Mark Hasebroock and Beth Engel of Dundee Venture Capital present at 1 Million Cups Omaha Wedneday.
1 Million Cups was created to network and introduce entrepreneurs to other startups, but Omaha-Lincoln’s version continues to evolve, sharing others’ stories in the ecosystem.
Beth Engel and Mark Hasebroock of Dundee Venture Capital presented Wednesday to a crowd of 40 at Mammel Hall on the campus of the University of Nebraska at Omaha.
“The business of venture capital, not many know what it is,” Hasebroock said. “It kicks in right after credit cards and money from friends and family. That’s when you look for seed capital. But it’s tough to access capital in the Midwest.”
That was Hasebroock’s experience as he tried to raise $100,000 to create a minimum viable product for what would become Hayneedle, his startup home goods e-commerce site, in the early 2000s.
He had 40 meetings with investors in Omaha and Lincoln and got a lot of head nods and “come back when you have $5 million in sales” answers. On the coasts, he’d get meetings with venture capitals left and right, eventually getting investments from Sequoia Capital in the Valley and Insight Venture Partners in New York.
“Why can’t you get that in the Midwest?” he asked. “Some day I’m gonna do something about that.”
About three years ago, he did, opening a $2 million fund with an e-commerce and web focus. That filled quickly and then launched another $15 million fund that is now invested in 24 companies from Omaha, Lincoln and Kansas City to Chicago and Boulder.
They saw 600 pitches last year.
Dundee’s investment strategy is focused in Midwest businesses in e-commerce, productivity software, platform as a service and community engagement software.
“What we really look at is the people who run it,” Engel said. “That’s what it comes down to. We invest in teams.”
Their five limited partners, made up of family, family foundations, institutional funds and private equity, hope to see three- to five-times the return over a five- to seven-year period, Hasebroock says.
In addition to funding, they also help answer startup’s operational questions, give marketing and public relations help as well as access to their network.
They’ve launched Straight Shot accelerator and Interface Web School to help fill the gap of talent, which many of their startups say they face.
“We’re starting to make sure the density comes together,” Hasebroock said. “We are about bringing all the partners together.”
Here’s a shortened, paraphrased recap of the Q&A that came after their presentation:
What does it mean to raise a fund?
Mark Hasebroock: We’re a startup in a way. We go to investors and we want their money. When we started out we went to people and said this is our vision and they said “we don’t do venture in Omaha.” So we started selling them on the demand and it started to resonate. Investors are looking for something better than stock returns and this can be it. It’s high risk, high return, high reward.
How do venture capitalists get paid?
MH: They give us this $15 million fund and we take a 2 percent management fee. We also get 20 percent of the profits after repaying the original $15 million. It’s a small team. Four people, four interns. Our team members get part of those profits after some vestment (a period of time with the company). But we didn’t feel like it was right to risk others’ money if we didn’t put our own money in it as well, so part of that $15 million is our own money. If it fails, we fail.
What’s the typical investment from Dundee and what do you do for them?
MH: Anywhere from $50,000 to $500,000 for about 15-25 percent of a business. We want to be the one to lead the investment in most cases. A lot of Midwest companies keep their head down and don’t talk about themselves. We don’t think they should do that, so we help them with marketing and public relations, have Andrea from our office set up Quickbooks and help with finances.
There’s a high concentration of wealthy people in Omaha. Why is it so hard to get their money focused toward VC?
MH: This is just my guess, but I think Midwesterners are conservative and want to be risk averse with their money. Venture isn’t understood, either. Maybe we need to educate and have them understand this is something to consider as an opportunity for investment like real estate, stocks, etc. That way, more companies will get started.
As we raise a third fund, it’s hard. Investors don’t have balance sheets to look at for the most part. They are looking at Dundee VC and our team, and if we can make management of these business and grow them to get better, then they’ll want to put their money on our team.
How do you see the progression of the Silicon Priarie?
MH: A lot of credit goes to Silicon Prairie News and Big Omaha. They said this is happening and we’ve got talent here to make it happen. What Dusty (Reynolds) is doing (as an entrepreneurial arm) of the Chamber is great. We’re at the 1.5 yard line with 98.5 yards to go. KC, Boulder, Chicago—we can easily become that. No doubt in my mind.
Techstars couldn’t get Google and Microsoft to care about what they were doing and now they’re banging down the door. It can happen here. We need community focus and engagement to bring it all together. You need three things: capital, talent and density. Bring that together someplace, somehow.
Where should that density be in Omaha? Should it involve a proposed university facility?
MH: If you couple with a university it is in danger of becoming only that university. It should be serendipitous. Aksarben is so expensive. The reason the Mastercraft took off was because it was $7 a square-foot. I had a guy on the coast ask about rent and I said $20,000. And he thought I was talking about $20k a month. I meant for the year. So the cost of business is cheap. It’s going to be $25-30 bucks a foot in Aksarben.
Entrepreneurs want to be where where they want to be. They don’t like being told to go to this building where they need to be. But when it does happen, all of sudden you have all of this together and it’s dense. There’s collisions and that’s what it’s all about.
What do we want to see?
MH: A lot of people ask about that and we hate hearing it. You should know ahead of time what’s your problem, your unique solution, why you will win, your pre-money value and how much you need to raise. People don’t know that ahead of the time. The average pre-valuation company we’ve invested in is about $1.5 million. On the coast, the average is around $5.2 million.
What’s the sweet spot for growth?
MH: We’re looking at 10-20 percent growth a month. It’s rapid, but not like what others on the coasts are looking for.
What’s advice for companies you believe in but don’t invest in? What should be the next steps?
BE: We give them an honest answer. “We aren’t a fit because of…” We aren’t wishy washy because that doesn’t help anyone. We do give suggestions or introduce companies to other VCs that we think may fit them. Our goal is build networks and relationships. Sometimes, if they’re under-capitilzed and need say only $20,000 we tell them to talk to Visa or Mastercard. Or maybe grants or an accelerator.
We look at ourselves as super angels. Angels come in after credit cards and family/friends investment and they throw in $50,000. We do $100,000 to a couple million bucks.
How involved are you in setting milestones, checkpoints?
MH: It varies by company. Nick (Engelbart) works with companies every day and we set up key performance indicators. We know every week if everything is going great or if we need to send up a flare and go over something.
How do you exit?
MH: We look for a return on our fund in about eight years with the potential for two, one-year extensions.
What do you look for in a founder or what are red flags, characteristics to avoid?
MH: Our best example is the MindMixer founders, Nick Bowden and Nate Preheim. One of the best sales and organizational people ever in Nick and one of the best technical people in Nate. They were late to our pitch at Blue Line (coffee), but they had passion and nothing was going to stop them.
Good listening, coachability, drive, frugalness are all great skills to have.
How can the community help?
MH: Our brand is important. DVC is a venture firm that helps businesses grow in the Midwest and that’s something we want investors to know as we raise our third fund. We also are always looking for bodies, if you know anyone. We have 25 companies that are always looking to fill virtually any job opening.
Credit: Photo by Nick Engelbart of Dundee Venture Capital.