Rob and Josef talk podcasts, and comes clean about his awkward intro to Nick Moran.

Nick talks about his path to becoming a General Partner of New Stack Ventures and the host of The Full Ratchet podcast. We talk decision-making as investors, and advice for founders, including the most common mistake: building a product then trying to find a market for it. Then dive in to address the problem of matching opportunities to investors, whether it’s founders pitching VCs, or VCs pitching institutional investors. 

Rob and Nick connect as founders-turned investors, while Josef jokes about the Insane Clown Posse in a truly additive and valuable fashion.

Not really.   

Who does Nick see executing? He calls out two companies that have pushed through the pandemic, Flamingo and Tripscout.

Full Transcript Below:

00:00

Welcome to execution is king, the Great North ventures podcast. Today we’re joined by general partner of new stack ventures, Nick Moran. He’s also the host of the full ratchet podcast. With me today also his general partner of Great North ventures Rob Weber. Thanks for having me, guys. This is such a pleasure to be here, Rob. Always good to see ya. Thanks

00:21

for joining us, Nick. First starters, talk a little bit about how you became a venture capitalist. And also tell us about a little bit about your work with the full ratchet.

00:31

Yeah, you got it. I mean, we’ve talked in the past, it was a bit accidental. This is my second career. So I started out in corporate America, doing m&a, you know, scouting out early stage tech companies to buy through a roundabout series of events, I ended up being an entrepreneur within this organization taking a product to market over three years, working with a large r&d team of 30. And we had sort of extraordinary success with that product. I was a beneficiary of that success and was able to sort of leave corporate america and, and figure out my next path in life as a young man when I was about 32. So I moved back to Chicago with my wife, I started angel investing and, you know, fell down this rabbit hole of venture and startups and, you know, how do you build the next transformational multibillion dollar tech company? And yeah, through that series of events launched the full ratchet, I think it was, maybe at best a clever hack to network with some folks on the coast. At worst, you know, it was just kind of a fun program for me to learn. And it really worked out. I mean, I think I was early to the podcast thing and got lucky. The audience sort of exploded, you know, before there were 1000s and 1000s of podcasts. And that resulted in a lot more deal flow than I knew what to do with and sort of snowballed into this investing for newstagged. ventures.

02:06

And you’re up to almost, is it almost 300 podcast episodes so far? Is that right?

02:11

Yeah, I think so. It’s probably more than that between we do these special segments in between episodes. So I can’t imagine how many we have total. But I would bet how it gets it’s more than 500 at this stage.

02:22

Yeah, it’s really impressive. I was just talking with Nick before the show about these great episodes he does with investor stories, that are just great little bites. So if you have a minute, check out the podcast, that episode I’m talking about the last one is about 11 minutes long. And it sees for investors giving post mortems on these companies that failed. And it’s just as super interesting, especially like the example around the one that failed due to COVID. Because it just this excessive headwinds and stuff. But there’s some great points from Great Investors on that podcast, urge you guys to check it out.

03:00

Yeah, I think part of the context that makes your experience, Nick, as he talked about it, you know, so interesting is having been on both sides of the table, you know, building a product, and then spending all this time interviewing all these investors, and then, you know, actually running a fund. But you know, especially as we think about, like, the product side, that’s kind of the background that my brother and I had before we started getting more adventures, you know, after, you know, spending so much time in this space. What are some of the takeaways you have, you know, for new founders, you know, in terms of product development? What are some of the common mistakes that you see, or what advice would you have, and I know, your fund is kind of in the pre seed seed stage was very early, in fact, earlier than probably a lot of other venture funds. What would be some of the advice that you would give to, you know, a first time founder who’s building their first product?

03:52

It’s a good question, I think, sort of classic mistake that still the majority of entrepreneurs make, even though we’ve we’ve said this advice over and over again, Rob, you and I have talked about it is, you know, they build a product and then look for a market later. Actually, just last week, we were talking about this episode I did with Dharmesh stacker from battery, right. And he was saying one of the weaknesses with doing investments in serial entrepreneurs. So folks that started and had success with a tech company from a previous generation is often those types of founders from you know, that learned in an old generation of tech, they often want to build super powerful tech, and then go out and you know, find a market for it. try and convince customers that this is the solution to all their problems. And in the modern world, in the modern tech world. That’s just not how things work. You need to prove value up front. You need to deliver ROI and value super fast. I think Dharmesh, his rule is in 90 seconds or less, you know, the end user needs to understand why this is transformational for them and makes their life better. And so we’ve seen this big shift to a focus on customers focus on needs, you know, what are the key problems that you’re facing in your work life or in your consumer life? And then how do we reverse engineer a solution that really delivers on on that problem? So if I were to give advice to the early stage founders, it would be you know, become obsessed with your customer, find your ICP, your ideal customer persona, spend time in a market, discover the key insights, you know, what are the key challenges facing that market, and then figure out how to build a solution that meets the need, you know, don’t just just because you’re a developer, and you’re a talented builder, that doesn’t mean you should go out and build some super powered tech, and then just assume that the market is going to love it.

06:02

Do you think that’s a consequence of tech really exploding out of, you know, the confines of being its own sector, and just kind of taking over every sector? that that that shift away from just being able to build something great, and then figure out a way to sell it, versus having to build to actually fulfill these needs?

06:22

Is that Yes, I think so. Joseph, I think it also goes a little deeper. I think it’s a mindset issue. And I think it’s, it’s the victim of arrogance, right. So we all have a bit of confidence, and maybe maybe a shred of arrogance, some more than others. But when you are arrogance, you believe the world operates like yourself, you believe that the mindset of the consumer base is much like yourself. And so you think that if you can build something, that’s your ideal product, right? That’s your ideal technology that ever the market will come? Right? If you build it, they will come? The reality is that, you know, if you’ve met one consumer, you’ve met one consumer, right? There’s a lot of shapes and sizes, there is no one size fits all anymore. That just doesn’t work. And so you need to figure out, you know, what are the segments within the market? What are the consumer groups, or the buyer groups within b2b that have a similar philosophy or ideology or buying behavior or need set, and you need to you build products that really serve a problem and serve a need. So I think it’s a problem of mindset. And it’s folks thinking that the rest of the world operates like themselves. And that’s just not the case.

07:42

It’s interesting, I do think there’s a sort of fine line between self confidence and being open to feedback, right. And I think in entrepreneurship, like you kind of have to have a balance, I think the best entrepreneurs app have developed that strong customer empathy. So they can kind of wreck, you know, they can take the feedback loops, and kind of, you know, bake that into their product development. It does take a degree of self confidence, though, because you can’t have every, every single feedback session or artifact, you know, can completely push you off your strategy. So it’s kind of a fine line of being a good listener, but also having, you know, some confidence in finding the right path forward. Right. And when you are building out your products in the past, like how much do you stock? Do you put in just like the systems for startups? Like, are your real vocal proponent of kind of lean startups and all the, you know, systems behind that? Or are you kind of take a more like open approach to, you know, in terms of the systems that these entrepreneurs are utilizing to kind of bake their strategy or their product development?

08:50

Yeah, that’s a tough one, I would say, Yes, I am a proponent of the lean startup, but more at the theoretical and philosophical level, I think some entrepreneurs can get maybe too caught up in the tactics, and you know, the details with that and chase their tails a bit. I mean, to your point before, you can’t be so wishy washy, that all feedback from customers finds its way into the product. Right? We like to say that when we’re selecting founders, or we’re investing in founders, we like to find people that are incredibly stubborn about their vision, but incredibly flexible about the path to get there. Right. So you need to have a really strong vision, here’s where we’re going. But you need to be incredibly receptive to the market in the customers and how the product actually manifest in the path. To tie this back to my experience with the product. I’ll give you a simple example. Right? I was building a handheld device, right? It was a handheld device for measuring compounds in drinking water. So things like monochloramine or chlorine or nitrate or iron, right. And a huge number of the customers That I did testing with said, I would like this to be touchscreen. Right? We launched this product in 2013 ish timeframe. And there was a big proponent of customers that said, I really need this to be touchscreen, right in the markets that we’re testing. Well guess what the reality is, there’s a lot of cold weather climates, where people are doing this testing on the back of a pickup truck in sub zero degree temperatures in places like Minneapolis, or Chicago. And they’re doing it with huge gloves, and big parkas and a hat and goggles. And you can’t have a touchscreen device in that environment. So this is just one simple example of the overwhelming feedback was we want touchscreen. But when you look at the markets we’re going to sell this product into it was not a viable decision for the product, right. And so that’s just one small thing. Like you need to collect all the different information from the customers, but it’s the job of the product manager to decide on the solution. Right? It’s the customers that surface the problems, the product manager needs to find a solution that most appropriately services the market.

