Reflections & analysis about innovation, technology, startups, investing, healthcare, and more .... with a focus on Minnesota, Land of 10,000 Lakes. Blogging continuously since 2005.

Category: Startups (Page 2 of 29)

The Startup Surge to End All Surges?

Photo by Chuttersnap via Unsplash

As big trends go, I’d label this one blockbuster. Startup formation is on fire. It jumped 24% year-over-year in 2020 here in the U.S. Consider this from the Economic Innovation Group:

“A new Census Bureau dataset allows us to track early-stage entrepreneurial activity in almost real-time. For the duration of the pandemic, the Bureau’s Business Formation Statistics series has provided a detailed look at the number and character of new business applications on a weekly basis. Its findings suggest that the pandemic delivered a massive shock to American entrepreneurship that has seriously altered established trends in new business formation. Counter to expectations, 2020 shaped up to be the best year for business applications on record.” (Emphasis mine.)

bar chart of business applications

Then there’s this analysis from Oberlo:

“In 2010, the number of new business applications came in at 2.50 million. But as new business statistics show, in 2020, 4.35 million applications were submitted. That’s a whopping 74 percent more. It is also a 24.19 percent increase from 2019 and the biggest increase of the past decade by a mile.”

[Note: This post first appeared as an article on Grit Daily.]

I’ve experienced (and survived!) at least five technology/business cycles since going entrepreneurial and founding my consultancy more than three decades ago. And each of these cycles drove a startup surge that was considerable. (One, the dot-com cycle, saw a reversal for a few years after it peaked in 2000. So, surprisingly, did the startup surge driven by the advent of the smartphone era, but that was due to the financial crash of 2008.) I benefited greatly from every single one of those surges – getting to partner with so many wide-eyed entrepreneurs who were doing some crazy, innovative things and reaped some big rewards.

But this latest explosion of startups – call it the Covid Surge, the #WorkFromAnywhere Surge, the Digital Transformation Surge – whatever name you want to hang on it, this baby stands well above the rest.

line chart of new business applications

It’s More Than Just the ‘Cool Kids’

Today, it seems everybody wants to be a startup. Or at least work for a startup. Or start planning a startup. Or marry someone who has a startup. There’s even a term for those who wish they could do a startup, or who dream about doing it someday: “wannapreneur.”

Quite simply, these people just do not lust after a traditional career anymore. Seriously, when do you remember a time you felt this sorry for big corporations? They’re so unloved. (Wiping a tear.) Who in their right mind wants to work for one company for the rest of their career – or, hell, even five years anymore?

You, Mr. or Ms. Millennial, GenZer, GenXer, or even Boomer, have other ideas about how you want to live your life. In charge of your own destiny – that’s what. With a chance to build wealth well beyond what you could as an employee for the rest of your life.

Do I get an amen?

The Great Resignation: ‘Been Nice Knowing Ya, Boss’

What I say is driving this latest startup-surge-for-the-ages is not Covid, and not #WorkFromAnywhere, per se – rather, a by-product of it. It’s called freedom. People got a taste of freedom of when they want to work, and where. And, for many, how they do that work – without being under the nose of some boss.

Surely you’ve seen multiple stories by now about how so many people are quitting their jobs rather than go back to the office. LinkedIn alone will bury you in them. (Which raises the question, why do they write so much about all this quitting when it obviously affects their model? No question they’re quite dependent on big companies and their recruiting ads, and all the ladder-climbing robots who flog their corporate accomplishments on the platform. Makes you think LinkedIn is really going to need that freelance marketplace platform we keep hearing rumors about if it wants to keep growing anywhere near like it has.)

Granted, not everyone who’s quitting their job is doing a startup. Some are taking different jobs (duh). A slew of others would describe what they’re doing as simply “going freelance.” But many if not most of those are forming a legal entity to do that – the Company of Me – which shows how serious they are. It seems fair to assume the majority of these new entities are “solopreneurs” initially. That may or may not fit your definition of a startup – but, regardless, today we’re looking at huge company formation numbers overall, those that have already happened in 2020 and the similar numbers rolling in for 2021.

If you’re into economics, more great insights come from this article, including the following:

“There is a widespread perception that small businesses create the most jobs in the United States and other advanced economies. Research suggests that it is new businesses (emphasis mine), not small ones, that create these jobs (Haltiwanger et al. 2013). Studying the patterns in startup activity is hence an indicator of future employment growth.”

A Telling Finding

Amazingly, a survey just published by Digital.com found that one-third of workers who quit their jobs within the last six months started a business. That is just an unprecedented number in my experience!

graphic of workers starting businesses

More insights from the survey:

“Sixty-two percent of respondents say they are starting a business to be their own boss, and 60% say they are passionate about pursuing a business idea… Although many respondents say the pandemic influenced their decisions, they also cite several reasons for leaving the workforce. Forty-four percent of workers quit their jobs because they want better wages and benefits, 42% want to focus on their health, and 41% desire a more rewarding career. Sixty percent of new entrepreneurs learned about launching a startup business during the pandemic lockdown.”

