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.

On March 19, 2020, a bill proposing the New Business Preservation Act was submitted to the Senate that seeks to drive economic activity, innovation, and job growth in the wake of the COVID-19 pandemic and the economic downturn. The New Business Preservation Act will provide equity funding for new businesses, with larger allocations directed to areas lacking in capital including the Midwest.

While the bill was important even earlier, the events of recent weeks add urgency. Dollar for dollar, it represents possibly the most effective grassroots economic stimulus for the mid-to-long term (2-10 years). Even for the immediate months ahead, it can stem job losses among venture-based businesses.

As an early-stage venture fund based in the Midwest, Great North Labs believes this legislation will drive startup activity and value creation in the undercapitalized regions of our country. Entrepreneurship is a proven, capital-efficient way to build economic value and transform regions, and adding capital to our under-capitalized region will bolster existing entrepreneurial ventures and encourage new ones.

Our support of this legislation is apolitical. As investors, we see the success of this approach every day. Around the world, venture capitalists who pick talent, invest in portfolio companies, and work with their ecosystem (including government) enable grassroots wealth creation. Better than any stimulus or wealth transfer mechanism, the most powerful and durable antidote to economic inequality is new value creation. It is not the CCC or WPA creating jobs for the sake of paying people, or the government distributing wealth, this is grassroots economic growth driven by venture capital.  It is not a one-time distribution. It does not depend on daily oscillations of the stock market which cannot possibly reflect true changes in economic value. Rather, it drives true economic value creation through innovation.

“Senator Klobuchar’s bill is a positive step at a critical time.  As we look at how to cope with the challenges presented by the coronavirus, we should not lose sight of the critical role new businesses play in creating jobs.  The New Business Preservation Act will help level the playing field, by backing entrepreneurs in every state and every zip code, and lead to a more inclusive economy.”

-Steve Case, Chairman and CEO of Revolution (Revolution operates the Rise of the Rest Seed Fund focused on investing in areas outside of traditional VC hubs.)

The Bill

The bill was sponsored by Sen. Amy Klobuchar, and co-sponsored by Sen. Chris Coons, Sen. Angus King, and Sen. Tim Kaine. It seeks to create an Innovation and Startups Equity Investment Program (ISEI) within the Department of the Treasury. The Program will “allocate money to certain States to assist high-potential scalable startups access venture capital to commercialize innovations, create jobs, and accelerate economic growth, and for other purposes.”

New Business Preservation Act

The legislation calls for $2B to go to the ISEI, with $1.5B going to initial funding and administrative costs, and a further $500M for follow-on investments. Eighty percent of funds would go to the Midwest, Southeast, and Southwest, with distributions based on population and adjusted for VC money already present, according to Leigh Buchanan at Inc. magazine, and as exits produce returns, they will be “reinvested in the next generation of businesses, creating a sustainable funding resource.”

Feasibility of the approach

Investing in America’s startups by following VC leads into deals is a fiscally responsible approach. As the chart below of VC returns by vintage year shows, even in recessionary years, returns are at an acceptable level for U.S. Treasury purposes.

Startups headquartered in the under-capitalized areas targeted by the bill will likely outperform the national averages because they generally are more capital efficient due to nascent capital markets to support them. It’s not unreasonable to expect a 5%-15% IRR even in recessionary times. This is accomplished because VC is a long-term investment vehicle, which is the perfect counter to a short-term financial crisis.

Small business vs. startup vs. tech startup

While the article and press release talk about “small businesses” and “new businesses”, the bill deals strictly with startups. A “startup” is defined in the bill as a business entity that:

While there is no mention of the word “technology” in the bill, most people associate startups with tech for good reason. New technologies drive, catalyze, and enable innovations central to new business models, products, and entities. While using a new technology is not required for a startup to put together a winning formula (or to get funding from the ISEI), many of the most innovative and successful companies in the world relied on either new or novel uses to create their businesses.

These companies often require upfront equity investment in order to achieve the scale necessary with their new software or hardware technologies to become viable, high-growth companies. Unlike a services, manufacturing, or industrial business, technology startups rarely have the assets or the initial sales base to obtain traditional bank financing.

The capital gap

Currently, in many of the vast, regional economies outside of VC centers, private investments are reserved for real estate and other traditional vehicles. The need for liquidity in the innovation ecosystem is not met. Because of this, startups in the Midwest and other under-capitalized areas have to work with a capital efficiency not required in more capital-rich areas.