11:13

That’s really interesting. Well, yeah, bringing up, you know, kind of the Midwest in Chicago. I know, that’s where you’re based. Can you describe a little bit about your experience, since you moved back to Chicago? What is the startup ecosystem like there? For those who are unfamiliar?

11:29

It’s exploding. I mean, I’m not on the ground in Minneapolis, I’m sure you’ve seen things really develop and evolve in your ecosystem. But in Chicago, I got back in 2012 2013, in 1871, had just opened, which is sort of the incubator startup Mecca. Within Chicago, we were really just finding our footing on becoming, you know, a real sort of call it a second tier tech ecosystem, not not on the level of San Francisco, New York, but a major player, right, we had had some big exits, we had some big successes, and that had spurned some talent in the ecosystem that went and started more companies. So now, you know, during the past almost 10 years, geez, it’s developed quite a bit, you know, there’s more venture capital firms than ever before. There’s more startups being funded than ever before. we’ve really seen the ecosystem progress for the better, and sort of hit its stride. So I think Chicago is only going to go from here. But you know, if you go back to the time I started investing, there was very few pools of capital. And we kind of, we had our choice of the startups we wanted to invest in now. It’s, it’s, it’s more competitive, which is better for everyone involved.

12:55

I was really impressed. When I went back to Northwestern in February, pre COVID. For venture capital events. I had gone to school at macdill. So I haven’t spent a lot of time at Kellogg, but when I went there, they have this fabulous new building, which they were just building when I was at Northwestern. And it was just a beautiful setting right there on the lake, the field. And it was full of all kinds of people. Betsy Ziegler was there from you mentioned 1871, some other people, all kinds of great funds represented there, mingling with just these top level up and coming VCs, out of Kellogg, and just being in that spot. And that’s not even that’s up in Evanston. That’s not in the heart of anything, which, from my experience is more towards 1871 would be kind of the heart of a lot of this action, while at least downtown in general will be more towards the heart of it. But it was super impressive. It really gave me some hope for what what we can aim for here. You know, like getting that vision, getting that idea, that vision for Minneapolis and what the ecosystem can aspire to be.

14:04

Yeah, it’s really great. I mean, you’ve cited the university’s Stanford and MIT their efforts are well documented and the stratix accelerator at Stanford, you know, one of the most prominent in the country. But look, look at Northwestern, you mentioned them, they’ve got the Wildcat challenge and look at Chicago Booth. They’ve got the NVC the new venture challenge, which I believe kicks off tomorrow on the third of June. This has become the Chicago Booth one has become one of the preeminent accelerators in the country. That ranks right up there with the YCS and Angel pads, right? The successes from that program, you know, the winners of Chicago, Booth NVC, our grub hub, Braintree tovala, I mean, you know, hundreds of millions, if not billion dollar companies that have been enormously successful. So it’s it’s really nice to see that the academic academic institutions have structured themselves in a way to really promote true Entrepreneurship, that is the challenge when you get into academia, you know, is this going to be more of a research or learning exercise, there’s this really, you know, a capitalist endeavor. And I think what we found is the Chicago based institutions have figured it out, and, you know, created some really transformational, you know, large scale tech companies. So we’re looking forward to meet and some more tomorrow at the competition, and at a future Northwestern event as well.

15:29

I think it’s really interesting, Nick, I’ve been building software companies, either as an was started off as an entrepreneur, and then an investor, the last, you know, I don’t know, 15 years, but 25 years as entrepreneur, all in Minnesota, and really, you know, from when I got started, there was very little support, there weren’t organized, you know, communities for startup competitions, accelerators, you know, maybe there was one or two venture funds, you know, now there’s, you know, just in the Twin Cities market, there’s well over a dozen early stage funds. And then we have, you know, it’s a little different in Minnesota, the University of Minnesota, I think it’s a little over 10 years old, we have a Minnesota cup, which is actually kind of built for all startups in Minnesota, it sort of lives, you know, on the campus of the University of Minnesota, but it’s not just for the U of M students. So it’s kind of interesting, I think it’s, it’s evolved a bit differently. But in many respects, I think the last decade is really brought just incredible wealth of support for entrepreneurs starting to build things. Of course, I think one of the main areas that entrepreneurs that are looking to get discovered are looking for support is on fundraising. And you know, despite the emergence of what 1500 plus venture funds around the country, you know, getting that first round of capital for many is still really challenging. And I know you’re, you’re one of the few funds that you know, invests in kind of pre seed, and then also what I’ve called, like, really early seed stage companies in the Midwest, I know you invest all around the country, what are some of the signals you look for? Or what are some of the things that you would in terms of advice would pass along to founders, you know, in terms of raising that first round of venture capital?

17:08

Well, first of all, you need to know where to aim. Right? Like before you launch a process, and before you start pitching. And before, you know you do your dog and pony show with a bunch of investors, you have to understand your ICP. Just like if you’re launching a product into a market, right, who’s your ideal customer persona. And for a fundraise is the same Rob, you just mentioned, like in the Midwest, there are seed stage investors series A investors pre seed, some will do pre traction, some won’t. Some will invest in hardware, others won’t write some, like consumer, some have a preference for b2b. We’ve got a whole crop of Life Sciences folks, right? There’s a lot of shapes and sizes to these investors. And if you just roll out of bed with a really cool product, and you know, a little bit of sales, and do your rounds in sort of Minnesota ecosystem with whoever you can get an intro to, you’re probably going to find some mismatches, right? It’s like the dating app. And you know, you’re you’re dating somebody from a different culture that doesn’t speak your language. And it’s like, where do we even begin here? So you kind of have to know where to aim. Figure out what type of startup you’re building, right? What are the sectors you appeal to? What are the technologies that you’re building around, you know, Ai, blockchain, etc? Who are the markets that you’re serving? Right? Are you serving certain demographics with your startup, let’s say, the boomers or Gen Z, for instance, or you know, maybe your startup is focused on women. And then the stage, of course, the stage is important, the geo is important. So there’s all these filters and structures that investors use to kind of think about your startup. Here. Again, it’s like sector, market technology, geo stage. And if you are honest with yourself about which boxes you check, you can find the ideal set of investors that is just well designed for your startup. Right. There are generalists that just invest in Minneapolis startups, there are specialists that just invest in AI powered startups, right, you need to know who those investors are first. Rob, you and I have discussed this tool that we built VC dash rank.com. It’s a simple questionnaire that startup founders can fill out in five minutes or less about their startup. And they generate a customized list of all the ideal early stage investors for their startup. I think we have somewhere from 15 to 30. Startups filling that out every day. So it ends up being you know, you add those up over time, there’s a lot of startups out there looking for investors, but if you’re aimed in the wrong direction, you know, you’re gonna waste a lot of your own time. In founders time is the most important thing when you’re building an early stage startup.

19:57

I think that that’s a lot a source of a lot. VC hate that you see, I mean, there is plenty of legitimate criticism about VCs, there’s there’s bad behaving VCs, don’t get me wrong. But I think that that point you just made, that it just being a mismatch, that people going into every what should be a speed date with the intention that they want to get married, without actually realizing that they need to make sure that that’s going to be a good match. I think that that manifests itself and justly so in people getting incredibly, you know, frustrated by that process, and then taking it out against just the industry in general. It kind of obfuscates a lot of the legitimate criticism of the industry, though, and and makes people you know, it makes it harder to uncover. Because when the problem is that source, what’s the real problem? It’s hard to uncover when it’s just simply a mismatch from the beginning.

20:54

100% Joseph, and I’m getting a taste of my own medicine, right, because as we embark on on raising our next fund, we’re not raising currently, but as we do that, we need to meet with the right investors for us, right. In our industry, we call them LPs limited partners. But I need to know who are the institutions that like to invest in emerging funds, right? Who are the institutions that like funds in the $50 million size range? Who are the institutions that have an interest in the middle of the country investing versus coastal, right or international, right, if I don’t do my homework, on my own ICP, then I end up spinning my own wheels with a bunch of folks that you know, want to cut billion dollar checks in the multi billion dollar funds that are focused only on San Francisco, and I’ve just wasted their time in my own. So, you know, this, this has got many different levels of extra abstraction, whether you’re a startup selling a product, you know, founder trying to, you know, sell your business, sell equity in your business, or a venture capitalist that’s, you know, trying to raise a fund.

21:55

And just some advice to anybody out there who’s going to turn around and Google ICP to figure out how to proceed, ignore the first results, or any results with pictures of crazy clown makeup. That’s the wrong result for you. Wow, flashback there. Now we’re showing our age.

