Minnesota IT Startups Score Big Bucks

Will wonders ever cease? In what can only be described as one long dry spell, Minnesota IT and Internet startups may now be finally starting to see the flow of venture capital pick up — at least if two recently announced fundings are any indication. [As I’ve written before, lots of money flows to the state’s med-tech startups, but it’s been a tough climate here for IT despite it being a strong sector in the past.]

On July 17, HotGigs, a Chanhassen, MN-based on-demand staffing exchange for contract and full-time employees, announced it had secured a $5.3 million round of Series A financing from Updata Partners, a technology-focused venture capital firm based in Virginia and New Jersey. It’s the first round of VC funding for HotGigs, which said it would use the funds to expand its management team, hire more employees, develop new product/service offerings, and launch national sales, support, and marketing efforts.

Here’s the significance of this news: the HotGigs funding is the biggest single round for an early-stage IT or Internet startup in these parts that I can recall since the pre-crash days of 1999/2000. [Note: I don’t consider a certain local storage startup, first funded in a big way about four years ago, to be in this category.]

And, just a few weeks prior to this announcement, another Minnesota tech firm announced a round of funding almost as large as HotGigs. Minneapolis-based Jumpnode Systems, which makes a plug-and-play appliance for IT monitoring, announced it had secured a $5.1 million round of Series A equity financing from Apple Core Holdings and Opticality Ventures, two tech venture capital firms based in New York. It was also the first institutional round of funding for Jumpnode, which had secured its initial funds from angel investors in 2005. Jumpnode said it would use the new capital to expand its executive team, accelerate product development, and expand its sales and marketing programs on a national basis.

Second Time Around
To get a little more perspective on this big news for Minnesota startups, I had coffee last week with Doug Berg, the CEO and founder of HotGigs. Doug had previously founded Techies.com in the 1990s, another online staffing services firm, which was a real rocketship — growing to 600 employees and coming ever-so-close to a big IPO in 2000, before….well, you know. Techies was a client of mine in the late ’90s, and I began talking with Doug about his latest startup in 2002, listening to his ideas and discussing them before he’d even decided on a name for the firm, and also helping him identify competitive offerings and so forth. As a longtime independent contractor myself, I thought his plan to focus on contract employees was right on. [Free Agent Nation, baby!] So, it was exciting for me to learn about Doug’s progress with this recent announcement. He deserves a lot of credit for his persistence.

After Doug whiteboarded his plans for HotGigs in late 2003 with an old colleague of his from Techies.com, Peter Braskett, in early 2004 he obtained an initial round of angel funding in the amount of $250,000 from a family who’d previously invested in Techies.com. By March 2004, he and his small virtual team had launched the initial HotGigs web site. Doug said he began by talking a lot with his old Techies clients to learn their needs. He soon discovered that a really hard problem employers were having was recruiting and managing contractors, which has been becoming a larger component of the workforce in many job functions (not just IT). What these employers needed was a site that could search all their recruiting/staffing firms that dealt with contract employees at once. Also, he learned that the recruiting/staffing firms were quite inefiicient in marketing their people; they needed a lot of help, too. Doug said he realized that no single staffing firm could pull off the online-exchange type of site he had in mind. So, he’d found his opening — the big problem that needed solving.

He realized, however, that there was some educating to do in his marketplace. Many recruiting firms would initially fear such an exchange, much as real estate agents did with the introduction of the MLS listing system. But that proved to be unfounded. And he began to sign such local corporate clients as Cargill, Blue Cross/Blue Shield, and ADC Telecommunications. “The message,” said Berg, “was that what we were doing was a natural evolutionary thing. We needed to bring these people into a marketing mindset. We were now in the Google era — database search.” He said the employers needed a lot of help screening candidates — “going through 500 resumes to five good ones,” he said.

Berg pointed out that it isn’t the employers that pay for his services (and he now has some 2500 such corporate users); the recruiting or staffing firms are the ones who pay. HotGigs first tried a price of $4000 per year, but he said that didn’t work. Later, he hit on $200 per month, and that pricing model took. The firm now boasts 9000 staffing firms as clients, and is adding them at a clip of 1000 per month.

“The business-to-candidate model, like Monster, had already been done,” said Berg. “But nobody was doing the business-to-business model — like Ariba in supply chain management.” There was a huge market at stake, said Berg. “It’s a $129 billion industry now, and will grow to $200 billion by 2010.”

I learned that HotGigs is far from a one-trick pony, however. It has added related service offerings. “We started at the marketplace level,” said Berg. “Now we’re going to contingent workforce management, with a service we call ‘Contract Central’.” Part of this offering is handling all the invoicing and paperwork for corporate clients. The firm is also hosting special intranets relating to this, the first for ADC. But that’s not all. HotGigs recently began offering a service it calls “Career Site Optimization” for its corporate (employer) clients — helping them greatly improve their own job-listing sites for full-time employees, according to Berg. He said HotGigs is already providing this CSO service to Health East and Cingular.

What are Berg’s plans for hiring after the latest funding? He said HotGigs would grow from its current 12 employees to more than 60 by yearend. And he’s already got the same recuiting firm engaged who helped him add 50 employees a week when he was growing Techies.com to 600 employees — so it’s a task he knows well. Doug said 10 web producers would be part of the new contingent, but most of the new hires would be “sales and support people.”

Lesson Learned
Doug noted that his chairman, Ken Holec, a successful Minnesota software executive and entrepreneur, played the key role in finding the investors for HotGigs’ successful Series A round. What advice would Doug give aspiring entrepreneurial fund-raisers out there? “Find a VC that knows your market!” he urged. “Ours was the original investor in CareerBuilder.com. Obviously, Ken and I didn’t have spend a lot of time educating them about our industry.” He pointed out another important thing, too. “These VCs are measurement guys. You have to turn your company into a dashboard so they can monitor how it’s running.”

And Doug Berg seems to have HotGigs’ engine humming along real nicely.