Ben Williamson is a senior associate and general counsel for Invest Nebraska, the state’s most active venture capital fund. Invest Nebraska is funded through the Nebraska Department of Economic Development and, in our humble opinion, is easily one of the best examples of economic development with a tangible return.
The Startup Collaborative is a proud co-investor alongside Invest Nebraska. We are also grateful to have Ben serve as an adjunct.
Q: Ben, tell us about Invest Nebraska.
A: Invest Nebraska exists with a mission to build a better future for our state by providing financial and operational assistance to high growth companies, advancing the entrepreneurial economy, and attracting out-of-state capital to Nebraska. Though Invest Nebraska was created in 2002, it really became impactful with the passage of the Business Innovation Act, introduced in 2011 on behalf of Governor Dave Heineman and passed unanimously by the Legislature. Invest Nebraska partners with The Nebraska Department of Economic Development and receives an appropriation under the Business Innovation Act that provides the resources to make direct investments into Nebraska companies. The fall of 2012 saw Invest Nebraska make its first equity investment under the Business Innovation Act and Invest Nebraska continues to help grow Nebraska’s economy by assisting entrepreneurs and investing capital in those companies that have high growth potential. Since 2012, Invest Nebraska has invested over $20M in capital in Nebraska start-ups – those investments have been matched by ~$90M in co-investment and those companies have gone on to raise ~$140M in subsequent capital.
Q: Tell us what it means to take capital from Invest Nebraska means.
A: We are industry agnostic, but we require companies to be based in Nebraska and they must have at least a 1:1 match to our investment from private co-investors. Next, we target “high-growth” companies, or companies that have innovative or proprietary products within a large obtainable market and that demonstrate early traction with a scalable business model. We primarily make equity investments (which includes convertible notes) but do occasionally offer traditional loan capital as well. Ultimately, our goal is to be a great partner to our portfolio companies and provide as much value as possible through operational assistance and our network of investors and advisors.
Q: In the lifecycle of a startup, where does capital from Invest Nebraska fit in?
A: We invest at various stages of a company’s life cycle, but primarily invest at the “seed” stage. To us, that means post-MVP (minimum viable product) and usually post-revenue but typically the first round of “institutional” capital. We write checks of $100k to $250k and often lead investment rounds.
Q: If a startup wants to earn investment from Invest Nebraska, what milestones should they hit?
A: There are currently two ways to get an investment from Invest Nebraska: through the Startup Collaborative or directly through Invest Nebraska. The companies that we help fund who make it through the Startup Collaborative modules are generally earlier than companies in which we invest directly but TSC’s milestones are well defined and TSC provides great tools for success. For direct investments, it really depends on the type of company. Regardless of the company, they must have a working MVP or prototype as mentioned above. Additionally, for example, for true B2B software as a service (SaaS) companies (i.e. business to business software with a recurring subscription fee) we like to see market validation in the form of material revenue. Conversely, a biotechnology or medical device company may be more capital intensive and take years to generate revenue. In those cases, we would instead look for formal intellectual property, prototype tests, and experiences and/or repeat founders. At the end of the day, whether you’re seeking investment or not, it’s essential to get an MVP into the market as soon as possible and start trying to sell it to customers before committing time, money, investment, or burning the boats.
Q: How – and when – does a startup need to start talking to you about venture capital needs?
A: If it were up to me, I would talk to every startup at least a year before they even consider raising capital. To go even a step further, I’d love to talk to them at the point when they’re deciding whether it makes sense to fully pursue this idea. There are tons of resources available for companies at the business planning stage and it is really important to think about capital needs and business strategy as early as possible.
Q: You are a big proponent of taking capital only when capital accelerates growth, talk a bit about that.
A: This is certainly one of the most self-sabotaging opinions that I hold. Venture Capital is probably inappropriate for 99+% of companies and frankly, I think companies should only raise money (i) if they absolutely have to (i.e. the capital intensive companies I referenced above); or (ii) if they have significant market validation and are growing quickly. Most companies I talk to don’t fit into either category, which isn’t a bad thing. It just means you should consider not raising capital, and “bootstrap” your company – by the way, this is a perfectly valid way to run a business. I fear that founders see other companies talking about raising money on Twitter and think “I’m supposed to raise money.” File that under the category of “Worst Reasons To Raise Money Ever”.
To clarify, when I say “raising capital”, I mean raising a formal round of financing typically including institutional investors. I think it’s nearly always acceptable to take grant money or raise money (i.e. $0-200,000) from “Friends and Family” to get started as long as the investors’ expectations are aligned with yours!!
Q: What are some of the things founders need to consider when it comes to capital?
A: When it comes to capital to get a business off the ground, I often see founders complicating the financial modeling process. It’s important to look primarily at two things: (i) the baseline cost required to develop an MVP that you can put into the market and start making money; and (ii) the unit economics to ensure that your product is capable of achieving necessary margins (i.e. top line revenue per unit minus the cost of goods). If you can cover/raise the baseline MVP cost and the unit economics are good, then you only need to ensure your product solves a real (and compelling) customer problem that people (whom you don’t know) are willing to pay you for.
With respect to fundraising capital, the biggest thing founders need to consider are incentives and expectations. If an investor and founder incentives/expectations are misaligned, everybody loses, period. Perhaps more obviously, founders also need to understand dilution and how different forms of capital affect dilution (P.S. this directly impacts incentives, as well). Lastly, founders often try to raise money at way too high of valuation at the seed stage – I think there is ego tied up in achieving a high valuation, even though it has nothing to do with the actual value of the company. This is super counterproductive as companies that do this almost never achieve the traction subsequent to that fundraise to raise at a higher valuation the next time they raise, which has big time detrimental effects.
Q: What’s one more thing you’d like to add?
A: Founders: read and learn as much as you possibly can – if you need recommendations, I have them. Lastly, A robust startup ecosystem is based largely on relationships…so let’s get coffee! Or beer!