Start Ups vs. Small Businesses

There is a lot of media coverage, hype, and trendiness around “Start Ups”. Who is the next Unicorn? Who raised the latest eight figure round? Who is disrupting what? There is a ton of advice (blogs, videos, etc.) addressing the various aspects of being a Start Up founder and how to grow your business. That’s great if you are actually in a Start Up. However, most of businesses that get created are not actually “Start Ups”, but rather “Small Businesses”. The problem is that much of the advice that is out there for Start Ups is totally inappropriate for Small Business owners. I am by no means the first person to touch on this topic, and I borrow heavily from other great posts (like here, here, and here). Let’s dig in…

First let agree on terminology. When I say “Start Up” I am referring to a type of business and not the maturity of a business. In other words, a business is not a Start Up merely because it is early in its existence. Second, there is no exact definition of Start Up or Small Business. I am speaking in generalities, and there are exceptions to everything I say here (so assume the words “most” or “many” apply to the statements that follow). To keep it short, I am going to only focus on two differences that illustrate my point well (this article is a great summary of some of the others).

Business Goals

Start Ups are designed to grow exponentially and to have a big exit (IPO, sale, etc.). The Founder of a Start Up needs to be prepared to rapidly scale the business and to quickly take a chunk out of a relatively large market. It takes a significant amount of resources to accomplish this feat, which is why most successful Start Ups require several large tranches of Venture Capital. Building a boot-strapped business to be self-sufficient is a very slow process. It is VERY rare that you could innovate (think highly paid talented employees) over several years, at a large scale, and quickly, without investment. If you have a business model that allows for that with no capital investment, hats off. However, the minute you take real VC money, you best be prepared to be driven towards rapid growth. The investors need every company they invest in to have the potential to scale exponentially, to make up for all the ones that will fail. For many Start Ups, if you don’t get to a 9-figure valuation (or more) investors will be dissatisfied.

Small Business, on the other hand typically, has the goal of becoming self-sustaining as fast as possible. Owners may start the business with personal savings, small business loans, or money from friends and family. They typically desire to become self-sustaining and to service that debt in a relatively short period of time. Where Start Ups need to burn through the cash fast to innovate and build a large customer base (anticipating another round), the Small Business is very careful with each expenditure focusing on sustainability. Once a small business is sustainable, many often do start to scale. For example, an owner that starts a dry-cleaning service may open a second location after the first location is cash flow positive and debt is under control. A small business can certainly grow large through steady growth, but many also stay in the 6-7 figure range for their entire existence.

Innovation

Start Ups typically have innovation at their core. Many are trying to do something entirely new, or provide a product or service that is at least an order of magnitude better than what is available in the market today. While there is plenty of room to innovate in Small Business, a Small Business can be highly successful by simply providing well established products and services to an underserved market. To be clear, many small businesses innovate in both their products and business models. It’s just not as essential as in a Start Up. For a Start Up it is hard to obtain massive growth and market domination with an incrementally better product. If you are passionate about the restaurant industry you be very successful opening several restaurants of the course of a few years; and you can certainly put your own unique spin on the business, but when was the last time you really went to a restaurant that truly innovated to provide an experience that was an order of magnitude better than anything else that exists?

So What?

There are many other differences, and people have written them up better than I will here. The main point I want to get across is that a lot of the books, blogs, and videos out there are geared towards Start Ups. Geared towards business for which the going in assumption is that you are trying to grow exponentially / fast, primarily through some technical innovation to create or disrupt a market. Advice about the persona you are supposed to have, your work life balance, financing, growth targets, etc. are largely geared towards Start Ups. If you don’t understand the difference between small businesses and start ups and the context in which the advice is given you could get wrapped up in a bad mental model.

