It’s hard enough to get venture capital firms to give Idaho companies a look. Brad LaPray knows humility won’t inspire investor firms to cut multimillion-dollar checks for his biodegradable plastics company in Idaho Falls, BiologiQ.
So when LaPray gave his three-minute pitch to representatives from six out-of-state investment firms at a recent event at Trailhead in Boise, he didn’t shoot for subtlety.
“I started BiologiQ in Idaho five years ago to make a lot of money and save the world from death by plastics,” LaPray told the investors, who’d traveled from Albuquerque, Denver, Silicon Valley and Phoenix.
He said his company turns the potato waste from fries and potato chips into pellets that manufacturers can melt into traditional plastic molds. BiologiQ has proved its technology and competitive advantage with one patent issued and two pending, he said. Orders will increase eightfold this year, he said. The next step is to raise several million in venture capital to build a plant and ramp up production and distribution.
“If anybody here wants to make a lot of money, I suggest you talk to us and figure out how we can enter the market as soon as possible,” he said.
Eight companies made short, “Shark Tank”-style pitches. Most were from Boise. All were early-stage, all offered digital products or services — or in BiologiQ’s case, a science-driven ag-tech product — and all needed money. They sought anywhere from $250,000 to several million dollars in “seed money” to turn ideas into actual products and services.
Kyle Sales, founder of Outdoor Toy Share in Boise, described his business as Airbnb for RVs and motor boats, using software to match customers and vehicle owners. He needed $500,000 to begin testing in several markets. “It’s an area ripe for disruption,” he said.
Eric Haden, founder of Wedding Nook in Coeur d’Alene, explained how his online platform aggregates wedding vendors, meaning brides can shop for flowers, cakes, venues or anything else at a single site. The site’s soft launch turned a $68,000 profit in the last two months, he said.
Refer.com President Chris Bounds, a former executive at successful Boise tech startups MarkMonitor and Cradlepoint, went out of his way to thank the venture capitalists for making the flight to Boise.
“It’s still difficult to get people from Silicon Valley to come,” Bounds said. “They don’t want to invest here.”
LINKS IN THE CHAIN
The good news for those companies is that plenty of wealthy Idaho investors love to buy $10,000 to $50,000 lottery tickets on young companies, said Bill Gilbert, co-founder of the Caprock Group, a Boise wealth management firm. Startup founders typically develop their companies with personal money or investments from friends, family or “angel investors,” such as members of the Boise Angel Alliance.
“Boise’s great for seed rounds,” Gilbert says. “It’s sexy. People galvanize around that stuff.”
Founders of promising companies willing to hustle to piece together small investments can raise their first million dollars in Idaho, Gilbert says. LaPray says he pieced together $7 million, mostly in Idaho, from 40 to 50 “unsophisticated” investors — successful businesspeople who dabble in investing but who made their money outside of the professional investment world.
But “sophisticated” investors — by which LaPray means venture capital and private equity firms that specialize in investing in growing businesses — are missing in Idaho, he says. BiologiQ needs to step up to the venture capital level, where firms target companies that have proved their concepts and want to penetrate the market.
His company faces the added difficulty of an ownership structure complicated by so many angel investors, as well as the preference of many venture capital firms for software development over manufacturing.
“It’s been very difficult (to solicit venture capital) in this area,” LaPray said. “There are very few sophisticated investors who understand what we’re trying to do. Most investors here would rather invest $50,000 or even a few hundred thousand dollars in a company that does software.”
Idaho had two venture capital firms, Highway 12 Ventures and Akers Capital, that closed around the same time in 2011. Neither yielded returns strong enough to raise additional money to invest in more companies, Gilbert says.
Since then, the Treasure Valley and Idaho have lacked an institutional investor that could support growing companies needing “Series A” investments, which typically fall between $2 million and $5 million, Gilbert says.
Idaho certainly doesn’t have any venture capital firms targeting bigger deals or equity growth firms looking to invest tens or hundreds of millions of dollars in established companies looking for Series B or Series C rounds as they ramp up distribution or to become publicly traded.
These serve as “links in the chain” that make up a startup ecosystem, Gilbert says. Companies in the Salt Lake City area now have access to all of the links, meaning a successful startup can scale from a founder’s garage to a public stock offering without soliciting money from investors reluctant to leave the West Coast.
Idaho risks losing its most promising companies to areas with more opportunity to solicit investment, Gilbert says.
“When we get to the point where you can raise a $20 million or $30 million growth equity round, and you can do that with money coming out of Boise, Idaho, then we’ll truly have an ecosystem,” Gilbert says.
Boise temporarily lost one of those promising companies.
Wevorce founder Michelle Crosby started her company about five years ago with the idea that divorce could be less awful. Starting with a test group of about 100 families, Wevorce provided legal and family experts who helped couples hash out the fairest allocations of assets and child custody. All but one of the couples came to agreements out of court, proving to Crosby that the concept could work on a larger scale.
Wevorce caught a break in 2013 when it was accepted into Y Combinator, a prestigious business incubator in the Bay Area. After three months developing the tech systems and expert pool, Crosby and 59 other companies in her Y Combinator batch gave 150-second pitches to a room of 400 angel investors and venture capitalists who were believed to be looking to invest $1 billion in all.
Wevorce raised $2 million in 10 days, allowing ramp its roster up to 12 employees and expand its network to 450 divorce professionals across the nation.
Crosby moved Wevorce headquarters back to Boise last year. She said the company saves 60 percent on overhead compared with the sky-high costs of the Bay Area.
Wevorce will try to raise an additional $3 million in venture capital funding this fall, Crosby says. While she’d love to work with Idaho investors, the company will likely look to firms expressing interest from Salt Lake City and Seattle.