Many startups begin life as personal service companies. Some of those actually go on to become product companies, whether hardware, software, even manufacturing businesses. A great many upstarts during the Covid era were founded as retail or ecommerce ventures. Online shopping went ballistic during the pandemic, and so many smart entrepreneurs took advantage of that.

It’s Easier Today

Historically speaking, entrepreneurs in the U.S. today have it pretty nice.

Consider all the factors that make their plight not nearly as difficult as it used to be:
• The low cost of starting a business
• The speed of creating a business entity (at least in most states; looking at you, California)
• Accessibility to capital, with a myriad of funding sources
• The low cost of capital these days
• And so many resources to learn how to do a startup, with organizations (both for-profit and nonprofit) practically tripping over each other to help entrepreneurs. These resources encompass many low-cost and even free services – coaching, classes, mentorship, accelerator programs, competitions with cash awards, and the list goes on.

Speaking of resources for starting a business, the outfit that sponsored the above survey, Digital.com, offers a wealth of links for new entrepreneurs.

So, What Are You Waiting For?

There’s never been a better time. But then, I’m biased.

 

I Wrote Another Article for Grit Daily… This Time on Startup Grit

Grit Daily is a very cool media site based in NYC. It was founded by an amazing guy named Jordan French (seriously, read that bio). And he has a bunch of other great team members around him. (You should subscribe — support independent journalism you won’t find anywhere else!)

I was introduced to Jordan by an another amazing guy, who’s based right here in the Twin Cities: William Harris. He connected me with Jordan right before I headed off to SXSW in March 2019. Jordan was kind enough to accept me as a contributor, and I wrote my first piece for Grit Daily on my experience at that crazy event: “Partying at SXSW for Your Health.” I wrote another piece in the ensuring months that included one of my most favorite topics, Apple: “Amex, Apple vie for top spot in heated ‘metal card’ wars”... about my weird love affair with a couple of new credit cards.

Fast forward to the beginning of 2021 — what we all hope will be a much better year — I just published another article on Grit Daily. This one is called, “10 New Year’s Resolutions If You Think You Have a Startup In You.” It aims to help anyone who’s thinking they’re ready to quit their day job and go off and build something big. Hope you like it. Tell me if you do!

 

 

Start a Business During a Recession? Yes, Take the Plunge!

photo of diving board

Photo: Markus Spiske, Unsplash.

Are we in a recession? Who knows? The definitions can be arcane. But we are in a massive government-initiated reaction to a public health crisis — that we do know. The talking-head economists will argue the meaning of the “R” word and when one actually begins (or ends). Blah, blah, blah — who cares? Some are calling what we’re in now just a “hibernation.”

The point I want to make is that, regardless of what we call a downturn in the economy, it can actually be the very best of times to start a business. I know something about this topic. I started my business during a recession — a year in which U.S. unemployment jumped faster than at any other time (well, until 2008-09). Did that scare me? Hell no! Because I knew I had something — customers weren’t getting what they needed from the established incumbents. And I survived three other recessions because I adjusted and simplified — reinvented myself and my business to meet the new realities.

So, buck up, people! Think of a recession as a challenge. The opening of a new door.

Why can starting a business during a recession be the right time? I’m hardly the only one who knows these truths. I loved how Australian startup founder Alec Lynch framed it when he wrote in Forbes after the last major recession (the 2008 financial meltdown), “10 Reasons The Best Time To Start A Business Is During A Downturn.” Here’s his list:

• People want innovation

• People want to save money

• Incumbents are vulnerable

• Good people are looking for work

• Things are cheaper

• Lower interest rates means cheaper credit

• You will have fewer competitors

• Smart investors want to invest

• Downturns give startups negotiating power

• You’ll build a lean startup with good habits

Some further perspectives on reasons why now is the best time to launch a business come from a guy named Brad Sugars, who penned a great piece in Entrepreneur magazine post-2008 recession, “Top 10 Reasons to Start a Business in a Recession.” One excerpt: “Just go back and look at the economic slowdowns throughout history. Most recessions in the post-World War II era last an average of 10 months, followed by growth cycles that last an average of 50 months. What this means for the startup is there’s no better time than right now to get going and start pursuing your business dreams — in anticipation of the next period of growth.”

You won’t find his list much different than Alec’s, but he does offer up one other key point: “You can get good PR by showing you are going against the trend. The media loves aberrations, and if you are optimistic by expanding or getting into business now, you would be in that category. That means you can generate some great PR by demonstrating your ‘alternative’ view of the market.”