I see a lot of small businesses reading blogs about VC, when it is clear that they don’t have a scalable business model that a Start Up would need. You can make damn good money with a business that pulls in $5M year after year with a 10% net profit margin. But no VC is going to invest in that business, and so any time the owner spends reading up on VC is a waste of time better spent elsewhere. Reading up on how pricing models for Start Ups that really care more about “users” than revenue, may not be super helpful if you are trying to build a sustainable local small business.

Start Ups get a lot of press, but I know a lot more people who have built significant wealth and financial independence as a small business owner than I do that have achieved the same through a Start Up IPO. Do you have a business that you think will really scale up to be a billion-dollar business within 5-7 years and is your goal to take it here? If so, then you might be a Start Up. If you are a business of 10 people and have been so for 4 years, you are a Small Business. If you are 25 people and offering products and services that are common in the market place, you are probably a Small Business. If you are just starting up and your first goal is to be sustainable and give yourself a pay check, you are probably a small business.

And you know what? Small Businesses are awesome. Small Businesses take just as much grit and determination as a Start Up. It’s not better or worse, it’s just a bit different. You need to understand that difference when seeking out information, planning for the future, and making decisions. So, my advice is to check out some of the articles I linked to and figure out if you are a Small Business or a Start Up. From there make sure you are seeking out information that is relevant to the type of business you have.

. . .
Originally Posted at macfadden.org.

desk area at Zeal entrepreneurial center

What can Zeal do for Entrepreneurs?

If you’re an entrepreneur in the Sioux Falls area and you haven’t been to the Zeal Center for Entrepreneurship, you are missing out on a hub of support and resources for growing businesses. The Zeal building, which is on the northwest side of Sioux Falls near Southeast Tech, houses a mix of idea-stage entrepreneurs, scaling companies, and government entities that support small businesses. Zeal rents space to all of these groups, but they are much more than landlords. Their main work is to provide a supportive home for growing businesses and connect them with the resources they need.

Zeal was founded fifteen years ago by the Sioux Falls Development Foundation and the Sioux Falls Area Chamber of Commerce. For many years, it was called the South Dakota Technology Business Center (SDTBC), but over the years they evolved to serve a wide variety of scalable businesses, and in 2016 they rebranded as Zeal.

“Entrepreneurship can be very isolating. They feel like they’re on an island,” says Wendy Dooley, the program manager and relationship builder at Zeal. But when entrepreneurs choose to work at Zeal, they’re connected with the resources they need, and they’re surrounded by other entrepreneurs who are also working to make their ideas real.

Membership

 

Zeal offers several levels of service, and their newest service offering is a simple monthly membership. At just $49 a month, membership works much like belonging to a 24/7 gym. Members get a key fob and can come in anytime, find a spot in the open work area, and get stuff done. Coffee and popcorn are provided, but the real benefits are the camaraderie and the resources at one’s fingertips. Talk with other entrepreneurs. Ask staff for a recommendation for a service provider. Use the gigabit internet. Take a mental break in the fitness room. Reserve one of Zeal’s several meeting spaces. And since the Small Business Development Center (SBDC) and several other business-supporting organizations are anchor tenants in the same building, entrepreneurs can get answers to their questions quickly.

To make this type of flexible membership available, Zeal underwent a major renovation last year at the time of their rebrand. “For so long we were facility focused, and we were missing out on early-stage people that weren’t ready to rent an office yet,” Wendy says. This level of service is perfect for many idea-stage entrepreneurs who need a space that bolsters their business development but who don’t have the traction to justify renting a dedicated desk quite yet.

Co-working

Co-working at Zeal means getting a dedicated workstation starting at $249 a month. Co-workers are able to move out of working in coffee shops or from home, and be surrounded by other like-minded entrepreneurs. Coworking comes with a Chamber membership, a locker and/or mailbox, and a multitude of meeting spaces. Coworking members also receive support from Zeal staff and partners.

Accelerator Programs

For even more support and accountability, Zeal and its partners provide a select group of startups with a 12-week intensive accelerator program. Program placement is competitive and comes with many benefits, including funding, dedicated workspace, branding and strategy development, and lots of mentorship. The 2017 cohort will be wrapping up their session soon, and Zeal plans to offer an accelerator session annually with the help of key corporate partners in the community.

