Comstock's magazine 1218 - December 2018 - Page 42

FINANCE but it’s a chicken-and-egg thing. If you have two or three more funds, you’d have a lot more deal flow.” Sikaria agrees: “I think for a healthy ecosystem, you want several Monetas in town,” he says. “You would want several DCAs, several Central Valley Funds. A lot of times when you’re looking at deals, the beauty is in the eye of the beholder. We might not like a deal, but you know what, an- other VC might.” FINDING THE RIGHT FIT Capital needs a path to flow. If the funders aren’t connected to the fundees, then the size of the coffers doesn’t matter. “The problem isn’t that there’s not money. The problem is that it hasn’t been connected to the deals that exist,” says Michael Knittel, chief investment officer at Lagunitas Asset Management in Folsom and cofounder of the Founder Insti- tute. “Those bridges are just getting built now.” The bridges include groups like Sacramento Metro Cham- ber of Commerce, StartupSac, Ag Start, Accelerate U, Fourth- Wave, HaneyBiz, Founder Institute and the UC Davis Venture Catalyst program. Everyone seems to agree on the impor- tance of this networking infrastructure. Whether it’s robust enough is an open question. Bissell describes the local entre- preneur community as “fragmented,” and says that without adequate mentorship, young entrepreneurs can get lost. There’s also a concern that even if there is ample oppor- tunity in the Series A range ($1 million to $5 million, Mone- ta’s sweet spot), there could be gaps in micro-seed capital, and even fewer resources for Series B or C — $5 million and up. “That’s what we need, a large entity that invests in Series B and beyond,” says Beckwith. “It would be great to have somebody like that here.” More dry powder could soon be on the way. Kevin Nagle, serial investor and owner of Sacramento Republic FC, plans to launch a Sacramento-focused fund in the neighborhood of $250 million. (Nagle is also on Moneta’s investment board.) But the timing on this influx is still fuzzy. Nagle first announced it in 2017; so far, he has made what he calls some “modest investments” from his own personal capital, but he has not yet hit the pavement to attract other investors. Nagle says he’s waiting until the Sacramento Republic FC reaches Major League Soccer status. Part of Nagle’s motivation is to ensure that local startups don’t flee the region to seek capital. Broome has the same concern, saying he’s seen “between 10 and 20” companies that would have moved to the region if they had been able to lock down local funding. “No one’s going to move here because of Farm-to Fork, or because of Wide Open Walls,” he says. “They need capital. A better ‘quality of life’ just helps you win a coin toss.” Broome 42 | December 2018 also wants to see more public funding, like the Startup Elk Grove Incentive Program, which will provide up to $800,000 of capital. “We need every community to have at least $500K in funding.” It’s hard to say how many local entrepreneurs are cur- rently seeking or securing capital. Broome says that the number getting Series A or B each year is “in the teens,” and he suspects the same can be said for seed funding. When pressed for an estimate, Knittel of Lagunitas Asset Manage- ment guessed that there are “between 200 and 300 worthy startups” in the region, defined as “companies that are al- ready built, have a product or service and have a leader- ship team.” He’s not counting wannabe entrepreneurs that lack a solid idea, plan or team. Of the worthy candidates, Knittel estimates that half will get funded in some shape or form. And the ones that don’t? “They’re not good pitchers,” says Knittel. “In the 20 years that I’ve been doing this, I’ve seen that when you ask somebody who’s really smart — and has some incredibly cool project that’s going to change the world — and you ask them what they do, they’ll drone on for 30 minutes. And at the end of the time, you’re like, ‘You lost me 29 minutes ago.’” FUNDING OUTSIDE THE BOX Let’s say you’re a good pitcher and have a killer idea, but you can’t get funding from the Sac Angels or DCA or Mo- neta. Or let’s say you need $10 million (who doesn’t?) and simply can’t find it locally. It’s reasonable for a local entre- preneur to wonder: Do I need to move to Silicon Valley, where all the action is happening? Is being in Sacramento a strike against me? “Absolutely not. Absolutely not,” says Beckwith, repeat- ing for emphasis. “We are on Silicon Valley’s radar screen. Our region has the ability to fundamentally extend a com- pany’s runway. If you’re in San Francisco, you have a burn rate of X. If you picked up and moved the operation to Sac- ramento, it’s going to be lower than X.” That logic is shared by Los Angeles-based Nate Locke, a partner at Kayne Partners Funds, who says that his in- vestment strategy is to focus on “underserved geographic markets like Sacramento,” and explicitly not Silicon Valley or New York City. “The strong university community, access to talent and lower cost of living all contribute to making Sacramento a great market for entrepreneurs,” says Locke. (His fund hasn’t yet pulled the trigger on any Sacramento startups — they’re still evaluating — but an affiliate Kayne fund has invested in Davis-based Engage 3, a tech startup that uses artificial intelligence to help companies optimize their pricing models.)