Next Frontier Capital Turns Four

NFC Turns Four

Four years ago, Next Frontier Capital held its first close on Fund I. On our fourth birthday, I write to share some learnings and insights and, most of all, to say a big thank you to our limited partners and founders for making our firm and work possible. There is a wonderful expression, if you want to go fast, go alone, if you want to go far, go with a team. Our four years is very much a team story, but we’ve gone fast and far. Thanks to Richard and Les for being wonderful partners.

Four years ago in celebration of our first close,I shared the news via a post that noted,

Based in Bozeman, Next Frontier Capital's focus is to partner with mission-driven, talented entrepreneurs to build Montana technology companies of impact, utility and value. Montana is characterized by a tradition of entrepreneurship, high university and commercial research activity, quality venture investment candidates, and yet is severely undercapitalized. We believe the ramp in venture allocation to Utah and Colorado is indicative of Montana's potential and future. The Fund’s Initial Closing is a testament to the potential of Montana’s future, the creativity and grit of her entrepreneurs, and a recognition by our Limited Partners that Montana is a worthy destination for venture capital.

Four years, two funds, twenty investments, new GPs and LPs, many entrepreneurs and co-investors later, I am humbled and wowed by the progress we’ve made.

Executing on Our Mission

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. Per Pitchbook, MT companies raised $83m and NFC companies, since our founding in 2015, have raised a total of $140+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 way 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.

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, Bessemer, BMW, Toyota, Amgen, Summit, Millennium, etc invest here in MT. Firms are indeed increasingly staffed to source and execute nationally.

Need for Regional Seed Capital

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.

NFC’s Opportunity

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.

Since our first close four years ago, we have branched out beyond Montana and are now actively investing in Colorado and recently made our first Utah investment.

I look forward to our next anniversary milestone post and to further sharing what we’ve learned as we work to execute on our mission to build companies of impact, utility, and value.