Jeff Standridge of the Conductor Angel Network in Conway and Jeff Amerine of Fayetteville's Startup Junkie are forming Cadron Capital Partners to fix what they see as a funding gap that prevents many Arkansas startups from taking their businesses to the next level.
"We've seen this gap now for two years plus," Amerine said of what is known as a "Series A gap," referring to the round of funding a startup generally raises after initial seed money.
"We're not going to wait for somebody else to parachute in and fix it," said Amerine, whose son Brett is also a founding general partner of Cadron Capital. "We're going to fix it ourselves."
Arkansas' angel investor network has grown considerably since 1999 when an early-stage investing club -- Venture Capital Investors of Little Rock -- was launched.
"I think you could get $50,000-$100,000 in a couple weeks. Angel and seed money is fairly available," Rick West, co-founder of Field Agent, said of young startups today. Field Agent is a mobile market research company in Fayetteville.
"If you want to be a startup and you've got an idea, there's an infrastructure here," West said. "There's a very healthy startup environment, but there's nothing to take you to that next level."
"If you need $1[million]-$1.5 million, there's no one. You've got private equity firms that want to be at a $5 million number, and then you have [venture capital firms] that want to give you $10 [million]-$25 million. Between seed money and $1 [million]-$1.5 million there's really no one here," he said.
Field Agent is one of the few Arkansas startups to have raised a Series A round of $2.5 million, though it came from Five Elms Capital in Kansas.
Amerine said that when Arkansan startups reach the Series A stage, "we want to be able to provide it and not have to send them somewhere else."
Cadron Capital Partners will aim to raise about $20 million to focus on the amount that Arkansas companies have had trouble finding -- around $250,000 to $1.5 million. These are often too small to interest large-scale venture capital firms and generally too large for angel investors to take a risk on.
Last year, NewRoad Capital Partners in Bentonville partnered with Los Angeles' Kayne Anderson to create a venture fund of about $100 million, which, Amerine said, left a void.
"[NewRoad] solved the back end of the problem, not that gap. They left that gap wide open, so that's what we hope to fill," she said.
Success Held Back
Jerry Adams, president and CEO of the Arkansas Research Alliance, said the gap is holding back the chance of a successful startup story.
"You've got gas or electricity in your car. You have enough to get it going, but you need more fuel to get to the next thing," Adams said. ""That more fuel right now is really the next big step forward in Arkansas, and I call it expansion money. Some people are doing it, but the net effect is not here."
Lineus Medical, a medical device startup in Fayetteville, recently dealt with the gap while it was trying to close out a round of Series A funding.
Jordan Mykleby, the company's director of engineering, said it took far longer to raise the funds in Arkansas than it would have on the East or West coast. "It's newer here, and people are more risk averse," he said.
Despite that, the company eventually managed to secure the funds it needed and remains committed to Arkansas.
"We still think we can do it here," said Spencer Jones, the company's founder and chief executive. "Just because it's slower or more difficult doesn't mean it's not possible or worth doing."
Mark Brandon was among the winners of the first ARK Challenge tech incubator in 2012. But after that success, he struggled to raise further funding to keep his company, now known as Qbox, afloat with Arkansan money.
He worked for six years to raise $200,000 in Arkansas before joining an accelerator in Silicon Valley, where he raised $2.5 million in six months.
He said the Northwest Arkansas market is not supporting tech startups at the speed and scale founders need, partially because few people understand the kind of investment.
"In Northwest Arkansas our businesses are retail, farming and logistics. All three of those businesses are about squeezing your assets, cutting costs down to the bone," Brandon said.
"Wal-Mart has a culture of squeezing their vendors that is legendary. And that's right for their business, but it's completely antithetical to a tech ecosystem."
Brandon said he advises Arkansas entrepreneurs to look elsewhere for an accelerator and funding, even though large out-of-state investors often demand that their portfolio companies move to be closer to them.
"I felt like I could get it done [with Arkansan money], but I was very much incorrect about that," Brandon said. "I want to believe that we can do it because I love this town, but I don't think we can."
Not Wanting to Move
John James co-founded Acumen Brands, which received a "Series C" funding round of $90 million in 2013. After leaving Acumen, he became a seed stage investor with Hayseed Ventures and is now looking to raise money again for a new venture, Engine.
He said the ecosystem has progressed "light years" from when he was first trying to fund Acumen.
"There was not even a group you could get together and brainstorm about the problems," James said. "And now, you could get 100-200 people together to talk startups. We've built a sense of community.
"Nothing but positive things to say about the progress we've made," he said, "but quite a bit of frustration about what's being done to fix our fairly obvious bottleneck, which I think is capital."
He said it has been a "nightmare" to find further funds for his new company locally.
"I've had two different people in the last two weeks tell me if I move to New York or Silicon Valley they will fund [Engine] with one check. The one thing keeping me here is, I love it here," he said.
James added the situation is better than it was eight years ago, but he is frustrated that it isn't changing quickly enough.
Standridge said efforts to close the funding gap is "a marathon and not a sprint."
He said the need for a gap fund is is a milestone that the market wasn't ready for three to four years ago. "And now we are," he said.
Ryan Mandl is a partner at Five Elms Capital in Kansas that has invested in Field Agent and Little Rock's Apptegy. He said that while the Arkansas startup scene is "a little bit earlier stage ... per capita, the quality of companies we're seeing is fantastic."
"We spend a ton of time in the Arkansas ecosystem and believe it is one of the most under the radar, but highly promising places to focus on."
Amerine pointed out that the Silicon Valley startup movement started right after World War II.
"It's been 70 years. It wasn't like it was overnight. We've got a long way to go. There are things we can do to accelerate it, but it's a long march to get it to where it's sustainable."
SundayMonday Business on 08/06/2017
Print Headline: Firm targets funding gap for startups