This lean approach can be productive in the early stages of a company’s life by helping to refine products and achieve product-market fit out of necessity. This efficiency is an advantage that Midwestern startups have over coastal startups when capital markets start to freeze up in an economic downturn.

However, once the opportunity for rapid growth and scaling arrive, large amounts of capital are necessary for a startup to reach its potential. Until recently, this meant relocating the operation to Silicon Valley, Boston, or New York. Along with the promising startups goes the jobs created, profits generated, and other ancillary economic benefits. This capital gap is where venture funds such as Drive Capital, Great North Labs, Hyde Park Venture Partners, Rally Ventures, and others that specifically focus on areas underserved by venture capital, work to provide the capital, guidance, and networks required to fuel growth and build long-term value.

Over 10,700 venture-backed companies received a combined $136.5 billion in funding in 2019, and the year saw double the exit value of 2018.[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://pitchbook.com/news/reports/q4-2019-pitchbook-nvca-venture-monitor
[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] according to the National Venture Capital Association website
[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

Great North Labs Startup Ecosystem Kickoff

“It doesn’t take a lot of capital with early-stage tech companies to make a big impact.” – Ryan Weber

The Great North Labs Startup Ecosystem Kickoff brought together successful entrepreneurs and innovators to learn about the current state of the tech and investment ecosystem and network with like-minded professionals. 25 speakers, 6 portfolio startups, and over 250 attendees came together for the afternoon! The topics of education, community, fostering connections, economic impact, and the ripe opportunity for venture capital in the upper Midwest dominated conversations, as some of the area’s most innovative thinkers gathered, spoke, and networked.

Here’s what people have to say about the event:

“a fantastic event with great speakers” (@jmjhjr)

“pretty amazing turnout here at #SCSU (@graemethickins)

“Much appreciation to @mnvikingsfan and @robertjweber of @greatnorthlabs for spending their time supporting the startup ecosystem of MN. Great event today @stcloudstate #GNLKickoff – Thank You!!!!” (@jongoldsberry)

Continue the conversation on Twitter with the #GNLKickoff hashtag. If you missed the event, or want to see it all over again, watch it on YouTube!

Follow these links for more info for investors and startups. Or contact us!

Thanks to everyone for coming, and stay tuned for future events!

 

Events

Oct. 8th-14th, Twin Cities Startup Week (TCSW), Greater Minneapolis-St.Paul Area. Over 200 events scheduled!

Oct. 9th, “Minimal Lovable Product Panel” (part of TCSW). 3-5 pm, at the Baker Center, Minneapolis. FieldNation is hosting, and Ryan Weber is a panelist.

Oct. 10th, “Project North Fall Quarterly Roundtable“. 12-4 pm, at the Lumber Exchange Event Center, Minneapolis. Rob Weber will speak on the “State of the Twin Cities Innovation and Startup Community”.

Oct. 11thGreat North Labs Pre-TedX Happy Hour (part of TCSW), St. Cloud. From 5-6 pm, we’ll gather at Great North Labs’s headquarters for a happy hour, ecosystem talk and networking before TedX St.Cloud 2018: Cultivating, which will be held only a few blocks away at the Paramount in St. Cloud. This event recently sold out, so we added a few more tickets. Purchase them through Twin Cities Startup Week!

Oct. 24-25, 2018 FUND Conference, Chicago. “FUND Conference is the nation’s connector of entrepreneurs, venture capitalists, angel investors, and industry experts with a focus on curated deal flow, captivating content and same day connections.” Pradip Madan is speaking.

Oct. 30, TalentMN Leadership Summit, Impact Hub, Minneapolis. Sponsored by Structural!

Portfolio action

CEOs from our portfolio companies presented at the Startup Ecosystem Kickoff, giving overviews, updates, and asks of the Great North Labs community. Visit the Startup Ecosystem Kickoff playlist on the Great North Labs YouTube channel to see presentations from Dispatch, Structural, TeamGenius, FactoryFix, ZAPinfo, and Pitchly.

New advisors

Great North Labs welcomed three new advisors in September:

Jason Heath is the CFO at Drip + LeadPages, and was formerly the VP of Business Intelligence & Analytics at GoDaddy.
Mike Bollinger is the Founder of Livefront and the Co-founder of TECHdotMN.
Graeme Thickins is the President and Founder of GT&A Strategic Marketing Inc. and is a MinneAnalytics board member. He also has a long career as a tech writer and analyst, and runs GraemeThickinsontech.com.