22:12

It’s really interesting, Nick, when I was a sort of founder turned investor, you know, I was like you as an angel investor for a while, while while I was sort of founder, took the success as an angel investor became a VC. And the number one request we have, from founders we back is, can you help me complete my round? Or can you help me connect other capital sources, and to me is like a founder turned investor, it’s like, the least interesting thing I could help a founder with, is just finding more capital, I’d rather go deep on like product goes to market, you know, human resource and operations, like how do you scale the growth of the company? Not so much like, Hey, can I i’ve this spreadsheet, I started with 200. Plus, it’s just people in the last four years that I’ve talked to you that are involved in the VC game, and I did use the VC dash rink comm tool that you built for internal startup we had been incubating called next jam, it’s really, really useful to kind of filter down across these different dimensions, who are the funds that we should be talking to? And I think a lot of founders, it’s not even so much as like getting an intro to the funds, like, I know that a lot of the funds that we should be talking to, but they weren’t necessarily the ones top of mind for me. So just having a filter to say yes, these are the ones that based on, you know, some kind of database are probably the ones that are right for you and make some ton of sense to me. So I think it’s super valuable. I’d love to see more startups using this. And it wouldn’t solve this, like signal and noise issue when what you really want is like relevant deal flow that can make right you know, the speed for fundraising faster, right. 100%.

23:46

I mean, it’s, it’s amazing to your point, how network driven and opaque the whole fundraising landscape still is, it’s always based on referrals. And you have to have the right networking etiquette. I mean, if you go back to the origins of VC, it was a little cottage industry, you know, country clovers, and people that were insiders, Sharon deals. And that’s kind of where this industry began. But, you know, as we move forward in time, it’s institutionalized. I mean, tech is no longer, you know, a footnote in the asset class universe tech is sort of leading and driving the returns, both in privates and publics. And so I think we’re gonna see our industry, our asset class, really professionalize and become more tech fold. Right? It shouldn’t be this old insider game of who you know, and who can I get an intro to and, like, you know, can I can I get the royal treatment from the investors at benchmark I mean, amazing, firm, right benchmark, but they they don’t have a website, right? You have to know somebody to kind of get in there. And honestly, I think that’s the model of the past. I think it’s gonna die. The future is about you. Technology Solutions media, you know, having a systematic process, it’s it’s not about who you know, it’s about what you can build.

25:08

And increasingly, it’s not about where you’re located either. I mean, that’s starting to not matter at all, which used to be hugely important for VC. And even when you look at VCs who do business all over the world or across the country, you know, that geography that they do more deals, where they’re located, then states further away, like if you’re based in DC, or even if you’re based in Chicago, you know, there might be a way more deals in Silicon Valley, but you’re going to be doing more deals in Chicago, just because that’s who you run into. But increasingly, that’s becoming less and less important.

25:44

Well, I think, you know, one of the effects of COVID is no longer do I have discussions with investors that say, oh, middle of the country, investing the Tam’s too small, like the outcomes aren’t going to be big everyone? Well, not everyone, but the vast majority of folks out there realize, wow, there’s talent everywhere, you know, whether it’s talent that left the coast that moved other locations, or just the reality that great, huge, multi billion dollar tech companies are being built everywhere. We’re seeing that more and more every day, which is, it’s nice not to have to face that objection anymore. Oh, Minneapolis. Oh, yeah. No good tech companies are gonna come out of there. Chicago. Yeah. You know, you guys have your strengths, but it’s not technology. Yeah. Okay. Let’s look at you know, the cameos of the world and, and you know, these other huge successes. So it’s no longer an objection, we really have to face which is nice.

26:39

So Nick, I know, you take a very systematic approach to venture capital, kind of pioneering how to use tools and technology to make the process more efficient. I saw this survey a few months back that ranked from founders seeking capital, the number one criteria or attribute that they cared about the most was speed. Yeah, and I know you’ve interviewed a lot of funds, are there, you know, from a systematic standpoint, are there certain things you found to really speed up the investing process? Or is there any any other venture funds that, you know, obviously speeding, making a quality decision that times are enemies of each other? Right? Like, you know, how do you have you? Have you found ways to move faster in decision making, or across the VCs that you’ve interviewed? Any that really stand out to you on this dimension of speed?

27:27

Wow, that’s a tough question. Yes, we have implemented a lot of systems and processes, I can talk about that when to your ladder question on any VCs in particular, I would say that the VCs that stand out, as being great at making decisions quickly, are solo capitalists, largely, you know, when an individual is doing the meetings with the founders and can decide at first meeting or second meeting. Look, this person has the right ingredients, you know, like you’re taking all these data points, they’re mixing up in your head, we talked about this abstract concept, pattern recognition. But honestly, a lot of at bats in this industry over time, you start to figure out here are the things that I like, and you process all these data points, and you make decisions. So it’s the solo capitalists that can move quickest, because, you know, there’s no infrastructure, there’s not multiple people, there’s not, you know, a whole series of diligence. When it comes to our firm. We are not that, right. So we have a number of people at our firm that can do deals. It’s not just Nick Moran, right. And I’ve been very clear with my folks here in New sec from the beginning, this will not be the Nick Moran show. This is newstagged ventures, we are building a scalable venture capital firm. And so what we’ve had to do is get very, very clear about what we’re looking for. We kind of divided up into three segments. So when we’re looking at a deal, we look at the who, the what, and the how. So the who is the foundation, that’s the people behind it, the talent, their raw capabilities, their you know, their raw mindset. The what is kind of the business is the business, the industry, the sector, the product, is it, you know, scalable? Is it venture scale is an interesting does it have tailwinds and then the How is sort of the framework that the founders are using to access that market, build the right product. Think about you know, how we wedge into the market? How are we focused on customer needs? To that point, we did you know at the top of the interview or are we tech first. So the How is like the process that the founders are going about to access the opportunity. And then you know, at New stack we think very specifically about what are our must haves. What are important to have and what are nice to haves and across each of those three, the who, what and the how we’ve been very specific about what those three are. So we have must haves on every deal. If a must have Isn’t there we pass, we have our important hands on every deal, if a certain percentage of important to haves aren’t there, we pass. And then we have our nice to haves as well. And so that’s our attempt at taking all these patterns and all these factors that we’re vetting for, and actually codify them into a process that can be taught to young folks, you know, as we have this fellowship program of 20 young folks across the country, undergraduates, and it’s too hard to spend the next you know, five years with all of them and try and teach them all these abstract patterns, we have to codify them, we have to get very specific about here are the factors to be looking for, so that their learning curve, you know, moves quicker. And the end effect of that, Rob, is that we should be able to make a decision on a founder, and investing in that founder in less than two weeks, hopefully, less than one week. But if we know what we’re looking for, and who we are as a firm, and you know, what types of founders are positioned to succeed in a partnership with the SEC, then we can move more quickly.

31:04

I just said one more kind of a more narrow question around this process and system you have I know, one of the things they talk about in venture capitalists kind of decision making is this notion. It’s like a psychology notion of, they call it confirmation bias. And I know I’ve experienced I’ve had to sort of fight myself against is that time where I see it, even in our partnership, like the more time you spend on a deal, there’s a tendency to look for evidence to support, you know, your initial interest in that deal. And so you have this self fulfilling kind of confirmation bias to do a deal as you dig in more and more and more. Have you had any, you know, with this sort of more in this sort of system that you have? Do you have any sort of guardrails against like confirmation bias? Or have you ever felt like you’ve experienced that? And, you know, or how do you avoid confirmation bias?

31:53

It’s a good question. I don’t know, if we have an answer to that, if I’m being honest, I do know that we’ve gotten incredibly late stage in diligence on deals. I mean, I even flew with, with my deal lead to Colombia, the country to do diligence on a deal and spent two entire days, you know, in the field, like meeting with customers and whatnot, we ended up passing because something came up late stage and diligence that violated my staff. And we had to have a real honest conversation about that. And, you know, as I think about scaling this firm, I think about, you know, we need to use these moments as teaching moments of how we got to make decisions. And even if it’s even if it’s so much easier to proceed with the investment at that point, because the sunk cost is there. And the confirmation bias, is there. the right decision, if we really want to build a best in class firm, that’s going to produce great returns, and teach folks how to say no, even when you’re over committed, is you got to say no, when, when it’s right to say no. And I learned that the hard way working for dinner for years in m&a, a very aggressive acquire My god, I would do diligence on 1000s of companies, I would spend, in some cases multiple years, getting to know founders of different companies and visiting them in Spain and Italy and all around the states. And then those deals would fall apart. And so yeah, that was a painful reality in our business. I mean, we’re meeting with founders, you know, for weeks or months. And so to pull the plug on those for me is like, you know, that’s nothing. It might be harder for the younger people. But for me, it’s nothing compared to multi year. relationships.

33:39

Yeah, totally. You bet that your prior experiences is super helpful in that regard. So I think Joseph, you had a kind of a final question, right? Oh, yeah.

33:49

Yeah. So our last question here, like to ask all of our guests who come on the show, can you tell us about someone or a startup that you’ve observed executing at a really exceptional level, maybe someone in your portfolio or someone outside of your portfolio, but someone you’ve seen maybe who isn’t getting recognition for that, but who’s really killing it? There’s too many to choose from.