Office Space

For businesses that have moved past the idea stage and who need their own office, Zeal has many options. Even with the recent renovations, Zeal still has twenty-seven private offices and six wet labs (a wet lab is a laboratory equipped with plumbing and ventilation). Zeal leases these spaces out to young businesses and research teams. These member clients get office space at an affordable square footage rate and have the opportunity to take part in Zeal’s incubator program. Zeal allows startups to sign a one-year lease with an option to renew. The flexible lease terms helps mitigate risk for a company that is just starting to find their place in the market. Startups can stay at Zeal for up to five years. By the end of those five years, companies are either at a stage where they’re ready to move out on their own, or they’ve determined it’s time for a pivot. Some successful alumni of Zeal’s incubator program are DocuTAP, McGowan Capital Group, Meta Payment Systems, Datasync, and Equity Trust’s Sioux Falls branch.

Resources

Zeal has some tenants that have been in the building much longer than five years. These anchor tenants are government entities that exist to grow the economy by supporting small businesses: The South Dakota Small Business Administration (SBA), SCORE (which is a resource partner of the SBA), South Dakota Small Business Development Center (SBDC), South Dakota Manufacturing & Technology Solutions (MTS), the Governor’s Office of Economic Development (GOED), the Enterprise Institute, and SD Bio Tech. This alphabet soup of organizations becomes much more accessible when you know that you can find them all under one roof and that Zeal staff will help you find the resource you need when you need it.

event at Zeal Entrepreneurial Center

Zeal also partners with local businesses who desire to provide professional services to startups. These are businesses that Zeal has vetted and who want to see startups succeed. Wendy explains, “In Sioux Falls, people tend to stick with their service providers as much as possible as their businesses grow, so it hasn’t been a challenge to find businesses that want to be partners. These businesses also have a desire to give back. They are committed to helping the startup community of Sioux Falls, and they want to help provide service in areas that are simple to them, but not to the entrepreneur.” Partner businesses are frequently referred to Zeal clients, and are encouraged to spend time on-site, attend Zeal events, and make connections.

 

meeting space at Zeal Entrepreneurial CenterWith coworking, acceleration, and incubation all under one roof, Zeal can claim the title of “super-hub,” as far as entrepreneurial centers go. And yet they’re always looking to serve the entrepreneurial community better. Zeal uses their space to host educational and networking events. They also host other events if there is a good fit with Zeal’s mission and vision. Knowing that mentorship is something that many area entrepreneurs are seeking, Zeal is working to build a bench of seasoned entrepreneurs & executives that are willing to mentor. With so many resources in one building, there is something for entrepreneurs at every stage.

 

Two things you can do this week:

  • Go out and tour the Zeal space. Bring your laptop and work for awhile. See if one of their levels of service would be a good fit for you.
  • Like and follow Zeal’s Facebook page to stay aware of events they are hosting.
SBA and SBDC diagram

What Can the South Dakota Small Business Development Center Do for Entrepreneurs?

Imagine an organization funded by the SBA, the DoD, the Department of Commerce, and the SDGOED, chartered by USD, and operating under the names SBDC, PTAC, MTS, and SBIR. If you think that getting help from this organization must be like visiting the DMV, you would be mistaken. It turns out that the South Dakota Small Business Development Center (SBDC) is a high-quality resource that’s easy to work with. All you have to do to get business help is call your local small business counselor and set up an appointment. If you’re in the Sioux Falls area call the local office at 605-367-5757 and you will be directed to the person who can help.

