Review of NFC's 2019 Annual LP Update

Les Craig

On June 28th, NFC held its 2019 Annual Meeting. Thank you to all of our LPs for their continued support. Their faith and trust in our firm is truly impacting our state, creating tremendous opportunities for early stage companies.

We always enjoy the opportunity to update our LPs on our strategy, investment activity, portfolio performance, and outlook. Moreover, we know that the LPs enjoy hearing directly from our NFC portfolio executives, and we were thankful to have senior leadership from TwinThread, Quiq, Submittable, and our newest NFC Founder (investment to be announced in the coming weeks!) present live at the Rialto in Bozeman.

We write to share some high level thoughts we brought to the LP meeting after reflecting on the past year’s investments; as well as the trends we are observing in Montana, and more generally in the Northern Rocky Mountain West (MT, CO, UT, ID).

The State of Venture in Montana and the Northern Rockies

Our core mission continues to be providing access to capital for founders in Montana and the Northern Rockies - and the past year has affirmed that key trends are in our favor. Venture capital is increasingly becoming a national game. The steady rise in the number of “mega funds” and the over $128.5B of VC dry powder currently in the venture market means that funds across the US are more likely than ever to invest outside their home regions in an enduring quest for qualified deal-flow.

When NFC closed our first fund in 2015, we firmly embraced the underlying assumption that leveraging a “boots on the ground” strategy was necessary for sourcing and supporting founders in our state. Our hypothesis was that we would be able to leverage this strategy to attract tier one VC firms as both syndicate and follow-on investors in Montana. It’s no longer a field of dreams topic of discussion; we can now confidently and definitively answer - yes, we built it, and they did come [and will invest]. The Montana-based portion of our portfolio (14 names) includes a variety of top tier national co-investors including but not limited to:

  • Foundry Group (Boulder)
  • Summit Partners (Boston)
  • Venrock Capital (Palo Alto)
  • Millennium Technology Value Partners (New York)
  • Bessemer Venture Partners (Menlo Park)
  • True Ventures (San Francisco)
  • Chernin Group (Los Angeles)
  • Revolution/ Rise of the Rest (Washington, DC)

The trend of Montana attracting national investors goes beyond our portfolio as well. Investments like the 2018 Goldman Sachs-led 25M financing of Livingston, MT based PFL signals a broader shift towards firms being staffed to execute nationally. We talk regularly with VCs and partners down-stream of our firm who want to invest in companies operating in our state. This is a movement we don’t expect to slow down; we expect it to accelerate as our portfolio matures and helps organically re-define what’s possible from a growth and success perspective in our state.

What we’ve observed as a result of this trend towards national interest is an even greater than expected need for up-stream, earlier stage investments in the Northern Rockies. Most national firms still rely on financial metrics to normalize their risk across geographies. This means companies without well-characterized customer metrics and go-to-market strategies who have generated less than ~$2M in cumulative revenue have difficulty attracting the attention of national investors willing to lead a Series A. Getting to these minimum thresholds, especially in nascent geographies, such as Montana, often requires $2-4M of total paid in capital and a few rounds of funding (2.1 avg number of rounds raised prior to first early-stage deal according to PitchBook in 2018).  This vacuum of opportunity is exactly where Next Frontier is excited to work with the best prospects in our region to get to minimum thresholds in order to achieve escape velocity towards a national firm leading their Series A/B.

We aim to be the preeminent fund in Montana and the Northern Rockies to help companies progress from Seed through Series A by leading strategically syndicated rounds in the $2-4M range.

By executing on this mission, we help companies attain the resources and total PIC required to meet the minimum thresholds of national tier one follow-on investors.

his positions us as a trusted local syndicate partner, and we can then market NFC deals nationally for Series A and Series B financing. Seed capital remains scarce in our region, which is why our role filling the gap between local start-ups and national visibility is so important. We are excited about the consistent flow of opportunity to work with amazing founders and funds in our region and to help them take their companies through their Series A raises and beyond.