34:15

Maybe I’ll pick a couple that were slammed hard by the pandemic. I mean, terrible categories for the bat pandemic. One is Jude chewy, he runs a company called Flamingo. Flamingo serves the multifamily property industry. And it’s a it’s an events focused platform. And that thing, I mean, the events out of the business went to zero effectively last, I think, April or May. This guy is just a rock star. He built a SaaS business alongside his events business during the pandemic, grew it to the size of the events business. I mean, remarkable MRR and now the events have come back and so now he’s got I mean, it’s kind of amazing but he’s got a you know, two sided, you know, dangerous multifamily software business that does both events and, and software as a service, which are super complimentary for what he’s working on. And it’s just been amazing to see the resiliency. I mean, it would have been very easy for him to shut it down. And many of my LPs reached out and said, Is God gonna survive? And I said, if you ask him, there is no quit here. There is no, you know, pulling this business up and just super proud of him. Another one is Conrad Wallace Xu scheme in MDX at at a business called trip scout. This is a travel business that serves consumers and just got crushed, absolutely crushed by the pandemic. Many travel companies went out of business, many large travel public businesses just are on the ropes like the TripAdvisor is of the world. And these guys have just made magic of, of the situation. It’s, it’s unbelievable, how they doubled down created more content and special guests. You know, created a almost like an Anthony Bourdain, like series on travel during the pandemic, travel from home, you know, everyone’s stuck inside. How do you get the experience of being on a trip when you’re at home? And coming out of the pandemic? they close? I think they recently closed 4 million bucks from accomplice, I mean, tier one VC there. I mean, they are on this upward trajectory, like I haven’t seen. And it’s it’s kind of amazing. You know, there was never quit, there was never hesitation. There was optimism, despite a really tough situation. So those are two I would, I would just, you know, tip my cap to them. I’m glad and proud to be an investor in people like that more so than than anything. Trip scout and Flamingo. We’ll have to check those out. All right. Well, thanks

36:53

a lot for joining us today, Nick. It’s been a pleasure and best of luck as you continue to grow, you know, new stack and thanks for you know, launching VC dash rank.com. And the other work you do to support entrepreneurs and founders and of course, the podcast, which is one of my faves. So thanks for joining us today.

37:12

Yeah, thanks, Nick. Make sure you check out the full ratchet, visit the new stack website. They’ve got some great tools for founders on there.

37:20

Such a pleasure to be here guys. Thanks for having me and love the pod Keep it up. Can’t wait to see who the next guest is.

Commercial real-estate (CRE), a $12 trillion industry, has been slow to use new technologies and data that can boost economic returns. During a recent Quarterly Spotlight event held by Great North Ventures, Tony Lesicka, CEO and Founder of Coverlease, and Pradip Madan, Managing Partner at Great North Ventures, discussed opportunities in CRE available from better use of data and analytics.

View the video, or read the summary below to learn about CRE data and how we should look at this going forward to maximize the potential of this industry.

Lack of transparency has rendered useful data inaccessible. Tony thinks this problem is solvable more easily and quickly than many people think. Lessons learned in how to anonymize data from industries such as healthcare can be useful. In healthcare, anonymized data is key to clinical trials and accelerated drug discovery. Similarly, CRE data can be anonymized.

There is some critical information that can bring value to the industry which can help with the use of this data and making it more mainstream. This revolves around pricing measures and how to effectively price this CRE in order to make better decisions for you and your company.

This is all provided by data and can be related to a zillow “zestimate” which provides a price estimate based off the data available. This cannot be done without the data in place and is something that can provide extreme value to the users of CRE in order to make better decisions within the industry.

The information is important because it will make the industry more uniform. In CRE every deal and property is looked at in a little different way and every contract is written up just a little differently. If this data is made available it will allow for an easier to use and understand the industry.

This would end up making the pricing and buying/selling of CRE more streamlined and easier to get fair and equitable deals. Ultimately a more uniform industry which is caused by the use of this information will help to mitigate risk for investors and increase opportunities due to the increased knowledge of what things are worth. 

This information has been blocked because there is no sort of standardization of data across the United States without this it can be very difficult to purpose the data that is available in a way people can understand and use it. This problem is rooted deeper than just this though, there has been an ongoing battle forever in the real-estate industry around privacy and confidentiality.

This is the root of why CRE data is not more available and there are even still 10 states in the United States that are considered non-disclosure states for sale data on CRE. This can be fixed but this is something that is only a matter of opinion on how and when it will be fixed.

This is a slow process and will take time to figure out, but per this discussion Tony talks about a few key things that need to happen in order for this problem to be fixed.

First there is the Legal, Regulatory, and Business Considerations which he discussed which could have a big impact on the use of this data and could shift a lot of things in the industry. One main thing to be looked at is those non-disclosure states. That is something that could be changed to make the data more available to use within CRE.

Second was to fix the ongoing problem of data transparency and the normalization of this data to be used in the industry.

Lastly, from a business standpoint just slowly implementing best practices in low-friction markets to help get customers and people realizing that it is ok and possible to use this data for the benefit of us all.

What CRE could look like with a truly scalable system in place 5-10 years down the line

This discussion was wrapped up with a question about what the future of CRE could look like with a fully-implemented scalable system in place.

There are a few key things to note that look exciting for the future of CRE within this question and something that can help show signs of growth for this industry going forward. This would allow for increased ease of use for everyone involved in CRE. Landlords and property managers would be able to focus their time on more valuable items and ultimately increase the bottom line.

This would allow for everyone involved with CRE to be more informed and allow for better decision making. Ultimately this industry would look a lot more uniform and easier to enter and be a part of due to the increased simplicity and understandability of CRE which will grow the industry and have lasting positive effects on the country and the globe. 

The University of St. Thomas (UST) is the largest private university in Minnesota with ~10,000 students. The business school, the Opus College of Business, is #2 in the state for undergraduate business education. The Schulze School of Entrepreneurship, named for Best Buy founder Richard Schulze, is #1 in the state and nationally ranked. Digital transformation and education trends are driving big changes at the university in how entrepreneurs are educated and how startups are supported.

This year the university announced the end of its full-time MBA program, and a focus on part-time and online MBAs, citing the changing demand for graduate business education. The decline is part of a local and national trend trend, as Minneapolis-St. Paul MBA program applications are down 20% in the past five years, and as top ten business schools even see double digit declines. 

We’re not here to argue for or against an MBA, but to call attention to the fact that the perception of the degree is shifting, and UST is shifting with demand.

At Great North Labs, we don’t prioritize pedigrees. Whatever your background, what is important is whether or not you can execute. Whether you’re working from theory or practice, it comes down to the product and your delivery of it. 

Elon Musk weighed in on MBAs with the Wall Street Journal recently, saying, “I think there might be too many MBAs running companies. There’s the MBA-ization of America, which I think is, maybe not that great.”

Musk’s advice for business leaders was, “Spend less time in meeting rooms, less time on PowerPoint presentations, less time on a spreadsheet, and more time on the factory floor, more time with customers.”

So that begs the question: outside of the MBA program, how is UST supporting innovation? What is UST doing to get students “onto the factory floor” and spending time with customers? 

How University of St. Thomas Raises Up Startup Entrepreneurship

For answers, we turned to Great North Labs own Mike Schulte, JD/MBA ’17. Mike has experience with the Opus College, the School of Law, and the Schulze School, as well as the university’s other programs and initiatives. He is not only keyed in to the school’s programs, but speaks as an investor and startup ecosystem supporter through Great North Labs, and can speak to how his educational experience has helped his career in venture capital.  

The Aristotle Fund provides real investing experience to students. The fund is a 100% student-managed investment fund, and is the ultimate in experiential learning. Gerald Rauenhorst, the founder of a construction company that became The Opus Group, (and UST Trustee from 1966 to 2012), provided the initial $5M for the fund. The gift was kept anonymous for the first 17 years, until 2016. Rauenhorst stipulated that there be no faculty oversight in the investment decisions. Consequently, though it is run as a class, every student manager is invested in the Fund’s performance to the point where it is a full-time job. 

“A fierce competitor, Rauenhorst wanted all the future student managers to learn firsthand the challenges of managing money and holding themselves accountable to their clients,” said Professor Mary Schmid Daughert 

Official mentors include accomplished portfolio managers at top local investment firms. One attends the class every week to give feedback on pitches, and they pull no punches. Mike has acted as an unofficial mentor for the class, and continues to make connections through his former classmates. 

“This was the best educational experience I ever had, and I could easily find 20 other people to tell you the exact same thing. When we get together we still talk about spending hours in front of the Bloomberg terminal scouring analyst  reports and how it has shaped our careers,” said Mike. “I would not be able to do what I do at Great North Labs if it weren’t for the Aristotle Fund. That is why I recommend these students for positions.”