Welcome to the team!

Job Board

Dispatch is hiring Drivers in Cincinnati, Chicago, Dallas, Kansas City, Orlando, and Minneapolis.
Structural is hiring an Account Executive, Office Administrator , and a Senior Engineer (ReactJS).
Team Genius is hiring a Lead Full-Stack Engineer
Pitchly is hiring a UI/UX designer and Core engineer- watch for postings on the Pitchly website.
FactoryFix is hiring a Visual/UI Designer, Vue.js Developer, VP Talent, and a Business Development Rep.

 

Great North Labs’s July Update

Where to Invest in the Midwest

At Great North Labs we are constantly making the case for investing in venture capital in the upper Midwest. Skepticism ranges from the size of the funds here, to the funding opportunities of the region, to the value of venture itself. GNL partner Pradip Madan addresses these issues in his latest piece “Where to Invest in the Midwest: Venture Across Asset Classes”. The article explores the popularity of venture investing with various types of investors, market timing, and the unique advantages of investing in a small venture fund in the upper Midwest.

 

Events

Thanks to everyone who came out to the Digital Transformation Summit on July 25th! Hosted by Great North Labs and Digerati, with speakers Gene Munster and Mark Ritchie, the Minneapolis event was a thoughtful collection of successful panelists and innovation professionals. With great food and cocktails, and VR demos by [x]cube LABS, the night was as fun as it was empowering.

August 16th-23rd, Madison. Forward Fest is an 8-day tech and entrepreneurship festival. It is a tremendous collection of events for startups and entrepreneurs. Ryan Weber will be attending from the 20-22nd, and will be holding office hours to meet with startups, entrepreneurs and investors while in Madison! Use the contact links below or tweet @mnvikingsfan  to set up a time to meet!

August 20-22nd, Grand ForksUAS Summit & Expo. What is UAS? Unmanned Aerial Systems: drones, their controllers and operators. This summit is in its twelfth year!

September 13th, Minneapolis.  Coolest Companies Fest is put on by the Minneapolis branch of the tech and entrepreneurship publication, American Inno. “Join us for drinks, music, fun and the Coolest Companies celebration in September! During the event, we’ll crown Minne Inno’s Coolest Companies.”

September 17th, St. Cloud. Great North Labs annual stakeholder meeting. Save the date! Invitations and details to come!

September 19-20th, Des Moines. Angel Capital Association (ACA) Midwest Regional Angel Meeting . A forum for Midwest angel investors to learn about latest industry trends and access the ACA “Best of the Midwest” investments for syndication opportunities.

September 27-28th, Chicago. Rise of the Rest CEO Summit. This is a private event put on by Steve Case’s Rise of the Rest Seed Fund. If you’re in Chicago and you want to connect with Great North Labs, Rob Weber will be in town for this event. Contact us through the contact links at the bottom of this email, or tweet Rob directly @robertjweber !

 

Portfolio action 

Pitchly is the newest addition to the Great North Labs portfolio. It is a content service platform for M&A professionals to organize and activate their intellectual property. Based in Des Moines, Iowa, Pitchly has developed a SaaS platform for professional service firms to aggregate information created during client engagements. Pitchly enables customers to conduct analyses on prior client services and easily turn data into content for marketing and business development activities. Pitchly is used in 35 countries to store more than 2 million client service data points for its customers.

Dispatch has closed their round of funding led by Great North Labs! The funding will be used to fuel an expansion to new markets. We had a strong showing for co-investors, with Revolution’s Rise of the Rest Seed Fund and the Gopher Angels investing alongside in the over-subscribed round.

New advisors

Bonnie Speer McGrath is President of Speer McGrath & Co. and CHRO of the Timmaron Group. Both companies provide executive support, board work, investing and fundraising. She was formerly President of TruScribe Software (now known as Squigl) , and nonconcurrently, the Board Director. Welcome to the team, Bonnie!

 

Job Board

FactoryFix is hiring a Business Development Representative
Dispatch is hiring a Sales Manager
Structural is hiring a Back-end Software Engineer, and a Senior Software Engineer
Team Genius is hiring a Lead Full Stack Developer

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

Can the Upper Midwest drive digital innovation in manufacturing and logistics?