And you have to love how he wraps up his piece: “There’s no better time to start than the present, especially if people around you are more comfortable with their own list of reasons why they shouldn’t start pursuing their own business dreams right now. It only means you’ll be facing a lot less competition.” Bingo!

Edward D. Hess, a business professor at the University of Virginia, coauthored a book called, “So, You Want to Start a Business? 8 Steps to Take Before Making the Leap.” Among his key points is having a clear understanding of your value proposition. “You need to decide why someone is going to buy what you have to sell. You must have a message (my emphasis) to customers about why you’ll be better, faster, or cheaper than the competition.” And to develop that, you need to talk to them directly and get to intimately know their needs.

Yes, it all comes down to this: will people pay you money for what you’re offering, and why? And remember, there’s a big difference between a business idea and a profitable business idea. The good news is there are tons of resources out there to help you start and run a new business. Read, think, plan, talk (a lot)… and build confidence.

Then dive in!

—————-

UPDATE 6/9/20: I told you to start your business 🙂 … It’s not too late!

“U.S. had shortest recession in history: Economist Mark Zandi” | Fox Business Video

 

Ten New Year’s Resolutions… and I Intend to Break Them All

champagne toast

Have you been doing a lot of thinking about making changes in 2020? Yeah, me too. Well, I did for a little while, anyway. And I actually came up with a few things I could resolve to do. But I quickly came to my senses. Nah! — why would I do these things? Here my list of discarded resolutions:

1) I will not tweet so much about $AAPL.

Okay, I admit it. What I do on Twitter, week in and week out, is over the top — all my cheering for the best company, and stock, in the world. But no chance I will stop. Sorry — I’ve been an investor in $AAPL since 1990. And it’s just too much fun trolling the Apple haters. (It’s hell to be right.)

2) I will go to SXSW again in March.

Don’t think so. Got the t-shirt. Don’t even wear that. No CES either — and no Times Square New Year’s Eve (like I ever did or would). You get the idea.

3) I will have coffee with every single person who wants to “pick my brain.”

Are you kidding me? Just seeing if you were paying attention. (And, yes, that awful phrase is actually still being used by some people.)

4) I will stop telling startup founders their pitch decks are… lacking.

I can’t — that would be impossible. Because 90% of them are pretty bad in my long experience. (And the other 10% can use a boost.) Haven’t seen one yet that can’t be improved. And don’t get me started about Executive Summaries. But I try my damndest to help folks with both.

5) I will quit Facebook.

No, I do still post to it once a month or so. Yeah, that’s about it. So, it’s still worth a teeny bit to me. Still ticked that they stopped allowing all my tweets to go automatically to my Facebook feed. That made my Facebook friends think I was amazing — posting multiples times per day. Little did they know I rarely ever went there… muahahaha!

6) I will sign up for a paid account on LinkedIn.

Thought about that for a microsecond. Are you kidding? What a rip! Who’s in charge of pricing at that place? Don’t they know that a large percentage of the population doesn’t care about the traditional, corporate work world anymore? They don’t care about a site for job hunting and job hopping and touting all one’s multiple advanced degrees. Soon, 40% of the workforce will be freelance or contract workers. And a recent survey found 51% of those folks would never take a traditional job, no matter how much it paid. Sure, LinkedIn’s an okay networking site. So I’ll keep using it for free. Thanks, Microsoft!

7) I will stop ignoring LinkedIn connection requests from people I don’t know or from countries I never intend to visit.

Haha! Just checking again to see if you were paying attention. And is LinkedIn (and Microsoft) really proud of having created a channel where so many jerks are trying to sell crap all day long?

8) I will spend more time at WeWork.

I didn’t spend much time when I got a free account for a year (which will end soon), so why the hell would I pay for it?

9) I will be more discerning about what clients I take on.

No, I will be extremely more discerning.

10) I will work really hard to get more followers on Instagram, and will open an account on TikTok.

Yeah, when Hell freezes over.

That’s it. Ten things to start my 2020 right! Now, off to work out and lose a few pounds… 🙂

Startup Fundraising – What Works in Minnesota?

100-dollar bills in the snow

No word is uttered more often in startup circles, here or anywhere, than that dastardly F word. More ink is spilled and blather thrown around about it than virtually any other topic in the startup world. Who scored a round this week? Why is raising money so hard? When will we have more funding in our town (state, region)? Blah, blah, blah, and more blah. Multiple media outlets fall all over each other to breathlessly report on any successful VC raise (and even sometimes angel raises) as if it’s the equivalent of being drafted into pro ball or something. And I’m not just talking Minnesota — reporting on fundraising news and tracking the ongoing raises of startups is a veritable global industry unto itself.