The SBDC has about twenty-six staff members across South Dakota, and about half of them are general business counselors. The rest offer guidance in specific areas, such as manufacturing, contracting with the government, international trade, or research and development grants. Jeff Eckhoff, who is the director of the South Dakota SBDC says, “Most of our counselors have a twelve to fifteen year tenure with the SBDC and many have prior business or banking experience.” They can quickly get you the advice, information, or business contacts that you need. South Dakota’s SBDC and the organizations under them serve over 2,000 clients a year. The two things they help with most often are regulations and financing.

Regulations

Because the SBDC is a government entity, they are very good at helping businesses relate to the government. They are strong in the areas where many entrepreneurs are weak: paperwork, bookkeeping, financing, permits, contracts, business structure, and taxes. As an example, during an appointment with an SBDC counselor, someone starting a service business can get advice on setting up the appropriate business structure and getting any other licenses or permits they may need to set up business. The new business owner can come in for a follow-up appointment as often as they need to make sure all these things have been done in a timely manner and that everything is as official and organized as it should be.

A more experienced business owner might contact the SBDC for the same assistance or to do a yearly review of their financials with their SBDC counselor. This is a good way to look back at what’s been working well, make sure everything is staying organized, and make plans for future growth. Jeff Eckhoff says, “The biggest myth about the SBDC is that we’re only there for startups.” The SBDC has services for every stage of business growth.

An SBDC counselor can point out other resources that apply to certain fields. Manufacturing businesses can connect to a Manufacturing & Technology Solutions (MTS) advisor who can help improve the efficiency of an assembly line, streamline office operations, and lead strategic planning with an eye to improving profitability. Companies can find out about government projects to bid on through the Procurement Technical Assistance Center (PTAC). The Small Business Innovation Research (SBIR) branch provides assistance with product development and market research. These and other resources can be accessed through your local SBDC office. A directory of resources and specific contact information can also be found at sdbusinesshelp.com.

Financing

One of the core services of the SBDC is to help companies obtain financing for their businesses start up or expansion. Whether accessing Small Business Administration (SBA) or traditional bank financing, the SBDC can assist your company. There are two types of SBA loans. The first type, 7(a), are loans that are made by banks but guaranteed by the SBA. These loans protect the bank from loss which may allow the borrower to put less money down, receive a better interest rate or lessen requirements for collateral (specific property that can be seized if the loan isn’t repaid). With SBA 7(a) loans, it’s up to the bank to decide if the company can afford to repay the loan based on their cash flow. The second type, 504, are loans directly from the SBA, made in partnership with the bank or other lending source.  These loans offer long-term fixed interest rates and take a second mortgage position to the bank, which also may allow the borrower to put less money down and provide less risk to the bank. The SBA 504 loans are used to purchase equipment or real estate while the SBA 7(a) loans can also be used for shorter term debt and working capital.

To get any type of business loan, a business needs to have a well-formatted, well-researched business plan, and the SBDC can help a business put this together. They help hundreds of businesses with this task every year, and it’s one of their specialties. Besides helping a business qualify for a loan, a business plan can be a vital tool for an entrepreneur to evaluate and plan for their business. A formal business plan is also a must for businesses seeking equity investment.

It’s Free

Many entrepreneurs don’t realize that they can get all this help for free. Others think that, because it is free, that the help won’t be of high quality. Jeff Eckhoff tells this story: “A business came to us to see if we could help them with a thorough financial review as they were changing ownership, and we could. At the end of the process, the business owner said to me, ‘People have got to know about this. The quality is as high as any place else we have worked with and the turnaround time was very fast.’” SBDC counselors are experts at what they do.

The SBDC serves every single county in the state, so some counselors spend a lot of time on the road meeting the needs of rural communities and remote business owners. Business owners in rural areas rely strongly on each other. “As Sioux Falls grows,” Jeff says, “it becomes easier to strike out on your own and not collaborate. We need to guard against getting stuck in our silos, and we need to be aware of what others are doing and our need to continue making connections.”