Legacy Manufacturing Hubs
Manufacturing and farming ecosystems in the US and around the world have developed around a combination of the following ingredients: raw materials (minerals, crops), energy (electric, hydro, wind, solar), logistics (bays/ports, rivers, roads), talent/labor pools, and viable operating economics. A combination of investment capital, balance sheet leverage, and public policy has provided the needed financial backing to scale up.
In the US, several manufacturing ecosystems have come to exist in different regions over the decades, focusing on aerospace/avionics, automotive, food and farming, healthcare, metals and mining, oil and gas, and semiconductors/electronic components/systems. Upper Midwestern states are prominent in this list. These ecosystems have been using current-generation industrial/process controls systems, heavy equipment, and ERP systems.

Industry Region Anchor Companies
Aerospace/Avionics California McDonnell Douglas, Hughes Aircraft.
Kansas Beechcraft, Cessna.
Washington Boeing.
Automotive Michigan, Indiana, Ohio Chrysler, Ford, GM, Visteon.
North Carolina Borg Warner, Bridgestone, Caterpillar, Continental, Cooper, Daimler, Denso, Freightliner, Goodyear.
South Carolina BMW, Mercedes, Bridgestone, Volvo, Magna.
Food and farming Central Valley, California Del Monte, Dole.
Wine Country, California Gallo, Mondavi, Jackson, J Lohr, Korbel, Rutherford, Sebastiani, Sutter, Wente.
Minnesota Cargill, General Mills, Land O’Lakes, Hormel Foods.
Missouri Monsanto.
Wisconsin Schreiber Foods.
Iowa Rembrandt, Burke, West Liberty.
Idaho Simplot.
Healthcare Minnesota Boston Scientific, Mayo, Medtronic.
Illinois Abbott Labs.
Industrial Equipment Illinois Caterpillar.
Iowa John Deere, Vermeer.
Minnesota Honeywell.
Wisconsin Rockwell Automation.
Metals Pennsylvania, Ohio Bethlehem Steel, U S Steel, USX.
Mining and materials Minnesota 3M.
Oil and gas New Jersey Arco.
Texas Exxon-Mobil, Schlumberger, Valero.
Paper Idaho Boise-Cascade.
Semi-conductors Silicon Valley ICs – Broadcom, Intel, nVidia, Marvell, SanDisk/Western Digital.
IC manufacturing equipment – Applied Materials, LAM Research.
San Diego ICs – Qualcomm.
Idaho ICs – Micron.

 Table 1: US regions, manufacturing ecosystems, and key anchor companies.
Digital Manufacturing – Requirements
In the age of ‘traditional’ manufacturing, the resources needed included:

 
In the age of digital manufacturing, from design to shipping, the following capabilities are important:

 
Advanced technologies useful for these capabilities include:

 
Next-generation digital manufacturing initiatives have taken root in regions where current manufacturing ecosystems have existed. For example, Tesla’s California factory is housed in the earlier NUUMI (General Motors and Toyota) plant in Fremont in Silicon Valley, where the plant was originally set up in 1960 by General Motors due to cheap land, the port of Oakland nearby, and a freight railroad along the Bay. Similarly, SpaceX (Hawthorne, CA) has leveraged design and manufacturing resources originally set up by McDonnell Douglas and Hughes Aircraft in the Los Angeles area near the port of Long Beach.
The Upper Midwest
Considering the extraordinary value creation of companies such as Tesla and SpaceX, there is a significant investment thesis in enabling next-generation manufacturing organizations to arise in the Upper Midwest, where many similar current-generation manufacturing ecosystems already exist.
Given the democratization (i.e., global availability) of some of the new technologies, the presence of global companies such as Google, Amazon, and IBM in most of the major cities in the Upper Midwest, and the significant academic centers across the region; highly-trained resources are available throughout the region to enable advanced digital manufacturing centers of excellence.
The Upper Midwest also has strong attributes to attract and retain relevant labor pools. Table 2 shows the relative desirability of different regions in the US as destinations for STEM workers. The statistics for the Upper Midwest, broadly including the greater Cincinnati, Columbus, Chicago, Denver, Madison, Minneapolis/St. Paul, and Pittsburgh areas, speak for themselves.