Why is the topic so ever-present? Should we really be spending so much time talking and worrying about the process of attracting other people’s money? Or, as many founders might suggest, would you be better off to just shut up and bootstrap, focusing on attracting customers instead?

(Note: This article first appeared at Starting Up North, in two parts, both of which are included here.)

I wanted to probe the minds of a bunch of folks I know and admire here in my home state—founders and investors (many of whom also serve as mentors and advisors), plus some recently successful entrepreneurs— to get insights from their experience, and some useful advice.

What have they learned about raising money here in Minnesota? What works to get a startup going? What doesn’t? What’s realistic? What isn’t? Our objective was to try to help you better understand what really goes on out there behind the scenes, not just what you may hear, or read in various reports and stuffy press releases. And also to maybe break some stereotypes. [In my interviews, I asked the founders a similar set of questions, and of course, a different set of questions for the investors. The viewpoints of each didn’t always align exactly with their peers, but they were all quite forthcoming, for which I’m most grateful – and, hey, we all benefit, right?]

Think Before You Raise

One piece of advice that came up more than once about startup fundraising related to the question of why. “Make sure you really need it,” said Chip Pearson, cofounder of JAMF Software [which was acquired by Vista Equity Partners in late 2017 for… a large number] and now at Bootstrappers.MN. “There seems to be a missing component in people’s thinking regarding funding and business plans. If you don’t have a plan on how you can run your business without funding – albeit slower — then you should really spend the time on that problem and then raise money. The other thing is many people starting out see fundraising as a finish line and not a starting line. At best, fundraising is a distraction. At worst, it becomes the only thing that founders think about.”

This raises the question of, can you generate revenue? “Currently, Minnesota angels like to see traction in the form of revenue or meaningful market validation,” said Sara Russick, cofounder of Gopher Angels and a partner in the Capita3 fund. “They want to know the entrepreneur understands how to sell the product. This is a change from when we launched Gopher Angels in 2012. Then, angels were coming in earlier. Now, there are so many companies to look at, and a limited number of angel investors, so we’ve seen a shift in the stage where they want to come in. This is hard for early entrepreneurs because they need that really early, pre-seed capital. Gopher Angels does follow-on in about one-third of our companies, helping them get through that seed stage.”

One founder’s caveat: “A focus on revenue is the most important thing,” said Markus Mueller, cofounder of FashionBrain.ai, based in Duluth. “However, it’s important to focus on the right revenue — not all revenue is created equal. We coined the term ‘toxic revenue’ for that which is opportunistic and does not really grow the company to being profitable and sustainable. Revenue, yes — but only if it’s generated the right way and secures the future of the company.”

I asked another founder how she feels about focusing on customer revenue instead of raising outside investment. “It’s extremely important to pursue customer revenue right out of the gate,” said Mary Fallon, cofounder of Kidizen. “Outside investment is meant to accelerate the growth of a proven business model. No one will invest in you these days unless you have demonstrated that many customers will pay for your solution, however you define ‘payment’. It needs to be a repeatable interaction. In the ‘either/or’ scenario of this question, it comes down to how much of your business you’re willing to give up to accelerate that growth.”

Warning: Are You Ready?

Dave Russick, cofounder of Gopher Angels, offered this advice to founders: “One, do your own diligence on your future investors. Make sure you find ethical and non-predatory investors. Secondly, make sure you raise enough. Don’t low-ball your funding needs.  Raising takes a lot of time. A founder does not want to have to seek funding every six months. What if you don’t achieve your optimistic projections? And, finally, have a funding strategy. Know what your funding needs may be through the next two or three rounds, and plan accordingly.”

I asked Chip Pearson if founders understand how long it realistically takes to raise a round of angel or VC funding? “Not at all,” he said. “It is a tremendous distraction with a number of levels to it – pitch, term sheet, closing. I was surprised how long it took even with two different, highly capable, experienced CFOs running the process.”

What Fundraising Options Are Founders Pursuing in Minnesota, and Why?

Raising money from Friends & Family. Several I spoke with had something to say about this option. “Many professional investors love to see a friends and family round prior to investing,” said Chip Pearson..” The logic is that founders may not care about losing institutional money, but they don’t want to face a Thanksgiving dinner where they lost their parents’ money.”

Another viewpoint was offered by Jeff Robbins, a partner at Avisen Legal, and founder/organizer of investor group Angel Pollination. “Doesn’t matter. Good investors evaluate an investment potential on the opportunity, the team, and the progress, regardless of how the founders move the ball.”

Several of the founders I talked to for this story raised money from friends and family as their first outside money, including Markus Mueller of FashionBrain; Mary Fallon of Kidizen; and Susan Langer, founder of LiveGiveSave. More from them later.

