Darcy Howe to fellow investors: Embrace 21st century investing

Editor’s note: The opinions expressed in this commentary are the author’s alone.

The future of Kansas City entrepreneurship and business looks brighter than ever. And I am really excited!

That’s because after helping manage the private wealth of some of the area’s most affluent families for more than 30 years, I’m beginning to see a new investment opportunity on the horizon which can draw us back to the roots of Kansas City. It’s one that may help bring private investing into the 21st century, for the betterment of not only the families opening their portfolios to new opportunities, but for local entrepreneurship as well.

But let’s back up a little to what the “old school investment” has looked like.

Many of Kansas City’s wealthy families are understandably conservative with their investments. It’s a caution that is tempered by an astounding, open-hearted willingness to give back to the community through philanthropy.

A conservative investment philosophy coupled with a philanthropic mindset has helped to sustain family wealth and community prosperity for several generations. That is a good thing. Yet I have seen another path to help Kansas City prosper, and it involves combining these philosophies.

That’s because times are changing.

[pullquote]

“The early growth of Kansas City was fueled by young companies, many of which still stand today.”

–  Darcy Howe[/pullquote]

Like many of these families, I am a capitalist. I believe that business holds the key to growth as a society, and to solving many of the world’s problems. From the invention of the lightbulb to getting a handle on some of the world’s most prevalent illnesses, you’ll find contributions from for-profit businesses.

In my experience, money follows innovation — and even as recently as 20 years ago, most world-changing innovations were still happening in corporate R&D labs. This was great for investors, because big business meant stability, which meant a safe place for their equity investments.

But you may remember that even a couple decades ago, business was beginning to evolve. The growth of the internet dropped the cost of starting a business. Brilliant minds were creating new ideas, not in corporate labs, but in college dorm rooms and garages. And tech advancement began to redouble so quickly that it no longer was the purview of just large corporations.

So venture capital — as we know it today — was born. Soon, even previously-conservative hedge funds were jumping on the tech startup train. They realized that funding startups now meant getting in on the ground floor of the next Fortune 1,000 companies.

While some families of wealth have quietly led early-stage funding in Kansas City, for many,  little has really changed. The concept of “startups” and their statistically high risk of failure has kept many privately wealthy families focused on lower-risk investments and philanthropy. Yet the early growth of Kansas City was fueled by young companies, many of which still stand today.

How can we change the mindset of Kansas City’s affluent families who do not yet invest in early stage companies?

[pullquote]“Viewing the risky nature of startups with Kansas City’s well-ingrained philanthropic eye is possibly one of the greatest gifts we can give to our city’s future.”

– Darcy Howe[/pullquote]

I believe it comes down to two things: familiarity and a slight tweak in the investment/philanthropy philosophy.

First is familiarity. It’s hard to see startups and entrepreneurship as viable investments if many of the area’s affluent have no frame of reference. Successful exits where investors made money are shared by only a few and often quietly.  

Some of that change is happening naturally. The next generation of these families has been surrounded by tech most of their lives. They know people their own age who founded startups. And some may call it the hubris of youth, but they’re more willing to take risk, especially at a stage in life where it has fewer consequences.

Added to that are the people willing to build bridges of understanding between the local investment and entrepreneurship communities. To add to those efforts, a few like-minded people and I began hosting meetups, inviting affluent families and local entrepreneurs to talk on level ground about their objectives and concerns.

I’ve been thrilled by the willingness of people of means and corporations to meet. Most have been open-minded about hearing the story; we’ve been building more connectivity and more understanding, even though the conversation still sometimes ends with, “this isn’t quite for me.” Not every town would have people willing to even take that first meeting.

The second part of this is tweaking the investment/philanthropy philosophy. And that’s because startups fail; even the seemingly solid, sure-thing startups. Yet between founding and a startup’s eventual success or failure, there are still opportunities and benefits, namely job creation. Young companies are the fuel for the U.S. job creation engine, which in turn drives our entire economy.

Viewing the risky nature of startups with Kansas City’s well-ingrained philanthropic eye is possibly one of the greatest gifts we can give to our city’s future.

Just as philanthropy is seen as an investment in the future of our community funding education, training, caring for the sick and needy; so, too, venture capital is an investment in the future of our community by supporting job creating innovation which can lift many boats.

But there still have to be ways for these families to invest.

Reserving a small percentage of their portfolios for early-stage investing would radically change Kansas City’s investment climate. But we first need clear paths to how that can happen.

One of the main roadblocks I’ve encountered in talking with the area’s wealthy families is the solicitor’s dilemma. Few want random entrepreneurs knocking on their doors. From pre-pitch vetting to due diligence to portfolio management, the venture capital process requires time and expertise. Many people I’ve spoken with have said, “I did that once and it didn’t work out.” Like all endeavors, success is a result of the process, and venture capital investing requires deep process, a portfolio approach and significant time and effort for it to be successful.

Until recently, Kansas City didn’t have a way for area investors to easily — and locally — tap into venture capital. But that, too, is changing. To name just a few, Kansas City now has Royal Street Ventures, Flyover Capital and The Collective Funds. And not to toot our own horn too much, but we will soon have a first close for the expected $20 million KCRise Fund, a co-investment and multiplier venture capital fund that will exclusively invest in area businesses.

All of my experiences tell me both the money and the ideas are already in Kansas City. We just need to bring them together!

Darcy Howe is the managing director of the KCRise Fund and board member for many local ventures. Before “retiring,” Howe worked at the Merrill Lynch Private Banking and Investment Group for 31 years, beginning as a financial consultant and ending as first vice president of investments. She is a founding member of the Women’s Capital Connection and has been an angel investor in early stage companies for over 20 years.