Servant Leadership creates ethical behavior in entrepreneurs. Servant Leadership is prioritized as part of the UST mission, with both the law school and the business school focusing a lot on self development. They bring in examples from industry to exhibit how this looks in practice, which include Pat Ryan of Ryan Companies US Inc., Dennis Monroe of Monroe Moxness Berg PA, and Alan Page, former Minnesota Supreme Court justice and NFL Hall-of-Famer. They challenge their students to adopt these same principles. 

UST talks a lot about Servant Leadership as a foundation of their mission, and it is visible in everything they do. Laura Dunham, Associate Dean of the Schulze School of Entrepreneurship, was recently featured in the Stanford Innovation Lab podcast episode “Teaching Ethical Entrepreneurship”. The podcast focuses on elevating applied ethics in the field of entrepreneurship. 

“I have students reaching out to me all the time to ask for career advice, and I never say no. I helped one student with an internship at a law firm I worked for. I’ve written letters of recommendation on behalf of students. This is what servant leadership looks like,” said Mike. “I really believe that faculty choose UST for the culture and that is why they punch above their weight class in that regard.”

At Great North Labs, we also believe in the principles of servant leadership. We support and give back to the communities we belong to, including organizations making a difference in the startup ecosystem. In addition to cash and time, we donate equity through our Founders Pledge so that when Great North Labs has a win, we all benefit. 

The Schulze School of Entrepreneurship pays students to work at early-stage startups. St. Thomas is arguably the most aggressive university in Minnesota at placing their students in early-stage growth companies. This sets them up to learn the skills required to execute and operate a successful startup business. These internships provide the “factory floor” experience that isn’t found in the classroom. 

The Summer Internship Grant program provides funding for some students while they intern at an early-stage startup. Companies interested in entrepreneurship students can inquire through the “Hire a Tommiepreneur” page on the St. Thomas website. 

gBeta St. Thomas program. gBETA is a program of gener8tor, a nationally-ranked startup accelerator with programs across the US and Canada. The seven-week accelerator is for early-stage companies, and is free, requiring no fees nor equity. Great North Labs is a proud partner of gener8tor, and a supporter of gBETA Greater MN-St. Cloud. 

gBETA St. Thomas is exclusively available to students and alumni of the University of St. Thomas. Companies of any stage, industry, or business model can apply to participate. The next cohort is July 13th -Sept. 3rd.

Mentor Externships give you a dose of the day-to-day reality, before you’re committed to it. The mentor-externship program at the School of Law requires at least 1 hour of “experiences” per week, where students are in the field, with mentors (usually UST alum), learning what lawyers do on a daily basis. This is completely self-directed, and students pick the fields they want to learn about. 

“For me, it was actually helpful in teaching me what I didn’t want to do which, in hindsight, was incredibly valuable. When I entered law school, I liked the idea of spending my days as a litigator in the courtroom… when I dug a little deeper, I determined that it wasn’t for me,” said Mike. “In addition to the externship, there was one semester where you worked 2-3 days a week in an internship. I worked at St. Paul City Hall. I had always liked local politics, but in practice… that was not the case. Every student’s experience was unique in this program, but I have no doubt that it was far more valuable than sitting in a traditional classroom setting.” 

Real consulting experience with real clients. The Applied Business Research course takes a team of 4 and assigns a client with a marketing need. The consulting team spends 6 weeks putting together a project, just like a marketing agency would do. 

“My project was for Code42. Code42 was considering a new product launch and wanted to know how to market it. Our research, including secondary, IT executive interviews, mass surveys, etc., uncovered that their customers cared less about the new product and more about security concerns,” said Mike. “Today, Code42 is positioned as an enterprise security software company. While I’m sure they weren’t relying on our research independently, I do think we provided valuable insights.”

By the Numbers

St. Thomas has 34,000 business alumni worldwide. 96% of them found employment, or went on to graduate school, within 4 months of graduating. Undergraduates from the School of Entrepreneurship have gone on to raise $42.9M in subsequent funding. 71% of the companies started by undergraduate alumni in the last 10 years are still in business. gBETA St. Thomas has helped develop and support a dozen local startups, without extracting capital or equity from the founders. 

Mike Schulte has seen first-hand the founders, talent, and startups that St. Thomas’s programs generate and support. He himself launched his career in venture capital thanks to the experiences he had at St. Thomas., and has been with Great North Labs for 3 years. 

Mike isn’t the only UST success story with Great North Labs. Two of our portfolio startups, TeamGenius and Clinician Nexus, are led by UST alumni founders. Our portfolio of startups employs 19 University of St. Thomas alumni all together. That’s almost one alumni for every startup we invest in!

Why it Matters

Though the market for full-time MBAs is fluctuating, UST is pro-actively adjusting to emerging trends. The school is re-thinking it’s educational offerings, as it adjusts to meet demands, but is maintaining rigor and efficacy.  In short, digital transformation is fueling innovation instead of fueling attrition.

While that change might not quite reach the level of “Hey, teacher! Leave the kids alone!”, it’s definitely not business as usual. The entrepreneurial support programs that have emerged across disciplines, schools, and functions are signs of this shift, and of the continued commitment of UST.

Those programs have continued to produce and support startups, founders, and talent, even as ideas of entrepreneurial education evolve. And during these challenging times, St. Thomas’s values have shined through, with the school emerging in the national scene as a leader in ethical entrepreneurship. That’s a mark of smart leadership for the largest private university in Minnesota. 

While there are vaccines on the horizon and a potential further stimulus package, possibly in time for the holiday season, we still have a ways to go until economic recovery. Startups will be key to that recovery. 
 

Which Startups Will Succeed?

Have you ever wondered if your app idea was worth pursuing, if a startup was worth working for, or if your buddy’s startup was worth investing in? Of course you have. While enterprise SaaS startups have reliable benchmarks to compare against, early-stage consumer app startups are harder to evaluate. 

This is a problem for these startups, because it affects their ability to raise money. It’s also a problem for Midwest investors, who miss out on huge successes like Groupon and Grubhub.

Here’s how to evaluate them.
 

MN Entrepreneur Gift Guide


As of 2010 census data, roughly 49% of the private sector worked for a small business, and 2 out of 3 new jobs were created by a small business. If you didn’t find all of your gifts on Black Friday, Small Business Saturday, or Cyber Monday, check out our 2020 Minnesota Entrepreneur Gift Buying Guide and buy from a small business.

Local small businesses have great, innovative products. Buying from them this holiday season also supports local jobs and growth. 

It includes ideas for a variety of products from local companies from camel milk skincare products to Boozy Jerky, and from Askov Finlayson’s Climate Positive Parka to the James Beard-winning  “Sioux Chef’s Indigenous Kitchen” (in case you’re still celebrating Native American Heritage Month).

Local Early-Stage Startup News


LaunchMN celebrated it’s one-year anniversary, and released a First-Year Progress Report. 

Our latest Lean Startup School (with Red Wing Ignite, ILT Studios, and LaunchMN) pitch night ended with 2 winners: 

gBETAGreaterMN St. Cloud Director Precious Drew was just named to Minne Inno’s 2020 Under 25! (Boozy Jerky mentioned above is an alumnus!)
 

Startup Investment Incentive

If you’re thinking of investing but need some incentive, here is how investors (including investors in VC funds and angel investors) can get a 100% exclusion on their gains from those startup investments. 

Events

Here is a mix of upcoming events, for investors, founders, and/or ecosystem supporters. All events listed are virtual.

Portfolio News


USA Softball Announces Partnership Agreement with TeamGenius. TeamGenius has a new partnership to serve as the athlete evaluation system for USA Softball. 

Inno on Fire: The 30 companies and people shaping Wisconsin’s tech scene. Allergy Amulet was named to the list of impactful tech startups.

2ndKitchen Releases New 2021 Multifamily Amenities Guide. 2ndKitchen has a new report out with research and survey data on the importance of amenities in Multifamily properties.

 

Job Board

Great North Labs is hiring VC Analyst interns for summer of 2021. The application closes this week!

Dispatch is hiring a Territory Sales Manager, Business Development Representative, and Ruby Developer for Remote work. 

FactoryFix is hiring a Team Lead – Full Stack Developer, Full Stack Developer, and Infrastructure Developer- DevOps in Madison, WI; and a Sales Development Representative in Chicago, IL, Indianapolis, IN, or Madison, WI.

PrintWithMe is hiring a Regional Sales Directors for East Coast, South Central, and South East regions; Director, Demand GenerationOperations Lead, and MBA Strategy Intern in Chicago, IL.

Parallax is hiring an Experienced Product Designer in Edina, MN. 