Seeking out Angel Investors. For most startups, significant funds first come from this source. It’s a big topic here in Minnesota, discussed daily in every corner of our startup community, because, quite simply, it’s how the vast majority of pre-seed and seed-stage startup funding has traditionally happened here in our state.

A favorite question is this one: just how risk-averse are Minnesota angels? Do they deserve the reputation? “For the most part, Minnesota angels are conservative,” said Gopher Angels’ Dave Russick. “There are a handful making bets, but most that do are investing in low dollar amounts to spread the risk.” Gopher Angels now has about 80 members and meets every other month, said Russick, and between 40 and 50 attend a typical meeting, depending on the time of the year. “We live stream and record each meeting. There are usually up to an additional 10 to 15 participating via the live stream or watching the recording after the pitch meeting.”

Dave’s wife, Sara Russick, cofounder of Gopher Angels, has this view: “First, if you’re investing in any startup at all, you’re not risk-averse. Minnesota angels value quality. They’re smart and experienced, and bring an analytical lens to how they invest. They’re not ‘heart and gut’ investors, not chasing the next shiny object. This also means that they’re committed to the success of the startups they invest in. They give lots of time and make meaningful intros—they’re really available to the entrepreneurs.”

What’s the perspective of some of the founders I surveyed for this story regarding angels, and their personal experiences?

Eric Martell, cofounder of a new startup called Pear Commerce, who’s working out of the Osborn 370 startup hub in downtown St. Paul, has had a variety of experiences with angel investors – in both Minnesota and Wisconsin. “My first startup, EatStreet [Madison WI], has raised $49M to date, $45M of which was raised while I was there,” he said. “Those raises spanned regional angels to midwestern VCs to nationwide funds to international funds. Admittedly, I was riding shotgun to my cofounder, Matt Howard, who is still CEO at EatStreet. Locally, I raised $1.5 million from angels to get Gener8tor Minnesota off the ground. This was a great learning experience for both raising local money and also running a micro VC fund. Most recently, Pear Commerce participated in the Brandery startup accelerator and received an investment as part of our participation. We haven’t announced our other funding yet, but watch for some news coming!”

Eric continued: “Here in Minnesota, I’ve raised from both local angels and regional VCs and think both work well. I’ve found angels to have a slightly lower risk tolerance than VCs — which might surprise some people. I have a theory about this: If you’re an angel, unless you’re very fortunate to have investable time and cash to build a true portfolio, you probably will err on the side of more caution because you can’t make the sheer quantity of investments a fund makes — time and cash! If you have three shots in a game of horse, you’re probably not taking any of them from half-court. A fund has a bit more of a luxury to place safer bets — more traction — and take a couple of those half-court shots because, if one goes in, you know you’re going to cover the whole fund. I think the best path to more early-stage fundings in Minnesota is for more funds to supplement the incredible activity of our local angel scene, which I really admire. We need a few more local VCs. But, much love to all the existing local VCs!” [Note: we’re not addressing traditional VC in this article, as we’re focusing on early-stage fundraising.]

Susan Langer, founder of fintech startup LiveGiveSave, based in Red Wing, also found her way to obtaining angel funding: “To date, we’ve raised just shy of $500,000 from family, friends, and a local angel group through two convertible notes. The first note did not mandate conversion to the equity round; the second did.” What worked best for her here in Minnesota? “The community! I was able to build on and network through existing relationships, as well as tap into the growing ecosystem in the Twin Cities metro and Southeast Minnesota. It was a labor of love, as I met with old and new friends to share my vision. Meeting Neela Mollgaard, former executive director of Red Wing Ignite, was a godsend. [Neela is now head of Launch Minnesota, an initiative of the Minnesota Department of Employment and Economic Development.] She connected me with valuable resources, all of whom offered, and continue to offer, measurable support — from mentoring and professional services, to pitch competitions and funding. Four years later, all have contributed to getting us where we are today – a working product in the App Store generating revenue.”

How did Kidizen get to angel funding and ultimately a VC round? “Like many startups, we began with seed money from family and friends and worked contract gigs to make ends meet,” said Mary Fallon, cofounder. “Concurrently, we pursued a few startup competitions, which helped subsidize our bootstrapping and helped us get our name out. Google for Entrepreneurs was one of the competitions that really propelled us down our path. In turn, that helped us raise our first round of convertible debt from angel investors. We followed up with a Series A round led by Origin Ventures in Chicago. We’ll be looking to raise our next round in 2020.”

Markus Mueller of FashionBrain: “Under our previous name (Tryon Media), we did a family and friends round, which obviously was after we had invested our own savings in the company. We then also raised angel funds — about $2 million from 2014 through 2016. Some investors also carry notes with the option to convert to equity.”