“In our initial fundraising, we thought we could raise about $350,000 in Boise, and at the time, that seemed like a lot of money,” Crosby said. “After we got into Y Combinator, we were pitching over coffee to angels, and people were writing one check for that big.”
BETTER DEALS IN IDAHO
Michael Hollenbeck, founder of Boise health care analytics company Proskriptive, says he hopes to pin down partners for a $750,000 seed round this month.
Proskriptive can boast revenues — projected at a half-million dollars for 2015 — that most companies seeking seed money cannot, Hollenbeck says.
He says he could piece together $500,000 in angel investments from Idaho, but he has traveled to Los Angeles, Seattle and Salt Lake City trying to find a venture capital partner.
Valuations in the Bay Area are inflated because the area’s many eager investors outbid each other, Hollenbeck says, whereas in Idaho, investors can use leverage to get better ownership deals.
“It’s a whole different world outside of Silicon Valley,” Hollenbeck said. “If you’re not raising money out of the valley, your valuation is about half of what it would be.”
Cradlepoint’s recent $48 million round of equity growth capital portends good things for smaller Boise startups, Gilbert said.
Caprock invested an undisclosed sum in the deal, but Gilbert says the reason for excitement is the lead: Utah’s Sorenson Capital, which invested $35 million and wants to expand its presence in Boise. A combination of Sorenson and other Salt Lake firms, including Mercato Partners, could substitute for one of the links missing in Boise’s fundraising chain, Gilbert says.
Mercato Partners led Cradlepoint’s “low eight-figure” fundraising in 2010, Cradlepoint CEO George Mulhern says.
“That’s as close to local capital as we’ve ever seen for that size of transaction,” Gilbert says. “That starts to change the game. That tells companies that they can do a sizable transaction right here in Boise, Idaho.”
The round was the fourth for Cradlepoint, which nearly failed before recapitalizing after Mulhern took over in 2011. Mulhern was a partner in Highway 12 Ventures, which invested in an earlier Cradlepoint round. The company toiled nearly five years developing devices with Mi-Fi capabilities, allowing users to create their own Wi-Fi hotspots sold at big-box stores. But that business model failed. The company was already moving down a path leading to its current offering of 3G and 4G routers and networking systems, and to cloud-based support services sold by subscription, when Mulhern came aboard.
Cradlepoint overcame several fundraising hurdles during its raises, including a “herd mentality” among venture capital firms to avoid tech companies with hardware components, such as Cradlepoint’s wireless routers, Mulhern says.
But geography made life harder. Cradlepoint hired an investment bank to narrow down a list of 20 to 30 investor candidates. Some of those based in Silicon Valley wanted to look closer to home, he says.
“I had a number of folks say, ‘I love your business, but why do I want to invest in you guys? I’d have to get on an airplane to fly out to board meetings. Or I could invest in five companies just down [U.S.] 101,’” he says.
At least one large, out-of-state growth equity firm, Frontier Capital, has taken an interest in Boise. Based in Charlotte, N.C. the firm typically invests between $10 million and $40 million in companies with a technology focus, often located in middle markets. Frontier recently closed a $340 million fund and opened a fourth fund of the same size.
Frontier Capital Partner Seth Harward made his first visit to Boise in July. He says few Boise companies are large enough to be in Frontier’s wheelhouse yet, but he hopes to pick them young and watch them grow.
“We want to be well-positioned there so that when they are ready, they can quickly get an investment instead of that entrepreneur running around the country for a year trying to raise capital,” Harward says.
Jack Boren, an analyst at Salt Lake City’s Epic Ventures, was one of the out-of-state investors at the Trailhead pitch event.
Boren says Boise has already produced companies that caught the attention of the investment community, including ProClarity, Clearwater Analytics and Cradlepoint. Boren pushed back against the notion that Boise is underserved.
“Wevorce and iVinci (Health) had no trouble,” Boren says. “Balihoo has taken on a ton of money. What I’m getting at is it’s always difficult and investors are starting to notice Boise.”
ON THE WAY?
Boise startups may soon get another local funding resource. John Hale, former managing partner at Boise financial services firm KPMG, and three other local entrepreneurs hope to start a fund of at least $5 million. The group hopes to announce the fund, including its partners, this fall.
“Deal flow is the most it’s been in Boise in years, not only in quantity of companies, but quality,” Hale says.
The fund would fill a niche between the current angel funds and the true venture capital level, Hale says, starting with early seed investments starting at $25,000 and ramping up future investments to as much as $500,000.
The partners plan to take a more hands-on approach than most angel investors do, Hale says. The partners would seek board membership on companies and serve as mentors, or step into management on a fill-in basis if needed, he says.
The new fund would not supply the $1 million to $2 million venture capital link that’s been missing in Boise since Highway 12 Ventures closed. However, Gilbert says out-of-state investment firms often form partnerships with smaller offices in markets such as Boise. Hale says the fund would seek out such partnerships and chances to invest alongside larger firms.
“The goal of our fund is to get to more $2 million to $5 million rounds by introducing VC firms to these companies when we’ve only put in $100,000,” Hale says. “Hopefully, we get a couple of successes and we build a reputation, and they see us as a partner in finding companies to invest in.”
The new fund could help startups skip friends-and-family fundraising, which creates problems when startups seek venture capital later, Hale says. Pitching to dozens of people takes time, and the resulting piecemeal investments make for too many investors, often with different ownership shares and share seniority.
“It gets all messed up, and a lot of VC doesn’t want
to deal with all of the stuff that gets bolted on,” Hale says. “One of the goals of the fund is to keep the number of investors down to a manageable few.”