Branch is hiring a Senior Software Engineer and Android Engineer for remote work, and an Account Executive, Mid-Market, and Channel Sales Manager in Minneapolis, MN.

Inhabitr is hiring a Chief Growth Officer/Head of B2C Growth, and a Sales and Customer Experience Associate in Chicago, IL.

Clinician Nexus is hiring a Customer Success Manager in Minneapolis, MN. 

NoiseAware is hiring a VP of Marketing, a QA Technician (independent contractor), Account Manager, and a Customer Advocate in Dallas, TX.

PartySlate is hiring a Senior Growth Marketing Manager in Chicago, IL.

The world is changing, and a new wave of tech entrepreneurs are shaping the new normal. The tech sector is performing well as the need for innovation, necessitated by the pandemic, becomes more urgent. 

As digital transformation accelerates in all sectors, and our country re-establishes its economic future, we are working to cultivate tech entrepreneurs in the Upper Midwest. By increasing the capacity of our innovation ecosystem, we can produce more startup successes locally. This benefits not only current founders and investors, but contributes to a sustainable economic future of the entire region. 

Building Capacity

We build capacity by donating time, money, and equity to organizations that support founders. Not every organization, but the ones we see as most impactful. By donating to those organizations, we support founders, the startup ecosystem, and the entire innovation economy. 

Startups are fantastic drivers of economic activity. They are growth engines that take in capital and put out jobs – as well as create their own value. That’s why it’s so important to support them- and the organizations that encourage, enable, and enhance their existence.

So have we put our money where out mouth is? Any returning newsletter reader can attest that we certainly talk about building up the ecosystem enough. Well, now it’s time for us to shut up and put up. Check out our complete cash, equity, and time donations to date, along with the organizations we donate to.

Annually, venture investment makes up only 0.2% of GDP, but delivers an astonishing 21% of U.S. GDP in the form of VC-backed business revenues.- Source: Brookings article “As the venture capital game gets bigger, the Midwest keeps missing out“

If you are a founder or startup employee that is interested in rising to the challenge, check out our Founders Pledge. It is as simple as pledging to donate 1% or more of equity to the nonprofits that you find worthwhile. If you eventually have a big exit, that donation can mean MAJOR impact for a nonprofit organization. Our founding partners have pledged at least 2% of their personal interests in our debut fund, and we look forward to sharing our success with these impactful nonprofits. 

Ethical Entrepreneurship

“The question ‘does this make for a better society?’ is a question we don’t typically ask entrepreneurs to think about, but they should be” says Laura Dunham, Associate Dean of the Schulze School of Entrepreneurship at St. Thomas University. Dunham was recently featured on Stanford Innovation Lab’s podcast, eCorner. 

Dunham speaks specifically to ethical behavior among entrepreneurs, but the same principle applies to us. So, does our investing make for a better society? Do our capacity building efforts bear fruit? 

Time will tell on the tech side of things, but we can share some impact metrics. So far we have invested in 22 early-stage startups. They have attracted $138.4M in total funding, and have created ~750 jobs. Of those startups, 2 have rural presences (HQ or significant office), 4 have female founders, and 3 have minority founders and combined. These startups from underrepresented categories account for 30% of our invested capital to date.

Events

Here is a mix of upcoming events, for investors, founders, and/or ecosystem supporters. All events are virtual unless otherwise noted.

Portfolio News

Airbnb to Ban or Cancel One-Night Stays on Halloween Weekend to Deter House Parties. NoiseAware has a new deal with Vrbo, as Halloween brings a round of pre-emptive, “possible Halloween party” cancellations to AirBnB. 

PrintWithMe Announces National Partnership With Trammell Crow Residential. PrintWithMe has inked a deal with one of the nation’s largest developers of multifamily apartments.

BabyQuip and Inhabitr Form Strategic Partnership to Provide Long Term Baby Gear Rentals to Millennial Families. Inhabitr has a new partnership to provide baby gear rentals through its furniture rental platform. 

Job Board

Dispatch is hiring a Business Development Representative, Account Executive, and Customer Service Representative in Bloomington, MN; a Ruby Developer and Senior Ruby Developer for Remote work. Also Territory Sales Managers in Baltimore, MD, and Washington D.C.

FactoryFixis hiring a Team Lead – Full Stack Developer, Full Stack Developer, and Infrastructure Developer- DevOps in Madison, WI; and a Sales Development Representative in Chicago, IL, Indianapolis, IN, or Madison, WI.

PrintWithMe ishiring Regional Sales Directors on the East Coast and in Texas; Operations Lead in Chicago, IL; VS/SVP of Operations, Marketing Director, Inside Sales Executive, and Director of Revenue Operations for Remote work.

Parallax is hiring an Experienced Product Designer in Edina, MN. 

Branch is hiring a Data Platform Manager, Senior Software Engineer, and Enterprise Support Specialist for remote work.

Inhabitr is hiring an Operations & Customer Experience Director – B2B Team in Chicago, IL.

Clinician Nexusis hiring a Customer Success Manager in Minneapolis, MN. 

NoiseAwareis hiring a Director of Finance, QA Technician (independent contractor), Account Manager, and a Customer Advocate in Dallas, TX.

PartySlate is hiring a Senior Growth Marketing Manager in Chicago, IL. 

Tech Sector’s Growth has Accelerated

It is no secret that during the pandemic, the tech sector is delivering stronger returns than other sectors.

As examples, underlying the stock prices, Zoom sessions increased from 10M daily in Dec 2019 to 200M daily in March 2020. Daily broadband usage in the US jumped from 13.2GB in March 2020 to 15.3GB in August 2020. Over the 10 years from 2009-19, US e-commerce penetration went from from 5.6 to 27%. E-Books have been flying off e-library shelves. Doctors are seeing patients via e-health. E-ceremonies are delivering graduations, weddings, and birthday events.

Communications, software, biotech, and e-commerce have been among the best performers. On the other hand, non-tech sectors such as airlines, cruise lines, casinos, and automotive, have receded. And in low-growth or stagnant sectors, the tech-enabled disruptors have grown the fastest. For example, in entertainment, witness the growth of streaming media at the expense of cable services. Or in education, witness the growth of e-learning enabled enterprises.


“Dow Jones Industrial Average Compared to NASDAQ Composite” (Data from Yahoo Finance, as of 9.06.20)

Pandemic as Change Agent

Why have Zoom, Twilio, Shopify, and Atlassian become runaway successes? The COVID crisis has boosted them more than most other companies: Zoom for everyone to run businesses, schools, events; Twilio for cloud communications; Shopify to find online growth while controlling one’s destiny compared to selling on Amazon; Atlassian to manage projects; and several others.

As humbling as it is to acknowledge this fact, while venture capital and venture firms are recognized as drivers of digital transformation, the pandemic has been a much bigger factor in driving growth. At Great North Labs we terminated our office lease and deployed reporting methods for our portfolio companies that enable electronic data transfer and analysis. We conducted our own 2020 annual meeting as an e-meeting. In lieu of serving hors d’ouvres at a live event, we used a local startup to send Giftbombs. As much as we have pondered these ideas in times past, the pandemic is motivating this digital transformation.

Where to Invest?

So, in this mix, where should we invest?

Venture capital has the potential of highest value creation of any asset class. All the big tech companies started as venture-funded startups. Imagine if you had invested a few dollars in them when they were young. The negatives of venture investments are that they are not liquid for several years. So, if you can invest and wait, this is a good option. Another key negative is that many investments fail. For this reason, investing as family and friends from a limited pool you have access to is riskier than from vetting across a large pipeline by a venture fund.

It is also true that innovative companies get started at the highest rate during downturns and discontinuities, such as the pandemic crisis we are in now. As a result, more than ever, the world is now teeming with start-ups building solutions to make the world better with high capital efficiency. And they are targeting every sector: healthtech with new drugs and vaccines; supply chains with secure ledgers; insuretech with more tailored insurance; fintech with better access to and management of personal or enterprise capital; foodtech for better food and access; mediatech for pervasive information and media access…you see the picture. Then there are startups enabling these companies: companies enabling training and placement of specialized workers; companies delivering customer service more effectively; companies providing remote accounting, legal, and marketing; and companies training and retraining workers for the future – in product development, customer service, accounting, marketing, demand generation, or anything else.

The world does not need more brick-and-mortar businesses sustained by PPP loans. They can reinforce or repair moats, but we will get better returns from supporting the young innovators. The world needs startups that build value in the post-pandemic world in capital efficient ways, and help the brick-and-mortar incumbents get a new lease on life.

The Decade Ahead

How long will this new wave of startups continue, and what is the period over which their value creation will deliver returns?

The impact of past pandemics – smallpox, yellow fever, bubonic plague – rippled through economies for decades, and caused permanent changes. Among other things, outcomes of past pandemics included industrial equipment for productivity increases to offset population losses, vaccines for health, social safety nets, and new fiscal and monetary policy. Many of these changes have now been part of our lives for decades and in some cases centuries.