Making connections is a large part of the SBDC’s work. Whether you’re looking for someone to help you with your business plan or someone in your industry to answer a specific question, the SBDC is a great first call. “Call us. We’ll help you,” is Jeff Eckhoff’s straightforward advice. In case you missed it, the SBDC in the Sioux Falls area can be reached at 605-367-5757.

aerial view of Sioux Falls drone picture by Matt Paulson

Building an Entrepreneurial Ecosystem in Sioux Falls Part 3: Better Storytelling

A few weeks ago, I published an important post highlighting four things that the city of Sioux Falls will need if it’s going to become a city that fosters new startup businesses that create high-paying jobs and attract outside capital. Since then, I’ve dived a bit deeper into the topics of making capital available to entrepreneurs and building community among entrepreneurs. Today, I want to focus on how we can do a better job of telling the stories of entrepreneurs that are already doing great things in the city of Sioux Falls so that we can inspire the next generation of entrepreneurs to start businesses.

Why Storytelling Matters

When I attended the first 1 Million Cups event in 2014, Andy Traub spoke about how he wrote his book The Early to Rise Experience. He talked about the self-publishing process, how he marketed the book and how the book has since impacted his professional life. Until then, I didn’t really think that writing a book was something that I could do. I thought to myself, “If Andy figured out how to write a book and sell a bunch of copies, maybe I could too.” I later sought out Andy, hired him to coach me through the process, began writing, and published my first book, 40 Rules for Internet Business Success, a few months later. Andy’s story made me realize that I was capable of doing something I previously thought I couldn’t do. The telling of his story inspired me to take action, try something new and achieve a new level of personal success.

Publicly sharing the success stories of entrepreneurs is critically important to inspiring the next generation of entrepreneurs to take the leap from idea to action. Hearing from an entrepreneur that has weathered the successes and failures of entrepreneurship causes people to think thoughts like “What kind of business could I start?” and “If she was able to successfully start a business, maybe I could too.” We need to know that there’s a person that lives down the street from us that had a similar upbringing to our own, yet has achieved significant success. If one of your high-school classmates has worked hard for the last decade and achieved something great, you might realize that if you’re willing to put in the hard work, you could do something great too.

Reflections on the Local Media

There are two major local business publications in Sioux Falls, the Sioux Falls Business Journal (SFBJ) and Jodi Schwann’s Sioux Falls.Business. They both do a great job of highlighting retail businesses, because they are often the most visible businesses in the community and they tend to drive the most page views. They also do a good job of covering large companies that are more media savvy than many startup businesses. They don’t do as good of a job covering entrepreneurs and small businesses that are less visible in the community. There are many successful businesses in our community that are getting ignored because they haven’t made it onto the radar of our local business media. For example, MarketBeat was recognized as the fastest-growing privately-held company in South Dakota by Inc. in 2016. This would be a significant accomplishment for any company, yet MarketBeat has never been profiled by any local media outlet. I know both publications are open to covering new and unique local businesses, but Jeremy Fugleberg (SFBJ editor) and Jodi Schwann can’t write about your company if they don’t know that it exists. It’s as much on us as entrepreneurs to tell the local business media about our companies as it is for them to report on us.

1 Million Cups as a Storytelling Tool

I believe 1 Million Cups is beginning to play an important role in telling the stories of entrepreneurs in our community. This is primarily because we’re highlighting stories that you may not hear anywhere else. Between 50 and 75 people come every Wednesday to hear the story of an entrepreneur and the video recordings of the weekly presentations are attracting between 1,000 and 2,000 views on Facebook. I know that speakers at 1 Million Cups have inspired people to start businesses, write books (that’s me!), join startup companies and change jobs. In the future, I hope that 1 Million Cups can continue to grow and have a wider distribution reach online.