What has his experience been with angel investors in the Duluth area? “When I first convinced a few local angels to invest, they opened their networks to help me identify other potential investors. Several of our investors have invested more than once, and a few have more than tripled their initial investment.”

Alternatives: What About Bootstrapping?

I asked some founders how they scraped by early on. Is bootstrapping a viable option? How far can it take you? “We grew my previous company from $3000 pooled from the founders to mid-six-figure revenue per year while we were still students [at UW-Madison],” said Eric Martell of Pear Commerce. “I think timing and opportunity need to line up, and it’s totally possible. But my current company could never exclusively bootstrap to scale. It really depends on what you’re building that determines if that’s a viable path.”

Susan Langer of LiveGiveSave: “Before raising funds from family and friends, Red Wing Port Authority, Southern Minnesota Initiative Foundation, and a small amount from a newly-formed local angel group, my husband and I depleted our emergency and retirement savings. I obtained loans secured by our home and life insurance. In hindsight, I would not have done that with our home, as it created a significant barrier for us when we wanted to get a home equity loan to pay off personal debt.”

Markus Mueller of FashionBrain told me how he bootstrapped: “We started out in a floral-wallpaper adorned former master bedroom and moved out when we were five people, then moved to a 300 square foot office space in Duluth’s Canal Park. We still bootstrap on office space and are actively considering remote work for the entire team and company. We also bootstrapped in other ways. However, it’s wrong to think or assume that bootstrapping can help you avoid fundraising. We bootstrapped to be conscious of the use of funds — not to avoid having to raise funds.”

Mary Fallon, cofounder of Kidizen, which began in 2010, had some great insights: “If you’re choosing the bootstrapping path, you’re willing to take little or no salary while working more hours than you’ve ever worked before. It’s often not a choice but a decision you make based on the passion for your solution paired with a lack of independent wealth. It helps to have a strong support system made up of those who are most affected by this decision, which for me is my family. When Dori, my cofounder, and I started out, we were told that we weren’t your typical startup cofounders. ‘Typical’ meant you were young, male, and willing to sleep on peoples’ couches to circumvent rent or a mortgage. We had husbands and young children and were not in our twenties. We failed many times on our path to now. Bootstrapping is viable, yes – if you can produce strong revenue growth while keeping operating costs low. Then your chances of scaling without outside funds are better.”

Another amazing, more recent story about bootstrapping comes from Mary Kay Ziniewicz, founder of Bus Stop Mamas, which I wrote about here.

Two Different Funding Approaches – One Repeat Tech Entrepreneur

Daren Klum is a Minnesota tech entrepreneur who first cofounded LiquidCool Solutions (formerly known as Hardcore Computer) in 2006, based in Rochester, MN. More recently, he founded Secured2, Minneapolis, a data security company. What did he do differently in those experiences? “In both my startups, we initially followed a similar path. We raised capital from friends, family, and small funds. In the case of LiquidCool, we went the VC route for our Series A and B. At Secured2, we’ve bypassed the dilutive nature of VC. Instead, we’re doing alternative financing to scale the business, working with the largest sell-side M&A firm for software companies in the country.”

What has been his experience finding capital here in Minnesota? “We had tremendous support from friends and family in Minnesota for the early rounds in both my companies. However, the bulk of the $40 million we raised for LiquidCool came from out-of-state sources – in North Dakota, Wisconsin, and California. And most of the $6 million raised so far for Secured2 has also come from out-of-state — Virginia, Ohio, and Michigan. We’ve found larger capital amounts to be very hard to find in Minnesota.”

Klum said he bootstrapped both his companies in the early years. “Without showing a proof of concept and customers, we couldn’t ask anyone to invest. Was bootstrapping a viable option? Yes, I recommend all entrepreneurs bootstrap to minimize the risk for their investors,” he said. “Bootstrapping can replace a seed round if you do it while you have a job. I built my first company this way. I worked a full-time job and, at night in my free time, I would build my new business. Once I had enough built to justify investment, I was able to raise capital and quit my day job.”

How did Klum find and connect with angel investors? “I found all my angel investors through my network of friends, family, and colleagues. As well, I’ve been fortunate to get a couple investments from customers and relationships I built while growing the business.”

How long can a funding round take? “In the early stages, it can go very fast, because you’re generally working with people you know – friends, family, colleagues,” Klum said. “The more time-consuming capital raising comes when you get to your Series A and B rounds. The stakes are higher, there’s more due diligence, more risk, and obviously a lot more capital in play. So, generally, any round past your seed round logically takes more time to land. It can be months or even years to close larger funding amounts. It depends on the type of financing — debt, equity, or convertible.”

How Easy (or Hard) Is It Getting That First Check?

