It’s Hard to be a Hero in Your Hometown

Name the last major hometown startup success story. When was it? What industry? How did the founders support themselves early on? How much did they raise from local funds? It’s rare that a Kansas City native will be lauded while still here and still young—usually, it’s after making it big elsewhere or on their own. This town doesn’t nurture rising stars; it celebrates their homecoming … if they ever come home again.   

It’s a Different Scale

I used to pitch Kansas City investors who’d say, “Once you’ve done that, come back.” but I couldn’t “do that” without investment. A friend explained that investors here spend 20 years to get a $5 million return, but those in San Francisco get $20 million in five years—$1 million in four years here or three months there. Which is easier to risk? A venture firm isn’t going to invest more than 5 percent of its portfolio in one venture, so $1 million yields 20 tiny investments of $50,000. Early investors here want you to be further along to lower their risk, but by then, they can’t put up enough to make their terms attractive. 

The Show Me State

ZIRP created 15 years of “trust me” investment. Now investors want proof you can make money. If you’re not making $10,000 monthly recurring revenue, you’re not going to get investment in San Francisco, never mind Kansas City. “Show Me” is after the fact. Kansas City does not take risks. Even building a new airport and interstate took decades. Midwest investors prefer you to do it on your own, then they’ll overpay on the next one. Like San Francisco but worse. It’s less profit with more surety. 

Moneyball

Big venture capital firms say they want home runs and grand slams. Investors in Kansas City prefer to get on base. They don’t want something brand new and revolutionary; they want an improvement on a proven approach by a team with a track record. In general, they are spooked by big risk/big reward. A 1,000x return on invested capital does not make them excited—it makes them anxious and skeptical. They want a sure thing that makes retirement more comfortable, not a chance to take over the world. 

Follow the Leader 

People here are financially conservative, which is another way of saying they follow the leader and take direction from someone they look up to. Fill up most of your round, then give a take-it-or-leave-it, now-or-never offer to a local. As soon as you don’t need them, they’re eager to get involved. 

A Little Help from My Friends

An angel round in San Francisco is in the range of $1 million to $2 million. Raising that first million here means 20 angel investors putting in $50,000, and too often, each is looking to someone else to give them the go-ahead, wasting months deciding. If you could get a commitment in KC, you could raise more money over video calls from fewer, more aggressive investors in other cities who write bigger checks faster. If you’re not raising a full angel or seed round, just enough cash to build an MVP to sell, you’re better off with a handful of small checks from friends and family so you can get to revenue,
then raise a round elsewhere. 

People Invest In What They Know

Kansas City’s lifeblood is engineering, construction, real estate, insurance, animal husbandry, and agriculture. These are big, slow, old, capital-intensive, low-return, mature industries. 

The target internal rate of return for a VC is 75 percent, but the vast majority of investments don’t get there. Three of 10 go bust, three of 10 are static, and three of 10 get 10 times bigger. The big returns come when one of 10 gets 100 times bigger, and one in 100 is the home run: 1,000x. The typical investor here prefers 910, producing an annuity of 7-14 percent from a safe, mature, well-understood industry.
If you’ve got a web product, compare it with San Francisco, Los Angeles, Miami, or Austin. For fintech, go to NYC or Chicago. If you’re doing anything more than safely adding proven tech to something Kansas City already understands, look elsewhere. 

What We Have

Kansas City has a ton of educational resources for startups. We have grant programs to put money in if you’re far enough along. And we have some funds that will follow known leaders. What we don’t have is aggressive, well-capitalized VCs who quickly, decisively commit to industry standard check sizes. 

If you’re successful on your own or find the support you need elsewhere, Kansas City might follow. If you’re the rare one this advice doesn’t apply to, you don’t need my advice anyway because you’ve already got what you need. 

And if you’re frustrated that I’d say such things, thinking, “That’s not true, it’s not like that! He’s wrong!”  

Well, friend … Show Me.