Rank (1=Best) Metro Area Total Score Prof Opptys STEM Friendliness Quality of Life
1 Seattle, WA 73.60 2 4 15
2 Boston, MA 71.94 7 1 43
3 Pittsburgh, PA 65.90 12 11 9
4 Austin, TX 65.15 6 8 27
5 Minneapolis/            St. Paul, MN 64.95 19 6 17
6 Madison, WI 64.00 13 16 13
7 Salt Lake City, UT 62.96 9 14 18
8 Springfield, MA 62.80 36 2 7
9 Chicago, IL 60.71 49 13 8
10 Atlanta, GA 60.69 5 27 31
11 Cincinnati, OH 60.51 16 33 14
12 San Francisco Bay Area, CA 60.50 3 7 67
13 Columbus, OH 59.71 33 21 21
14 Denver, CO 57.73 10 24 37
15 San Diego, CA 57.39 59 23 16
16 Sacramento, CA 57.20 44 20 25
17 Colorado Springs, CO 57.00 17 54 20
18 Worcester, MA 56.88 43 3 65
19 Richmond, VA 56.58 8 32 44
20 San Jose, CA 55.79 18 18 53

 Table 2: Desirability of cities in the US for STEM professionals. (Data Source: Richie Bernardo/ WalletHub, “2018’s Best & Worst Metro Areas for STEM Professionals”).
Superimposed with Table 1, Table 2 shows the opportunity for these regions to become magnets for next-generation manufacturing.
What Do the Next-Generation Manufacturing Innovations Look Like?
As a result, disruptive new companies are emerging in these regions, creating the investment opportunity to fund them from early-stage growth to scale-up. These companies are working with the incumbents shown in Table 1 to accelerate their evolution towards advanced digital manufacturing.
Examples of innovative companies focused on manufacturing and transportation in the upper Midwest include:
Proto Labs[i]– Rapid prototyping: allowing quick turnaround manufacturing.
FactoryFix[ii]– Contingent labor for equipment: predictive diagnosis for timely repair with skilled labor and relevant spare parts for better customer experience at lower cost.
Basin Commerce– River transportation: harnessing of shipping capacity on lake and river waterways using barge booking software.
Rambl[iii]- AI: sales call CRM logging and intelligence that analyzes calls for specific criteria and actions to surface insight.
Stemonix– Drug discovery: tissue manufacturing for testing potential side-effects of new drugs for neurological and cardiac diseases.
Aker– Crop management: Use of drones for crop management based on weather databases and image-based diseases detection. 
The Four Legs of the Innovation Stool
Infrastructure, technology, labor, and capital are the four legs of the innovation stool. The Upper Midwest has all of these.
Through new digital manufacturing technologies focused on topline and bottomline benefits, today’s manufacturing ecosystems are ripe for significant new value creation.
At Great North Labs, we are focused on providing early-stage capital to innovators in the Upper Midwest, with an emphasis on next-generation manufacturing. We leverage partners and advisors with market and operating experience in manufacturing. We invest in, and provide guidance and advisory resources to technology startups like FactoryFix that are poised to disrupt the traditional manufacturing and logistics industries in the Midwest.
 
[i] Donald Krantz, Director at Proto Labs, is an advisor to Great North Labs
[ii] FactoryFix is a Great North Labs portfolio company
[iii] Rambl’s co-founders, Mitch Coopet and Brian Bispala, are advisors to Great North Labs

The Industrial Internet is the future- and it’s being built now.

IoT and Analytics are transforming industry, and who know industry like the upper Midwest?

Add to the decades of institutional experience a community of educated tech adopters, then just add water (liquid capital) and stir. BAM!
Forget Silicon Valley, this is Silicon Lakes.

Read the Full Story

New Investment

TeamGenius is player evaluation software for managing tryouts, coach evaluations, camps, and more. Team Genius is focused on building stronger young adults and communities through their powerful, simple software tool. Streamline scoring with the mobile application, add transparency to the evaluation process, and ditch the paper evaluation forms, clipboards, and spreadsheets!

Browse our Portfolio

Minnebar 13

With no formal workshops, “BarCamps” are user-generated and participant-led by tech and business community leaders. Over 100 sessions were held this year at Minnebar13. Participants, speakers, and staff braved the ridiculous Minnesota blizzard to hunker down at Best Buy HQ for Minnestar’s premier tech conference.

MinneStar is currently running a 100 Day Challenge where the Board of Directors is matching donations by new community members. Join Rob and Ryan Weber and contribute to this important part of the Twin Cities tech community!

Great North Labs at Minnebar

Ryan Weber presented How Running Lean Can Help You Raise Capital, about how the stages of funding correlate to the phases of customer development. His Exponential Technology and Leadership talk delved into disruptive technology and innovation.