I asked Daren Klum what it was like taking that first investor check. “The first check is always the hardest – it’s usually family, and can be a very sobering experience. Once you take someone’s money, you’re committed and there’s no turning back. I see far too many first-time entrepreneurs take that first check, and then the going gets hard and they quit. Quitting is final. If you quit, you can’t reach success.”

Another viewpoint came from Markus Mueller, the founder of FashionBrain. “Getting the first check wasn’t hard at all — at least it didn’t feel that way. But there was a lot of effort that went into preparing the first pitch deck and engaging potential investors. Pre-work is key — by the entire team. They had my back, as the CEO and key fundraiser. Without their help, I would not have been able to do it. It does not get easier – in fact, I believe it gets harder. So, my advice is to focus and raise money as fast as possible with all effort on fundraising, and then return to driving the company’s business development. I made the mistake to raise funds over more than two years — and I regret the lack of focus the came with that. Know exactly how much money you need — raise exactly that. Don’t oversubscribe by more than 10%, for example. And use the funds to grow your company, to create value. Then, if necessary, raise more money at a higher valuation.”

How hard does Eric Martell of Pear Commerce say it is to get that first investor check? “I think this is a total case-by-case question. It was super hard to get early investors at EatStreet, then easier. I’ve seen companies exactly the opposite. You might have a very compelling vision or track record and get first checks easily, but then need to prove results. Likewise, if you’re a Minnesota tech company doing over $10 million in revenue, you’re flying in some rarified air and are likely to get a ton of love on a larger round.”

Rob Walling is the founder of TinySeed, a startup accelerator designed for bootstrappers. (Previously, he founded Drip, acquired by Minneapolis-based LeadPages, which adopted the Drip name.) I asked him if raising friends and family money is important before looking elsewhere. “Prior funding is less important than how much traction – for example, revenue – a startup has. I’d rather write a check to a founder who is capital efficient enough to make it to revenue without raising any funding.”

Should VC funding be so glorified? When is it the right way to go? “VC funding is simply one way to start a company,” said Rob. “It should not be viewed as a goal or having ‘made it.’ VC funding comes with a pretty major set of drawbacks, and founders should know what they are getting into before signing a deal.”

Can the Crowd Help?

A non-traditional option some have pursued here in Minnesota is crowdfunding. Since Kickstarter entered the national scene several years ago, many founders have tried it or its competitors. But, frankly, only a few startups in Minnesota have had great results. That may be changing. Wes Wierson, cofounder of Rochester startup LEAH Labs, is out to cure cancer in dogs. Here’s what he had to say: “Instead of Kickstarter, where you get a deal on a new tech gadget, the crowdfunding platform we chose—WeFunder—actually gets you equity in the companies you support. It’s been amazing for us. In addition to validating the market through testimonials of angel investors who know we’re building a cool product. and pet owners donating on behalf of their fallen furry friend, it brings much-needed seed investment to our business.”

Traditional VC did not fund Wes’ business early on, after he went through a recent biotech class in the famed Y Combinator accelerator program in Mountain View, California. “I think it’s because they really don’t understand our technical science, and, secondly, they’re more risk-averse than they want you to believe. With equity crowdfunding, we’re able to ignite our business based on the passion of dog owners, and the support of angel investors who understand the high reward market we’re building.”

What’s The Current State of the Minnesota Angel Community?

“When we founded Gopher Angels seven years ago, the angel community was limited to hard-to-find individuals or one angel fund,” said Dave Russick, cofounder. “Gopher Angels was able to provide a home for individuals and micros funds to collaborate on deals, which helped fill the funding gap for seed and early-stage companies. Frankly, there was still a greater need for funding than could be provided by GA. Over the last few years, the funding landscape has improved greatly. There are several new funds available to entrepreneurs, many of whom target specific industries. We also now have active accelerators such as Gener8tor and Techstars Farm to Fork that provide seed funding while helping the companies prepare better for the funding chase. There are also multiple individuals and organizations that are serving to connect founders and investors. We even have some funds such as Urban Innovation that have set up offices in the Twin Cities. In short, the angel investor scene here has changed tremendously and changed for the better!”

Joy Lindsay, partner, Sofia Fund: “I think the angel community in Minnesota is healthy and growing. I’ve been an angel investor for 20 years, and it’s probably the most active I’ve seen during that time. There are many new participants to the angel community. When we raised the original Sofia Fund, we purposely targeted women to join the fund who had never invested in the asset class before. These are people who are not only bringing their money but their expertise and network to engage with companies and help them grow.”