Next Steps for Storytelling

In order to highlight all of the hardworking and successful entrepreneurs that are launching and growing businesses in Sioux Falls, I believe there’s room for a new media channel to highlight these stories. What if one of the several community organizations whose mission involves promoting the local economy hired a journalist and interviewed local entrepreneurs? This could take many forms—a weekly podcast, an online video show, a blog or something else I’ve never thought of. Instead of just spending dollars trying to recruit out-of-state companies to move to Sioux Falls, we could spend some of those dollars telling the stories of homegrown entrepreneurs that built something in our city so that the next generation of Sioux Falls entrepreneurs is inspired to take action and launch their own businesses.

Join the Conversation

I created a discussion group on Facebook called Sioux Falls Area Entrepreneurs. Join the group and have your say in what the city of Sioux Falls needs to do to better foster entrepreneurship and tell the stories of entrepreneurs doing great things in the city of Sioux Falls.

What Can the Enterprise Institute Do for Entrepreneurs?

Where can an entrepreneur go for guidance when their product is selling like hotcakes but they can’t keep up with demand? Or when they can’t make necessary hires because of cashflow issues? Or when the only way to bring their product to market is to build a multi-million dollar processing facility, and they don’t yet have millions of dollars lying around? Enter the South Dakota Enterprise Institute.

The Enterprise Institute exists to serve high-growth companies and those who want to invest in high-growth companies. It sustains itself by providing specific fee-based services in this niche and with the help of some donations and grants. While they work closely with the Small Business Development Center (SBDC) and other government services, the Enterprise Institute is an independent non-profit. “We were created because of a gap and to specialize in that high-growth-company development consulting,” says Tom Eitreim, who is the program director for the Enterprise Institute. So if you’re working to start or grow a scalable business that may require risk capital, the Enterprise Institute is able to help you walk through that process.

For High-Growth Companies

You should contact the Enterprise Institute if you realize that your business or business idea has the potential to grow into a very large business (reaching seven figures or more), but that you’re going to need to look beyond your business’s current resources to get it there. You’ll talk with Tom Eitreim or with Tim Weelborg, the executive director, about your business and the types of financing available. You might discover that a bank loan is actually a better fit for your business. They might refer you to the SBDC for more general business planning if your business isn’t as scalable as necessary or isn’t ready for investment. “We have a really good working relationship with the SBDC, and often a referral to them later becomes a referral back to us when the company is ready and can see what their needs are,” explains Tom.

Those companies that are ready for growth and who do decide that it’s time to seek investment can take advantage of the Enterprise Institute’s primary service offering for entrepreneurs: an equity review. During the equity review process, the Enterprise Institute helps the entrepreneur to prepare their business plan and other documents with all the details that will be of interest to potential investors. The fee for this service starts at $500, but entrepreneurs can choose to add more consultation for an additional fee. The Enterprise Institute can even help startups practice their pitch before they go in front of potential investors.

The pitch-preparation process may also include deeper market analysis or a preliminary patent search, and the Enterprise Institute has access to data and software to help with this research. Fees for research services start at $300 and can help entrepreneurs to form more accurate projections or make a more compelling pitch.

For Investors

The other side of the coin at the Enterprise Institute is administration of angel funds. An angel fund is a pool of money set aside by a group of accredited investors for investment in startup companies. The angel funds that the Enterprise Institute administers have the opportunity to invest in the same high-growth businesses that the Enterprise Institute is helping to prepare for investment. Not all businesses that work with the Enterprise Institute get funding from these angel funds, and these angel funds also invest in businesses that are not clients of the Enterprise Institute, but there is often some overlap. “We created the funds in response to a need, because a lot of our clients needed the capital, but it wasn’t organized in angel funds. There were people that would write checks, as individuals, but we like this model,” Tom says, explaining that angel funds can streamline the fundraising process for businesses while helping investors to diversify their investments across many startups.

Since the angel funds that the Enterprise Institute administers are member managed, the Enterprise Institute can stay out of the middle of the deals themselves, letting investors and entrepreneurs make their own decisions. The Enterprise Institute simply acts as support staff for the angel funds that choose to work with them. In this role, they manage the paperwork, file the taxes, and get ongoing reports from the companies that the angel funds invest in. “We make sure that the train is running,” Tom says.