Rob Weber focused on How Entrepreneurs are Impacting Cities. Participants learned core concepts on entrepreneurial thinking and leveraging local industry expertise to create the next big thing.

Upcoming Events

EntreFEST May 17-18, Cedar Rapids, IA

State of Innovation: Ag-Tech May 22nd, Minneapolis, MN

Drone Focus Conference 2018 May 30, Fargo, ND

New Venture Challenge– May 30, Chicago, IL

 

Welcome New Advisors, to the Great North Labs Team!

Brad Lehrman – Attorney, Soffer Law Group, PLLC
Jeffrey Robbins – Attorney for Entrepreneurs and Angel and Venture Investors, Messerli & Kramer
Mitch Coopet – Co-founder of Aftercode
Paul Borochin – Assistant Professor of Finance at UConn School of Business
Art Rosenberg – President and Owner, Capital Commercial Realty Group, LLC
Shawn Teal – President, Forest Hill Capital

See our Team

Healthcare Today

Some of the smartest minds work in healthcare, life sciences and biopharma. Yet the healthcare sector struggles to bring innovation into its ecosystem. The pace of innovation adoption has been much greater in other sectors, including in communication (Facebook, Skype), learning (Google, YouTube, Coursera), shopping (Amazon), personal finance (PayPal), and entertainment (Netflix).
This is not because of a lack of innovation in the pipeline. Healthcare sector innovators are hard at work on drugs and therapeutics, devices, and operational aspects of healthcare delivery. Breakthroughs have come in genomics-based precision drugs, machine-learning-based disease detection, EMRs, payment systems, patient adherence and education tools. In healthcare, the innovation tends to be evidence-based, with scientific papers that quantify results from well-designed experiments, and a highly-skilled academic research ecosystem at their source. That aspect is unique in the healthcare sector, and the sector has other ecosystem attributes not seen in other sectors.  It’s this unique ecosystem that makes market insertion, growth and adoption at scale more complex, requiring specific insight and enablement.
The Upper Midwest has substantial healthcare anchors to promote a thriving ecosystem of clinical innovation and practice. Examples include the leading research, teaching and clinical centers of the Mayo Clinic and University of Minnesota; hospital systems like Minnesota Health System and CentraCare; device manufacturer Medtronic; software companies like Epic; payers such as United Healthcare; and the processors Optum and United. There are also hundreds of strong, related entities across the region. Healthcare investment is shifting from traditional hotspots like Boston, Houston, and Raleigh-Durham to Silicon Valley, and while the global ecosystem catches up, there is an opportunity to take advantage of this transition to strengthen the ecosystem in the Upper Midwest.
Strong healthcare research leads to breakthrough ideas which require mentorship and incubation to grow. Leading research institutions can organize ecosystem support, such as how the University of Minnesota encourages mentorship through their Venture Center’s Business Advisory Group which brings together entrepreneurs, funds (including Great North Capital Fund), and industry leaders to drive the successful commercialization of its academic research. This is big business, and the U of MN now generates roughly $1B per year from such efforts (two-thirds life sciences and one-third software/IT).
Geographic and industry-themed startup accelerators have also begun to proliferate in the region.  Startup accelerators support early-stage, growth-driven companies through education, mentorship, and financing for a fixed period of time, among an admitted cohort of companies. The multi-city startup accelerator, Gener8tor, is managing a new Twin Cities med-tech accelerator backed by Boston Scientific, the University of Minnesota, and the Mayo Clinic.  Venture studios and incubators are other forms of early-stage support available in the region.  Minneapolis-based Invenshure has successfully launched multiple healthcare startups.
The region’s healthcare system is also significant on the demand side. For example, the cost drivers of healthcare in Minnesota reflect those in the US at large. Yet, while challenges in patient care are also similar to those of other regions, Minnesota’s efficiency is better. Healthcare spending accounts for over 16% of the US economy but is only about 13% of the Minnesota economy. So not only are Minnesota-based insights relevant, they are valuable. Innovations can be developed and piloted in Minnesota, then applied in other states. Startups developed here can be scaled nationally and, with adaptation, internationally.
 

Figure 1: Health Care Cost Drivers: Spending and Shares of Growth by Service, 2011 to 2013.
(Source: Minnesota Department of Health).
 

