with them? That's up to you. These are just a few highlights of what we've found. Take a look through the rest of our data and put it to use how you'd like. Then tell us what we can add, delete, alter—anything. We hope this opens up a discussion, and we merely become facilitators.

Then sound off in the comments, too. We'll be taking your comments and asking for feedback from some key leaders to put together a follow-up post on what we can do better going forward and gather insights on the current environment, the forecast you see ahead and more. This is your community and your story to tell.

Check out the table below—go here for a bigger version—for the survey's raw data. For a full electronic copy of the report, email Fred Bauters

 

Credits: Graphics produced by Lemonly.

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