For the Business Ecosystem as a Whole

The Enterprise Institute gets a broad perspective on business that few other entities have. By working with both entrepreneurs and investors, the Enterprise Institute is able to help both groups better than if they only worked with one part of the equation. They can help investors understand the needs of startups, and they can help startups understand what investors are looking for. Their work is to prepare these two groups to meet.

Other work that the Enterprise Institute does, such as hosting Innovation Expo conferences in Sioux Falls and Rapid City or judging at statewide business plan competitions, falls in line with this objective of getting the right people to meet each other. “What I’ve learned from working with businesses across the state,” Tom says, “is that, as we’re a smaller state, it’s good for people to meet people from other cities, talk shop, and interact.” Regarding Sioux Falls specifically, he adds, “Sioux Falls has a lot to be proud of. There’s a lot of people that want to help entrepreneurs and see them succeed.”

The Enterprise Institute has been staying busy, working with dozens of startup clients and administering nine angel funds. “We’ve seen a steady increase in clients as entrepreneurship begins to be seen as a viable career path and the ecosystem continues to build,” Tom says. “We see a good amount of deal flow.” When his friends wonder what he really does in his work, Tom can pull up a client’s website or point to a storefront and say, “See that business? When they needed to raise funding, we helped them. They were able to raise money from investors that we assembled.”

If your startup is ready to grow and might need to raise risk capital, contact the Enterprise Institute. Their main office is in Brookings, but Tom is here in Sioux Falls most of the week. His office is at 2329 North Career Ave, in the same building as Zeal and the SBDC, where he’s ready to help growing businesses make decisions and find the resources they need.

people taking a picture at Falls Park in Sioux Falls with industry in the background

Building an Entrepreneurial Ecosystem in Sioux Falls Part 2: Making Capital Available to Entrepreneurs

A few weeks back, I highlighted four things that the city of Sioux Falls will need if it wants to become a true entrepreneurial city that regularly spawns job-creating and capital-attracting startups. In short, if we want a stronger social community of entrepreneurs, we need to do a better job of sharing our success stories, we need better educational opportunities and we need to make more early-stage capital available.

Today, I would like to dive a bit deeper into the topic of venture capital. I had previously written a short guide that outlines the options for entrepreneurs that want to raise money in South Dakota and the surrounding region. Now, I would like to review the available risk capital options for private-held companies at varying stages in the business life cycle and try to identify where the need for additional capital is.

The Venture Capital Stack

Companies can raise money to grow their business in many ways. The options that are available to them will vary largely depending on the size of the business, the age of the business, its financials and how much money the company is hoping to raise. Understanding the different segments of venture capital will help us understand what unmet venture capital needs there are in the city of Sioux Falls.

Here are the traditional segments of private equity financing:

  • Pre-Seed Stage or Friends, Family and Fools – Before a company has fully formed, developed its products, and attracted its first customer, it will be very difficult to attract the interest of a professional investor. If you need to raise money before having your first customer, you will likely need to rely on your own personal finances or an investment or loan from a friend or family member. In some parts of the country, there are incubator programs that will sometimes invest a very small amount of capital (say $25,000), which can help a company get off the ground.
  • Seed Stage – Companies that have started to flesh out their business and have their first few customers and want to raise an initial round of $250,000 or $500,000 of growth capital are seed-stage companies (at least in my part of the country). These are largely funded by individual angel investors and angel groups, such as Falls Angel Fund and The Funding Farm.
  • Early V.C. – When a company has developed significant traction and wants to raise $1 million to $5 million in capital, it will need to look to local or regional private equity firms. Locally, Bluestem Capital, Bird Dog Equity Partners, McGowan Capital Group and others fill this role.
  • Late V.C. – Companies that are looking to raise $10 million or more will almost certainly need to look outside of the state, perhaps even outside of the region, to find capital.
  • Public Markets – When a company becomes very large and wants to raise public capital (often 9 figures or more) or pay off its private investors, it may file an initial public offering (IPO) and be traded on the public markets. Raven Industries and POET are examples of publicly traded companies based in Sioux Falls.