She continued: “Dave and Sara Russick have done an amazing job growing Gopher Angels. I was just at their meeting last week. Again, these angels are smart, engaged individuals from a variety of backgrounds and industries. Many have never invested before, but they join the group and learn from each other. The Minnesota Angel Tax Credit has also been a driver of bringing new people to angel investing. As we all know, investing in startups is very high risk, so anything that can be done to support that activity the better. Minnesota has a rich heritage of giving back. While that has historically meant we are very philanthropic, more and more I also see successful entrepreneurs and corporate executives giving their time and talent to invest in and then to mentor entrepreneurs. Like philanthropy, this work is critically important to the economic growth of the state.”

How does startup attorney Jeff Robbins, who also heads the Angel Pollination investor group, assess the current state of the Minnesota angel community? “I’d say better educated on investing and increasingly not doing so. I would add some color to that – our prime angel community is aging out. They’re moving to warmer climates and investing in funds rather than companies. And the recession has delayed the emergence of next-gen angel investors.”

Is that a clarion call to younger angels out there – time to step up?

Sara Russick of Capita3 (and also a cofounder of Gopher Angels) assesses the current situation thusly: “There are so many awesome entrepreneurs who are working so hard. Many more of them deserve funding than are actually getting it. A small number of angel investors can’t fund them all – it’s that simple. We have tons of resources to help grow the startup community. We need more resources pointed at growing the angel investor community.”

Mary Grove, Minnesota-based partner in Revolution’s Rise of the Rest Fund, sees things in a similar vein: “Minnesota’s startup ecosystem has scaled impressively over the last half-decade. It’s an attractive place to start and scale a company. From the density of Fortune 500s to the talent pool to the capital efficiency of building here. That said, there is still a large gap at the early stage in the funding landscape, especially at the Seed and Series A stage across most sectors.”

What Does the Future Hold for Startups Trying to Raise Capital in Minnesota?

Rob Walling of TinySeed says things look good: “The more Minnesota startups that have success, the more our ecosystem grows. I’ve been in town for three years, and, even during that short time period, I have noticed more events, more startups, and generally more action in our local startup ecosystem.”

Sofia Fund’s Joy Lindsay also likes what she’s seeing. “Raising money for a startup is never easy. But I think there are a few trends in Minnesota that are making it easier. Most of the very early capital invested in startups comes from investors in the general geographic region. We do have an active and growing angel community. But what is also encouraging to me is the growth of new venture funds. In recent years, Capita3, Matchstick Ventures, Great North Labs, The Syndicate Fund, and even funds like the student-run Atland Ventures have all closed new funds to invest in seed and early-stage rounds. These funds didn’t exist five years ago and are actively investing in companies, many of which are based in our state. Then there are funds like Vensana Capital, led by seasoned VC Kirk Nielsen, who recently closed a $225-million fund. Obviously, that capital won’t all go to Minnesota companies, but it’s great to have Kirk based here. We could use more of these large Series A and Series B venture capital funds in our state, but it’s encouraging to see so many new funds starting.”

Joy continued: “One area that excites me is the focus on getting all members of our community interested in entrepreneurship and investing. The Sofia Fund was one of the very first groups to focus on growing the number of women angels, and then investing in women-led companies. Capta3, another local fund, focuses on women-led companies in healthcare. Lunar Startups is a local incubator doing great work to support women, people of color, and other high-potential entrepreneurs. The Aspen Institute, the Center for Economic Inclusion, and the Case Foundation recently held a summit to discuss ‘inclusive investing’. Here in Minnesota, MEDA has provided capital to minority entrepreneurs through its $1 Million Challenge.”

Does attorney Jeff Robbins see things improving? And how do we compare to other states? “Improving over the 2008 recession days? Yes. Minnesota fares well among Midwestern states, and we do have cool companies.”

“The future is bright,’ said Sara Russick. “We’re turning a corner and growing from a nascent entrepreneur ecosystem to one that is being supported from all sides, taking advantage of Minnesota’s awesome people, education, big corporations, and communities. Our state is attracting attention from investors from around the country because they see what’s happening here. As more of our startups begin to mature, we could see the Series A/B gap grow. I hope we see many more Series A and B funds come in to support their growth, and keep our innovation and talent here in Minnesota.”

Mary Grove of the Rise of the Rest Fund provided this perspective: “The good news is, more investors are paying attention and seeking opportunities to establish a local presence here or simply seek out local startups to fund. I believe we’ll continue to see expanded access to capital and the opportunity for more innovative companies to start, and equally importantly, to scale and stay here. Our recent Twin Cities Startup Week was a great example of this trend. I connected with investors and startups alike who had flown in from other cities in the region as well as the coasts to participate. At Revolution’s Rise of the Rest Seed Fund, we’ve invested in six Twin Cities-based companies. I’m proud to be based here and part of the Minnesota entrepreneurial community.”

[Note: The second Rise of the Rest Seed Fund was announced October 28 – another $150 million fund focused on backing entrepreneurs outside traditional coastal hubs.]

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