In the current pandemic, we have already seen seismic shifts. Post-COVID, the seedlings of Silicon Valley are sprouting at an ever-faster rate in Middle America and many other locations worldwide. At Great North Labs, we believe venture investing and the creation of new enterprises will spawn a new productivity cycle that will permeate economies across the globe over the coming years and decades. In the widespread, tech-enabled economic recovery that we are already seeing, the current venture investment cycle which will seed new startups may well be among the more productive than its recent predecessors.

NOTE: THIS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION WITH RESPECT TO GREAT NORTH FUND INTERESTS IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. 

Last month we wrote about the history of local startups that were formed during a recession and went on to success, including local unicorn Jamf. The conversation quickly turned to what that means for founders and investors. 

Starting Up in a Downturn

The idea is that while many startups are beat down by strong headwinds, those that are resilient and adapt to stay aloft are better-positioned to take off post-recession. The local, successful startups that have come out of downturns offer compelling evidence to support this idea proposed by Rob Weber. 

Lee Schafer delved into the topic in his Star Tribune article, “Can a downturn actually be the right time to start a business?” and spoke with Scott Burns, CEO of Structural and former CEO of GovDelivery.

Managing Partner Rob Weber’s own previous company, NativeX, was a startup success that came out of a recession.

Scott agrees that it’s probably true that “what doesn’t kill you makes you stronger”, but he doesn’t think that it’s better to start in a recession. Specifically, he laments the opportunities lost that he didn’t pursue when they presented themselves. 

“When CEO of GovDelivery during trying times, he said, ‘we were so beat up we lost our ability to move fast when the opportunities did arrive.’”

Investing During a Downturn

Few people would disagree with Scott that running a startup during a recession is a difficult position. Being a startup founder is incredibly tough even in easy times. But if founders can run lean and stay agile, they might come out of the pressure cooker with a proven, capital-efficient business.

In the Midwest, capital efficiency is already a necessity for startups. We have 10% of US venture-backed startups, but only 5% of funding. For investors, this can mean attractive returns on investments. Specifically, a 5.17x median MOIC (Multiple on Invested Capital).

There is opportunity to be found in a recession. The next GovDelivery, NativeX, and Jamf could be out there right now.

The trick is to keep yourself willing and able to move on those opportunities when they arrive.

Events

Here are some interesting upcoming events. They are all virtual.

Portfolio News

Allergy Amulet is new to the Great North Labs portfolio! Allergy Amulet is a fast & portable food allergen & ingredient sensor. The wearable device is paired with test strips, and is the world’s smallest & fastest consumer food allergen sensor. Read more at Crunchbase.

“Indeed acquires recruiting process automation platform ZapInfo”. Jobs site Indeed has acquired ZapInfo!

“Misty the robot graces Fierce AI Week in engineering”. Misty demonstrated it’s use as a temperature screening assistant for COVID-19.

“PrintWithMe Announces National Partnership With RangeWater Real Estate”. PrinWithMe has partnered with a manager of 50,000+ multifamily housing units.

“Pitchly completes $2.5 million investment round”. Pitchly has completed a $2.5M capital raise.

Job Board

Dispatch is hiring a Business Development Representative, Data Engineer, and Quality Assurance Engineer in Bloomington, MN; a remote Ruby Developer. They are also hiring Territory Sales Managers in Albuquerque,NM; Denver, CO; Phoenix, AZ; Portland, OR; Salt Lake City, UT; Seattle, WA; and Tucson, AZ. 

FactoryFix is hiring a Team Lead – Full Stack Developer, Full Stack Developer, and Infrastructure Developer- DevOps in Madison, WI; and a Sales Development Representative  in Chicago, IL, Indianapolis, IN, or Madison, WI.

PrintWithMe is hiring a Regional Sales Director on the East Coast; AR/AP Specialist, Inside Sales Executive in Chicago, IL; Customer Service Representative, Marketing Director, and a Fall 2020 Strategy Intern (MBA) for Remote work.

Parallax is hiring a Growth/Experienced Business Development Representative in Minneapolis, MN; Experienced Product Designer, and Head of Customer Success & Product Ownership in Edina, MN. 

Branch is hiring a Data Platform Manager, Senior Backend Engineer, Senior Software Engineer, Customer Success Manager, Customer Support Rep, and Fraud Agent in Minneapolis, MN.

Inhabitr is hiring a Chief Growth Officer/Head of B2C Growth, and a Sales and Customer Experience Associate in Chicago, IL.

Clinician Nexus is hiring for Customer Support I in Minneapolis, MN. 

NoiseAware is hiring a COO, VP of Global Sales & Account Management, Embedded Developer, QA Technician (independent contractor), Account Manager, and a Customer Advocate in Dallas, TX.

$23.7 Million Raised


Great North Labs has closed its first fund with $23.7M in committed capital! This is one of the largest debut seed funds ever raised in the Midwest. 

“We are very appreciative and humbled by the tremendous support shown for our debut fund by our limited partners,” said Great North Labs Managing Partner Rob Weber. “Our investors’ support shows not only their conviction for us as fund managers, but also their conviction to backing the next generation of startup founders across our region.”

Managing Partners Rob and Ryan Weber, SCSU President Robbyn Wacker, and Managing Partner Pradip Madan at the Great North Labs Startup Ecosystem Kickoff last September. 

This fund raise has exceeded our team’s expectations, and has increased our capacity, reach and impact as we cultivate the next generation of tech startups across the Upper Midwest.

“The opportunity in the Midwest is significant for investors with the right experience, criteria and investment thesis. For four decades, capital has gravitated towards Silicon Valley, Boston and New York. With the high cost of living and a talent supply-demand imbalance, making a startup successful is now more difficult in Silicon Valley,” said Managing Partner Pradip Madan, who is based in Silicon Valley. “As a result, investors are starting to pay more attention to the startup ecosystems in places like Chicago, Minneapolis, Madison and Des Moines. Plus, many of the industries – financial, food, travel and hospitality, healthcare, insurance, manufacturing, mining – that entrepreneurs are now disrupting are native to these areas. In the new Gold Rush, the gold is the hard-working entrepreneurs and their startups in these regions.”

Read more at VentureBeat, the Star Tribune, Yahoo Finance, the Minneapolis-St. Paul  or Milwaukee Business Journals, MinneInno or ChicagoInno, Tech.MN, the Grand Rapids Herald, the St. Cloud Times…

Events

July 17-18th. Enterprise Rising, Minneapolis. “If you’re an enterprise SaaS startup, then this will be the best room you’ll be in all year.” 

July 17-18th. Fund Conference, Chicago. Brad Feld of Foundry Group is the featured speaker this year. “FUND Conference was launched in 2015 to connect investors, vetted, emerging-growth companies, and business leaders for same-day connections and business development opportunities.”

July 18th. Minnedemo32, St. Paul. A showcase of working tech products made in Minnesota. No PowerPoint, 7 minutes to present. 

July 24th. Horizon, St. Paul. This is Forge North’s activation event for ecosystem leaders. “If you are ready to look to the horizon, set clear and ambitious new goals for our region, and rally around breakthrough ideas, partners in Forge North invite you to join in.”

July 25th. TedX Fargo 2019: Forward, Fargo. “We want to empower people to be solution-orientated, believing that ideas can change the way the world works. We want to encourage you to listen to new ideas, find a topic that you’re passionate about, and then take action to enable those ideas. Join us as we celebrate our 10th TEDxFargo event, and 10 years of TEDx!”

Advisors

Two Great North Labs advisors are new to the team! 

Geoff Wood is the founder of Gravitate Coworking in Des Moines, Iowa, as well as the Executive Director of the West Des Moines Business Incubator. Geoff co-founded and publishes Clay & Milk, a media startup that covers the Iowa entrepreneurial ecosystem.  

Mike Rynchek is the former CTO of Bright Health. Before that, Mike founded and served as CEO of Spyder Trap, which was acquired by Bright Health. He is currently the Global Strategy Lead for Onduo, and an active startup investor and advisor. 

Job Board

Dispatch is hiring all over the country (25 cities!) for Field Sales Representatives and Drivers. In Bloomington, MN, they are hiring an Engineer, a UX Designer, and for Biz Dev, Customer Experience, and Driver Engagement roles. 

Structural is hiring a Node/JavaScript Engineer.

FactoryFix is hiring a Software Engineer in Madison, WI, and a Business Development Specialist and an Account Managers in Chicago.

Misty Robotics is hiring a Manufacturing and Repair Engineer, a Devops Engineer, and a Sr. Software Engineer, in Boulder, CO. 

pepr is hiring for Biz Dev – Outbound Sales in Minneapolis. 

