Yesterday, NFC held its 2018 Annual Meeting. Thank you to our LPs for their continued support.
Les, Richard, and I always enjoy the opportunity to update our LPs on our strategy, investment activity, and outlook. Moreover, I know that the LPs enjoy the opportunity to hear directly from NFC portfolio executives and we were fortunate to have Quiq, IronCore Labs, onX, and Ataata present.
The LP meeting begs some powerful questions. What have we learned in the past year? What is our best thinking regarding strategy, market position, and outlook? How are our investments performing? What types of deals are we looking to source and why?
In this post, I write to share some high level thoughts we were able to share.
NFC is executing on its mission to fund MT companies of impact, utility, and value. Pitchbook notes that NFC is the most active investor in our market. Moreover, prior to NFC's founding, MT received ~$3-5m per year in venture capital. In 2017, MT companies raised $83m and NFC companies, since our founding in 2015, have raised a total of $100+m. Per capita venture investments in MT grew from ~$3 per year to $79. MT's per capita VC investment of $79 per year is now larger than $74 in ID, $33 in NV, $48 in NM, and $34 in AZ, while we have a ways to go to catch UT's $358 and CO's $214. Why does this matter? MT founders are now in a position to build market leading companies without compromise when choosing to do so from Montana, and they no longer have to rely solely on SBIR grants to fund core research, which greatly increases the likelihood of shipping product.
Despite the growth of venture investing in the Rocky Mountain West, three markets received 85.8% of Q1 deal value, the West Coast, Mid-Atlantic, and New England. There are a few underlying trends, however, that the suggest the regional venture market will continue to grow. First, per the Brookings institute, the US population is "dispersing to suburbs, exurbs, rural areas, and “middle of the country” metros." In Bozeman, we are feeling the tailwinds of population migration - Gallatin County is the country's fastest growing micropolitan, the County was named by the Policom group as the strongest economy of its size in the US, and by 12/31/18, in reflection of our growth, Bozeman International will offer nine daily non-stops to major US cities.
In addition to the population shifts underway, the increasing number of mega Funds and the $120bn of VC dry powder, means that Funds are more likely than ever to invest nationally and out of their home market. When we started NFC, it remained a begged question whether tier one firms would invest in MT and the region in general. We have seen True Ventures, Venrock, BVP, BMW, Amgen, Summit, Millennium, etc invest here in MT. Firms are indeed increasingly staffed to source and execute nationally.
In order to attract national capital, however, there appears to be a minimum traction threshold required to secure interest. With the average Series A now $9m in proceeds at $27.5m pre, startups looking to secure national capital are needing to provide quantitative metrics that allow for firms to normalize endogenous risk via business model analysis. For example, in SaaS, a mature model, we see that companies need to be ~$2m in ARR with well characterized LTV, CAC, Churn, etc metrics. If those metrics are met, national firms are interested. Why quantitative filters? It is hard to evaluate teams, products, and strategies from afar independent of material revenue and KPIs, while local firms are well positioned to do so.
Getting to the metrics above, moreover, takes healthy amounts of seed capital, and Pitchbook now sees the average firm raising two rounds of capital before the major VC round. We think that it takes $2-4m in seed capital to achieve the required minimum operating performance necessary to attract a national firm to a regional deal.
This funding need is NFC's opportunity - we aspire to be a leading seed capital firm in our target markets, whereby we can look to lead $2+m seed rounds and work with management and our co-investors to achieve the "magic numbers" that allow for a successful Series A.
The days of “if I can’t drive to it, I won’t invest in it” appear to be waning, and NFC sees tier one Funds aggressively looking to source in our market, with co-investment activity to date illustrative of the trend.
In summary, the major population and economic growth underway in Montana, along with the increasing number of mega-funds looking to build national, not backyard, investment practices bodes well for regional venture and startup activity. However, national interest is conditioned on quantitative metrics and a minimum threshold of performance that allows for long distance evaluations. Seed firms, like NFC, are faced with a magical opportunity, to fund companies still working to reach the national VC thresholds and to then partner with management, co-investors, etc to build sufficient value and progress to entice the nationally-active firms to invest.
The $100m to date invested into NFC's 12 current companies speaks to the promise of regional venture and to a new market dynamic where the biggest and best funds appear to be more interested than ever in backing quality companies regardless of location, even here in MT!