Follow-On to Mike Smith in Arkansas Business
Posted by Wilson Kanaday on Thu, Feb 03, 2011 @ 01:37 AM
Mike Smith recently wrote an article for Arkansas Business on the state of entrepreneurial development in Arkansas. I don't disagree with anything he said, but I would like to add some color to it. I'm sure Mike's gratitude for this is difficult to measure.'Entrepreneurial Development" being named one of the Top 10 Business stories of 2010 was well deserved. We can argue what specific number was appropriate - Arkansas Business put it at number 10; Mike lobbied for number 2. The point is that - to paraphrase Vice-President Joe Biden - it was a big deal. So why now? Mike attributes this to 10 years of effort in the State of Arkansas. This is warranted for the following reasons:
- The Legislature is fully on board as is evidenced by the tax credits and matching funds that are available to startups in Arkansas.
- Innovate Arkansas - specifically Tom Dalton, Jeff Amerine, Mike Smith, Jr., and Ted Dickey - have done yeoman's work with the startups in Arkansas. I attended the Arkansas Venture Forum in 2008; it wasn't that exciting. In 2010 Vertical Studio was fortunate enough to be one of the presenters among seven other outstanding companies. There were companies that did not get to present in 2010 that would have been the best presentations in 2008. The dramatic increase in quality is largely due to the work of Innovate Arkansas.
- Fund for Arkansas' Future has paved a road for seed stage investing in Arkansas by making several investments in strong companies in recent years. This has spread a lot of confidence to would-be entrepreneurs and other investors.
- Gravity Ventures recently closed a small seed stage fund late in 2010 and it has already begun putting that money to work.
But there are other factors at play too:
- It's easier now to launch a startup than at any point in history. Steve Blank - startup guru - estimates that it is 10x easier.
- There is so much investing in seed stage companies nationwide that some are concerned there might be a startup bubble. I have my reasons to think that is ridiculous, but that is for another post.
So what needs to be next for startups to survive and thrive in Arkansas? Mike identified three primary ingredients for a healthy growing startup environment:
- Ideas
- Management Talent
- Risk Capital
I’d add a fourth to the list: a core competency. A quick witted VC from out of state I spoke with last week offered that our easily identifiable core competency is ‘Feed & Seed’. Clever and true. But then we got to talking about our true core competency; data management. Arkansas, thanks to the roots that gave birth to Axciom, is world class at data management. This is a great place for us to be. The world has more data than ever before and it is growing exponentially. Even small businesses have more data pouring off their website that could be put to good use than they could ever get around to working with. There are few communities in the world better suited to help solve the growing problem of “What do I do with all this data?!” Next, companies are willing to invest a handsome fortune in solving this problem. IBM has invested more than $12 billion in 20-something data analytics companies over the last four years. That is worthy of any one's attention. So what is the next step? I would argue that it is increased risk capital and that capital should come from individuals. (Yes, I understand how self serving this could appear, but it is also for the greater good.)
- We have the ideas. Just look at the stable of Innovate Arkansas clients and the presentations at the Arkansas Venture Forum. I’d guess that there are at least 15 companies in Arkansas that deserve funding.
- Management talent is much more difficult to gauge, but having met many of the Innovate Arkansas clients’ managers, I’m impressed. Can they all manage wildly successful startups? Obviously not. Which ones can and which can’t? Good luck on that one. We’ll just have to let them play in the wild and see who survives. But some of them certainly will. Further, there is a lot of management support available to fill in gaps.
- Risk capital is (at least part of) the missing link. And the most significant gap seems to be the risk capital coming from individuals.
There are a surprising number of wealthy individuals in Arkansas. But at this point they do not put their capital into startup investments. There are two core barriers between these individuals and investing in startups; 1) Knowledge of the process, and; 2) Emotional comfort with participating. There are numerous benefits of seed stage investing if done appropriately.
- The investors should expect over-sized returns across a portfolio overtime.
- Startups are a core catalyst of economic growth. They typically have an average wage greater than the community average which contributes to the tax base. Further, their dependency on the traditional economy - printing, food, supply chain & logistics - is a benefit to many other businesses.
- Well executed startups create wealth in a community very quickly. Imagine a company that requires $1 million of capital, but then sells for $15 million in a few years. Hopefully those were local investors looking for their next startup in which to invest.
- A strong startup community attracts and retains great talent. In Arkansas we often lose some of our top young talent to other cities because they want to go solve the “big problems” and chase dreams they imagine are too large for their backyard.
So we need a way to reach the under utilized cash today that is typically reserved for mutual funds, commercial real estate and timber and get some of it allocated to startups. There needs to be readily available and trustworthy resources that can guide new investors through term sheets and basic due diligence. Rather than one individual coming to invest $25,000 in one company; groups of friends, maybe 6, need to come together with $15,000 each and invest that across 3 to 6 companies. It’s amazing how much that money will do to drive a well managed seed stage company. I don’t have a crystal ball, but I'd be surprised if $180,000 across eight seed stage companies didn't outperform a timber investment of equal size over the same time. So how do we start this? Talking. Read this, send it to your friends and talk to them about it. Find other like minded people - Innovate Arkansas is a good place to start - and connect with them. Organize. Start building social networks. Twitter is an easy start. A Ning community around this would be a great start. Learn how other angel/seed investors operate. There are great resources for this too. Check out Angel List. These are some of the most active and successful angel investors in the country. What is at risk here? That’s a hard call. Really, just lost opportunity. Acumen Holdings is a great example. They are an ecommerce and online technology company in Northwest Arkansas. If you ever met their founder, John James, you should know very quickly that he is worth betting on. I told one investor, “I don’t care if John James thinks he has a better way to sell eggs on the street corner, I’d bet on him.” It’s that obvious. And Acumen Holdings recently closed a $5 million round of investment. But the bulk of the investment came from Georgia. Why’d we let that go to Georgia? It’s like the Lee Ziemba of the startups. Here we have identified four pillars of startup community success. Three of them are already in place. Having a strong core competency like we do around data is unteachable; it’s like speed on a football field. We have been blessed with it. We have the ideas and likely have the management. With the appropriate funding in place we have a great opportunity in front of us that will make a difference in Arkansas for generations.