Holt: Early-stage capital isn’t Kansas City’s biggest problem

Rack your brain and create a list of local tech businesses that have successfully raised early-stage capital in Kansas City.

The list is actually quite extensive.

Now try to list the tech firms that have raised later stage capital in Kansas City — defined as closing a round of $5 million or more. It’s going to take you a while.

Late-stage capital is the biggest gap in the Kansas City funding landscape. Of the few local investors even willing to look at late-stage deals, even less will fund a company that hasn’t yet reached profitability. And the reality of the startup tech industry is that most companies looking to raise $5 million or more will still be operating in the red.

While I believe the energy being allocated toward creating more early-stage capital in Kansas City is great, I think we’re ignoring a larger problem: Kansas City needs local investors to fund later-stage deals. Solving the late-stage capital issue will, in turn, create a surplus of early-stage capital.

Early-stage capital is (finally) taking off in Kansas City

There are already many different places an entrepreneur can go locally to raise early stage capital. Organized funds like Flyover Capital are actively making investments and there are numerous angels who will invest in early stage technology businesses.

Jeff Dunn, CEO of Sora Medical Solutions, recently raised early stage funding from local angels and has a positive outlook for the area’s investment climate.

“We found that the investment community was very receptive to our call for capital needs in our early funding stage,” Dunn said. “Sora was able to secure nearly $1 million of seed investment last October.”

Many businesses have had similar positive experiences, although there are also examples of businesses that have struggled to locally raise early-stage capital. From my perspective, this isn’t a problem.

Regardless of the amount of early-stage capital we have locally, there will always be entrepreneurs who find this process easy and efficient and others who will find it difficult to navigate. I’ve successfully raised early-stage capital in Kansas City twice and unsuccessfully raised early stage funds in Austin and Silicon Valley. Every market has entrepreneurs who will experience both sides of the coin.

Late stage capital almost always comes from outside KC

In the past two weeks, I’ve had three conversations with local entrepreneurs who have successfully raised early stage funding but are concerned about being able to stay in Kansas City when they have to raise their next round.

That’s because the record is clear: over the past few years, area companies that have raised late-stage funding have all found it outside Kansas City. Netchemia, now People Admin, raised $6.5 million in 2013 from Mainsail Partners in San Francisco. Farmobile raised $5.5 million in December from Amsterdam-based Anterra Capital. C2FO brought in $9.1 million in 2012 from Union Square Ventures in New York.

Although there are likely strategic reasons each company partnered with each capital source, Kansas City isn’t without its own strategic advantages — except for the availability of late-stage funding. The bottom line is that entrepreneurs looking to locally raise later-stage capital have extremely limited options. And having to go elsewhere for funding increases the chances that the company will have to move.

But local late-stage funding has a snowball effect

You may be wondering why this is an issue if the good, local companies are able to secure later stage funding in other places. Investors who participate in later rounds and write bigger checks will, over time, do much better than an investor who writes a smaller seed-capital check in an earlier round.

While the percentage return to the early stage investor may be greater on an individual deal, the amount of money made on an exit will almost always be greater for the larger investor in the later round. If Kansas City can do a better job giving entrepreneurs options for later stage capital, more proceeds from a successful exit will stay here. And, as a result, there will be more investors with capital looking to fund early- and later-stage deals.

The focus and momentum behind solving the capital problem for entrepreneurs is great for the community, it just needs to be shifted to include the real money-maker deals. 

Travis Holt is a co-founder of Brush Creek Partners, a risk management, due diligence and insurance firm. Follow him on Twitter at @TravisSHolt