2ndKitchen is hiring a Full-Stack Developer in Brooklyn, NY, and an Operations Associate in Chicago.  

PrintWithMe is hiring a Business Development Executive, a Customer Success Manager, a Strategy Intern, and a Marketing and Operations Intern.

More than 8,000 venture-backed companies received a combined $85 billion in funding in 2017, representing the highest annual total since 2000.[i] As stocks, real estate investments, and venture capital reach record highs, what are investors thinking about where to invest?
The answer depends on the type of investor:

 
Is this a good time for venture investing?
If the economy continues to do well, venture investments will do well. If the economy falters or if there is a stock market correction, this may still be a good time to invest in venture capital.
This is because stock market corrections (and corrections in the real estate market, which usually follows the stock market) follow business cycles, which can last 4-7 years. Venture funds usually invest over a 9-10 year investment cycle (i.e., a 5-6 year investment period followed by a 4-5 year harvest period). A slower business climate or stock market correction ahead could well be bracketed within the life of a new fund. And if needed, with due approvals from the limited partners, venture funds can extend their term to time their exits better.[vi]
 
Is there benefit in investing in venture funds in down cycles?
Let us look at the dynamics of different asset classes in downturns.

  1. Real estate – During the 2008 financial meltdown, real estate crumbled. As people lost their jobs, renters could not pay their rents, and property owners could not cover their mortgages. As defaults grew, real estate prices dropped. The Case-Shiller index dropped from 195 in 2005 to 116 in 2011.[vii] Considering the leverage of real estate investments, the losses for investors were much higher.
  2. Stocks, ETFs – The stock market similarly took a serious hit. The DJIA dropped 54% from 14,164 to 6,469 over 17 months.
  3. Venture capital – From Q1 2008 to Q1 2009, venture funding fell by 50% nationally to $3.9 billion (Dow Jones Venture Source).

Why did venture capital fare better than real estate or stocks?
First, lean times promote capital efficiency. As is often heard, recessions are the best time to start new companies, which is where early-stage venture capital is focused.
Second, venture capital firms mark up or mark down their investments over their life cycle. However, as actual valuations are pegged only by liquidity events, the real IRR is not known until the investments achieve liquidity. During the holding period, capital-efficient companies, and venture companies that focus on capital efficiency, do well, i.e., are counter-cyclical. They suffer fewer dislocations during downtimes. They can maintain their strategies, continue to do business as usual, and get ahead of those that slow down. Employees of such companies are more secure and loyal. And if needed, high-quality talent not available during good times can be hired, with loyalty that again pays dividends over the long term.
 
The capital efficiency of the upper Midwest
Companies in the upper Midwest inherently tend to be capital-efficient because there is less capital available. Similarly, smaller funds such as there are in the upper Midwest are inherently more capital-efficient, as they have less to invest.
44% of venture capital flows into Silicon Valley.[viii] This sets the consumption set-point of Silicon Valley companies at much higher burn rates than in regions where availability of venture funds is limited. The relative lack of available capital in other regions, including the upper Midwest, instills caution in spending.
 
Employee wages
While most other expenses are comparable across the US, with legendary real estate prices, Silicon Valley employees cannot survive at less than Silicon Valley wages.
This is not true in the upper Midwest. Though other expenses are comparable, housing costs may vary from 1/3rd to 1/10th of the Bay Area, enabling much greater capital efficiency for employers. For example, Google employees can buy 5 houses for the price of one by moving to one of Google’s locations across the country.[ix]

Figure 1. The real estate cost advantage of the upper Midwest compares well against not only the most expensive regions in the US, but also against what may be incorrectly perceived as lower-cost overseas regions (e.g., China). Seven cities in China and an equal number of cities in the US are listed above Minneapolis.
 
Fold? Hold? Or double down?
Not only can capital-efficient companies continue without disruption during slow times, given the lag between investment and market benefit, those that increase their investment can emerge even stronger in a recovery.
Intel applied this counter-intuitive strategy across many recessionary cycles, and invested several billion dollars in down cycles.[x] When their new semiconductor fabrication capacity resulting from these investments came online a few years later, their timing coincided with market rebound. On the other hand, competition (e.g., Atmel, Fairchild, Intersil/GE, IBM, Motorola, Raytheon, and several others) weakened from retrenchment and lost market share. As the industry consolidated during down cycles, Intel gained market share, and cumulatively over several cycles, emerged as its leader.
Some investors may feel that liquidity is useful during a downtime. Others argue against it, as getting out of the game when entrepreneurs are especially capital-efficient has a higher opportunity cost, and to use the Intel analogy, puts the winners further ahead of the losers. According to a prominent Silicon Valley investor, “you got to stay in the game”. At these times there are opportunities to go one step farther and double down.
 
Are smaller funds better than larger funds?
The statistical odds of a unicorn (company valued at over $1B) are lower than, say, of a ‘deci-corn’ (company valued at over $100M). Larger funds invest larger amounts per deal. To return high multiples, they need unicorns, which are rare. Smaller funds invest smaller amounts and can get the same multiples from ‘deci-corns’, which are much more common.
 
Advantages for Midwest venture capital
There are other tactics used by, and attributes common to, small Midwest VC’s that safeguard against downturns:

  1. Global investments that require skills available in the upper Midwest. While staying abreast of the latest trends in Silicon Valley to stay competitive, Midwest VC’s can take advantage of expertise available in the upper Midwest to serve global markets. In so doing, they avoid the valuation markups and early-round dilutions of Silicon Valley yet seek global parity in later rounds and exits.
  2. Local investments, global exits. An emphasis on the upper Midwest inherently allows investing at a discount compared to the investments in overheated markets such as Silicon Valley. This roughly translates to a 60% discount in term sheets offered on companies in the Upper Midwest. Global businesses rooted in the upper Midwest still attain exit valuations that correlate with global valuations. Thus, if a down cycle may require 50% markdowns for some Silicon Valley funds, Midwest VC’s can still record a 10% (=60-50%) markup at the bottom of the trough, emerge stronger from uninterrupted progress from investees’ capital efficiency, and exit with a markup brought to parity with global valuations in strong economic times.
  3. Emphasis on product-market fit. With the reduced capital investment now possible in many tech businesses, the barrier to entry has been lowered. Smaller venture funds can adjust criteria to focus investments on product-market fit, early revenue, and early break-even and profitability, instead of being limited by the number of affordable investment options. Nothing demonstrates product-market fit and staying power than paying customers and profit; for customers, employees and investors alike, there is nothing more powerful than profitability. Judicious investment in such businesses and mentorship to focus teams on profitability facilitates survival in lean times.
  4. Operators as investors. Small venture funds are often started by former operators with past successful exits, and the Midwest is no different. Many Midwest VC’s have a history of building profitable businesses the old-fashioned way, a dollar at a time. This experience of running a company, of managing payroll through good times and bad, of knowing the revenue and cost management discipline required to make money operationally and sustainably (i.e., not with short-term financial engineering), is invaluable for VC’s to have. So much so, that even accomplished operators will supplement their teams with experienced industry advisors.
[i] https://nvca.org/research/research-resources/
[ii] https://www.bizjournals.com/twincities/news/2018/03/15/how-the-leader-of-the-university-of-minnesotas.html
[iii] https://www.wsj.com/articles/robert-f-wallace-named-ceo-of-stanfords-endowment-1427138729
[iv] https://news.yale.edu/2017/10/10/investment-return-113-brings-yale-endowment-value-272-billion
[v] http://www.pionline.com/article/20151014/ONLINE/151019943/university-of-minnesota-endowment-reports-57-fiscal-year-return
[vi] https://www.strictlybusinesslawblog.com/2017/06/29/the-life-cycle-of-a-private-equity-or-venture-capital-fund/
[vii] https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index
[viii] National Venture Capital Association
[ix] https://www.cnbc.com/2017/04/07/you-can-buy-multiple-houses-for-the-cost-of-one-near-google-hq.html
[x] https://www.reuters.com/article/us-intel/intel-to-invest-7-billion-in-u-s-as-recession-deepens-idUSTRE5196WR20090210
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Investment Thesis: Fund II Strategy

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Investment Theme: Digital Transformation Through AI

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June: Great North Labs’s first fund raised!

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Great North Labs Raises $23.7M to Invest in Early-Stage Tech Startups in the Upper Midwest

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May: Innovation Ecosystems, SingularityU Kickoff, and PrintWithMe

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April: Minnebar Recap, ZenLord Pro, and Supporting Entrepreneurs

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Minnesota Innovation Collaborative

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March: Minnebar, Hockey + Hustlers, and Innovation Workshops

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February: Improving the Culture for Entrepreneurship, 2ndKitchen, and the Prairie Capital Summit

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July: Pitchly, ForwardFest, and Where to Invest in the Midwest

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May: Team Genius, IoT, and the Future of Everything

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IoT 3.0

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