Montana Investment Potential

Now more than ever, NFC is driving early stage investment in the Northern Rockies, especially in Montana. The changing venture and local demographic trends from last week’s post by NFC Associate, Katie Ellig, are helping to further accelerate increases in Montana investment. As you can see in the table below, per capita VC funding has nearly doubled in Montana over the past four years, bringing us ahead of Arizona and closely challenging Nevada. Per capita VC funding in the state is growing significantly faster than anywhere else in the Rocky Mountain region, and we are thrilled to be driving this trend.

In 2019, PWC reported that the total VC dollars invested over a 20-year period (1995 to 2015) in Montana was $143M. Since March of 2015 when NFC was founded, the total number of VC dollars invested in our MT portfolio companies surpasses the previous 20 year total by nearly $40M ($182M as of June 28, 2019). The total paid-in-capital in our entire NFC portfolio (Montana and non-Montana companies) is approaching $0.25B over a 4.5 year period, and 2019 marks the third year running we are the most active VC in the state according to CB Insights.

Additionally, our deals are dramatically increasing the availability of capital for Montana founders. On average, each NFC dollar invested in a Montana company has brought an additional $7.99 in co-investor capital to companies with offices in our State. And these numbers don’t even take into account the key roles that outside strategic investors are playing in our Montana portfolio; investors including Amgen, BMW i Ventures, Toyota Research Institute, and FLIR.

Of course, the next logical question is “so what if you are able to get MT companies funded, the real question is will there ever be any liquidity in these investments?” After all, you can count on one hand the number of publicly traded companies headquartered in Montana (five, and three of them are banks). Historical acquisitions have been equally bleak. Montana’s one previously well-known feather in the cap was the 2011 RightNow acquisition by Oracle. However, the frequency and likelihood of M&A activity has rapidly changed over the past 12 months. NFC alone has had two acquisitions across both funds—Ataata and Blackmore. Montana also boasts three major acquisitions by publicly traded companies outside of our portfolio during the same time period: Elixiter, Bozeman (Acquired October 2018 by Perficient, NASDAQ: PRFT); Advanced Technology Group, Missoula (Acquired September 2018 by Cognizant, NASDAQ: CTSH); and Wisetail, Bozeman (Acquired by Alchemy Systems in 2017, Alchemy acquired Aug 2018 by Intertek Group LON: ITRK). The increase in major acquisitions is another trend we don’t expect to change anytime soon, and it only further supports our confidence in Montana’s growth as a strong start-up ecosystem beginning to draw national attention.

2019 and Beyond

Since November of 2017 we’ve interacted with 79 amazing early stage companies in MT, and 197 companies in the Northern Rockies. We couldn’t be more excited about the talent, humility, leadership, and drive of the founders we’ve met. We also couldn’t be more impressed by the quality of teams these leaders have assembled - teams doing very very hard things, and doing them better than anyone else. Teams who are dominating national markets such as the MeatEater and OnX Maps. Teams who are bringing about disruptive horizontal SaaS solutions to revolutionize efficiency, security, and speed for enterprise such Halp, Alpin, and Section. Teams with deep subject matter expertise and unparalleled vertical specificity who are focusing on efficiency and optimization such as Aumni, OptioSurgical, TwinThread, and PatientOne.  

In 2019 and beyond, we can’t wait to experience more of the same energy and momentum. We’re also excited about the strong prospect of 2019 being [perhaps] the first time Montana surpasses a new venture capital milestone: >$100M in total annual VC dollars invested in the state. We think it’s not only possible, but highly likely given Montana’s current trajectory, only halfway through 2019.

We feel confident in our investment strategy, and our aspiration is to continue to be a founder-first fund. It’s the most important element of our mission statement: to provide access to capital to founders; and when we decide to invest, we take our responsibility seriously to help them on their journey to create companies of impact, utility, and value. To date, across both our funds, nine companies have received follow-on funding and all 21 portfolio companies are still operating. We see this as support for our thesis that our founder-first focus will lead to success for our companies and continue to accelerate the development of a strong start-up ecosystem in the Northern Rockies.

Our closing vision and our definitive mission statement to our LPs at our annual 2019 update was to be the preeminent seed to series A venture fund in Montana the Rocky Mountain West, and we look forward to the potential that this focus will unlock for early stage companies throughout the rest of 2019 and beyond.

-Richard, Will, and Les
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