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Capital Connection

Thinking Bigger Guide 2017-18

Post Categories: Thinking Bigger Guide 2017-18

Kansas City’s goal is to be the most entrepreneurial city in America. But access to early stage funding and lack of education about investing and raising capital may be keeping it from reaching this achievement.

“You can waste a ton of time trying to raise capital if you don’t have your game together,” said Kyle FitzGerald, CEO of Life Equals.

FitzGerald has plenty of experience in the arena of searching for capital. In November 2016, Life Equals closed on $780,000 in seed funding. After meeting its milestones for the round, FitzGerald met with investors and decided to raise a second round of seed funding to expand and increase the company’s value before targeting a Series A round.

Today, FitzGerald is savvy about what kinds of investors to look for and how to make the company attractive to them. But in the beginning, he said, the company spent about 18 months “vacillating around,” trying to both find funding and refine its purpose. The Roeland Park company started out in 2011 selling a line of vitamins.

An accelerator program in 2014 helped to bring everything into focus for Life Equals.

“Companies or founders that want to raise capital really need to understand how that process works. … You need to know what is required for you to be able to legitimately pitch for capital,” he said. “If not, you’re going to just waste precious months or years, like we did before we went through Spark Lab, to figure that out.”

In 2016, Life Equals launched its Balance superfood shot, which offers half a day’s serving of fruits and vegetables in one small bottle of organic juices. It’s on the shelves at many local grocery stores, and through Whole Foods, it is expanding into other markets.

Creating capital

According to a report commissioned by KCSourceLink — We Create Capital, published in September 2017 — the challenges faced by FitzGerald are common to Kansas City-area entrepreneurs. The report listed several gaps that KC needs to fill in order to grow the entrepreneurial ecosystem:

  • Early stage funding
  • Angel investors
  • A more connected ecosystem of entrepreneurs and investors

Melissa Roberts works with entrepreneurs daily in her role as marketing director at the Enterprise Center of Johnson County. She concurs with the findings.

“In Kansas City, the capital has been here. It’s existed for a very long time,” she said. “But the way that we communicate about the capital options that are available, and who’s a right fit for whom, and at what stage each kind of capital is appropriate—that has changed drastically over the last couple years. As a result, capital is easier to find.

“We’ve made some significant progress on the capital pool, but we still have a lot of work to do.”

Early stage funding

“If there’s still a gap to plug, it’s really at the seed stage,” Roberts said.

Roberts compared the entrepreneurial ecosystem to a funnel, with many early stage businesses worthy of investment at the top, and fewer at each stage funneling down to commercialized companies.

“While we’ve made great strides in the seed investment space, there’s proportionally more companies that can be seen as qualified for seed capital,” she said.

The KCSourceLink report indicated that in 2016, 88 companies raised $5.3 million in seed capital investments in the metro area. That means KC is only halfway to its goal of increasing these early stage investments to $10 million per year by 2020.

ECJC is helping to close that gap through a new fund established in 2017 through a U.S. Economic Development Administration grant. That grant will go toward a $5 million equity pre-seed fund. Startups will be able to receive money from the fund as long as they can find matching funds elsewhere, Roberts said.

The new fund isn’t only about capital, Roberts said—it will signal to investors later in the pipeline that the company has been vetted and proven itself.

Angel investors

Another area of improvement recommended by the report was to increase the number of angel investors in organized groups to 240. KCSourceLink has tracked this information since it started the We Create Capital report in 2015, and the numbers are improving—they’ve grown from 140 to 200.

What is an angel investor, exactly?

“Angels are a particularly important group of investors that provide critical early stage funding,” said Laura Huang, an assistant professor of management and entrepreneurship at the Wharton School of the University of Pennsylvania. Huang led a study of 1,659 accredited angel investors in the U.S. for a report called The American Angel.

Angels are investing their own money and looking for high returns. About 55 percent of angel investors nationwide have experience as entrepreneurs, the report said.

When angel investors come together as a group, their investing power increases and risk is spread out. Generally, a group has some mechanism to perform due diligence so investors don’t have to spend time on it themselves.

Angel investment groups are growing in Kansas City. Mid-America Angels, based at the ECJC in Fairway, had enough interest from investors to form groups in Manhattan, Topeka and St. Joseph, Roberts said. Those chapters look at regional deals shared through a network.

Roberts said MAA has ramped up its funding of startups—both the number of checks and the dollar amount are rising, she said. In addition, Roberts said, MAA closed more deals in the fourth quarter of 2017 than in all of 2016, when it closed $3.68 million in funding deals.

A connected ecosystem

One other area in which the report recommends improvement is in helping entrepreneurs and investors find one another—and helping investors find other investors.

It uses the phrase “networked capital.” Roberts described that as knowing what door to knock on: “Capital that’s active in the entrepreneurial community; capital that’s not, say, behind the door of an estate in Mission Hills.”

FitzGerald said the accelerator program that Life Equals participated in helped him understand the value of networking, and it also introduced him to potential investors. It also taught him to be wary of “lone wolf” investors, he said. In his experience, working with angel groups streamlines the process and speeds up the timeline for investment.

Keep it growing

What else will it take to grow Kansas City’s funding scene? More entrepreneurs — and more time.

According to The American Angel report, entrepreneurs tend to become active investors, writing more and larger checks.
FitzGerald hopes to follow in that path.

“Having gone through the process, I can’t wait to be an accredited investor so I can put money into the right venture capital fund,” he said. “There’s nowhere else in the investment market where you can have outsized returns and truly beat the market.”

As for encouraging others to become investors, FitzGerald said success stories like Zoloz, known as EyeVerify when it sold to Ant Financial for a reported $100 million in 2016, stoke interest.

“The fastest way to get someone to cut a check is to convince them they’re going to make a lot of money and show them some kind of proof that it happened or it’s going to happen,” he said.