Change is Accelerating

Each decade brings its own set of innovations that transform industries. The healthcare industry will undergo vast changes in the next 10-20 years. The growing spate of investments and partnerships among tech innovators is signaling an increasing rate of change in this sector. The most visible examples of these innovators include Amazon, Apple, Google, Qualcomm, and Walmart. Google Ventures alone did 27 healthcare deals in 2017, up from 9 in 2013.
These companies you wouldn’t normally think of as bastions of healthcare innovation, yet they are all allocating large talent pools and budgets in the industry. Until Tesla, who would have thought that the next innovation in cars would come from Silicon Valley? More than their balance sheets, the noteworthy attributes of these companies are their culture of observing ecosystems, and their practice of inserting innovation in a stepwise and sustained manner to upend markets.
When you combine such entities with those like Berkshire Hathaway and Goldman Sachs (both of whom are partnering with Amazon in healthcare), and the financial and corporate venture groups that work with them, a disruptive landscape begins to take shape in which other innovators and incumbents alike can find new opportunities. For innovators, it means aligning their innovations with insertion points with high economic value and low resistance. For incumbents, at minimum, it means awareness and being prepared; more proactively, it means proactive engagement with capital (e.g., investments through VC firms), pilots, and adoption. For example, the Mayo Clinic has partnered with Google on leveraging its Knowledge Graph smart search algorithm for patient education, and Optum’s venture arm (based in Boston and Silicon Valley) has allocated $250M to venture investments
The range of innovations in the pipeline is equally stunning. Early examples include smartphones coupled with wearables for clinical-grade data. Today’s pipeline includes voice assistants (trained Alexa-like products) for health-related questions, machine vision for detecting physical anomalies (in skin, bones, retinae, or genes) or even bacteria in food. There are AI and visualization-enabled robotic surgery tools for doctors (e.g., Verb Surgical); machine learning in patient-specific onset detection for things like allergies and COPD; big data in early cancer detection (e.g., Freenome) and other diseases like multiple sclerosis, Parkinson’s and autism. The Mayo Clinic and AliveCor have shown that an AI can be trained to identify people  at risk for arrhythmia and sudden cardiac arrest despite normal EKG results. There is also analytics-optimized underwriting for individuals and small businesses (e.g., Oscar), Medicaid (Clover) and self-insured populations (Collective Health). 
 

Enabling the Innovation

Applying capital to create, enable and grow innovation platforms, align disruption with practical value in startups, and engage institutions for initial adoption, deployment at scale, and sustained growth requires a deep understanding of the ecosystem and cross-disciplinary skills to navigate it. This is especially true in healthcare given the ecosystem’s unique attributes and complexity, the importance of human health, government regulation, and the depth of incumbency among some players.
Startups benefit from focused enablement of resources including mentors, partners, lab space, hardware/software development expertise, and communication and data analysis platforms. Healthcare enterprises benefit from investment partners who understand their service goals and the need to balance innovation within financial constraints and with operational realities such as the need for patient privacy and the limitations of government regulations.
At Great North Labs, we focus on bringing such forces together to apply capital and expertise effectively and efficiently. We study ecosystems and leverage experts as advisors. We bring people together at events and entrepreneur training, through referrals, and with investment, mentorship and thought leadership by our team. We apply our capital and resources locally, with a deep connection to innovation hubs nationally, and with the goal of scaling globally.

July Newsletter
Great North Ventures

iraLogix closes $22M + Branch expands with Uber

iraLogix Closes Series C
Great North Ventures

iraLogix closes $22M Series C

June Newsletter
Great North Ventures

Flywheel lands Gates Foundation grant

We're Hiring
Great North Ventures

Venture Capital Analyst

We're Hiring
Great North Ventures

Executive Assistant – Venture Capital Firm

Great North Ventures Raises $40M Fund II
Great North Ventures

Great North Ventures Raises $40 Million Fund II

Investment Thesis: Fund II Strategy
Great North Ventures

Investment Thesis: Fund II Strategy

Investment Thesis: Community-Driven Applications
Great North Ventures

Investment Theme: Community-Driven Applications

Fund II Theses: Solving Labor Problems
Great North Ventures

Investment Theme: Solving Labor Problems

April Newsletter
Great North Ventures

Trends in the Gig Economy + Work in the Metaverse

Minnebar14
Josef Siebert

MinneBar 14 Recap

Minnesota Innovation Collaborative
Josef Siebert

Minnesota Innovation Collaborative

engineer and various business information. Internet of things industry.
Pradip Madan

IoT 3.0

Healthcare innovation image
Great North Ventures

Healthcare Innovation