Of course, there are other ways to raise money for your business. You can borrow money from a bank if you can show cash flow to pay off a loan. You can use your own personal financial resources or personal lines of credit. You can try to launch a crowdfunding campaign to get financial support for your business as well.

The Location-Independent Nature of Venture Capital

A while back, there was a thread on the Sioux Falls Area Entrepreneurs group that chided local investors for not investing more in local businesses. An entrepreneur commented that they had to rely on outside capital to fund their business because no local investors were interested in funding their company. What this entrepreneur failed to realize is that almost no private equity investor is going to make an investment simply because they are based in the same city. Private equity investors are not non-profits looking to create local jobs. They are investors looking for a return on their investment commensurate to the amount of risk they are taking. Every angel investor, angel group, or private equity fund has certain criteria they are looking for in a founder and in a business when they invest. If they don’t see what they’re looking for in a deal, they are not going to invest—even if the company is just down the street.

Because venture capital is largely location independent, local angel funds and private equity groups often invest in companies located outside of South Dakota. For example, Falls Angel Fund recently invested in Myriad Mobile out of Fargo. Some might see this as an economic development problem (“Why not invest your dollars in local companies?”), but it’s not. Just as local venture capital dollars are flowing out of the state, venture capital dollars from around the country are flowing into the state. Companies in South Dakota can look to private equity firms based out of Minneapolis, Omaha, Denver, Chicago and California to raise money when they exhaust local sources of venture capital. For example, Docutap raised nearly $12 million from Bessemer capital out of California. The fact that venture capital flows from city-to-city and state-to-state is very much a net positive for companies in South Dakota, because companies can access much larger pools of capital out of state than if they had to rely solely on South Dakota dollars.

Seed-Stage Capital Needs in Sioux Falls

In my opinion, the greatest need for capital in Sioux Falls (and South Dakota) for that matter is for pre-seed and seed-stage companies. I do not see a significant need for post-seed stage capital because companies that hit significant traction can typically raise money regardless of where they are located. I really believe we need more sources of capital that will write the first $25,000, $50,000 or $100,000 check to help get a privately-held company off the ground. The five local angel funds sponsored by the Enterprise Institute, along with The Funding Farm and individual angel investors, are good steps toward providing this type of capital. These sources have invested in many companies located in South Dakota, but they don’t have enough capital to fully fund 100% of the fundable seed-stage companies in the region.

There will always be companies that angel groups turn down because of perceived problems with the business or its founders, but I believe Sioux Falls would probably need to have two more angel groups with similar capitalization levels to Falls Angel Fund in order to cover 100% of the fundable businesses in the city and surrounding communities. I don’t believe having a single larger fund is the answer, because private equity groups sometimes get deals wrong and I believe companies should have opportunities to raise money from different groups. Having multiple funds would also force the funds to compete over deals, leading to entrepreneurs receiving better valuations for their businesses and more competitive terms.

It’s probably not very likely that another Falls Angel Fund will pop up in the next couple of years, because it raised $1.35 million from 31 different local investors. It only came together because of a concerted recruiting strategy from myself and John Henkhaus over the period of several months. The $50,000-at-a-time money may be tapped out in Sioux Falls for now, but that doesn’t mean we can’t have another angel group that funds seed-stage companies. It would probably just need to be capitalized in another way. For example, a larger private equity group could create a $1 million fund specifically for investing in early-stage companies and bring on someone deeply involved in the entrepreneurial community to identify deal flow for this fund. 

Pre-Seed Stage Capital Needs in Sioux Falls

This is an area where our community is making progress. The Zeal Center for Entrepreneurship is launching a growth-accelerator program that will provide participating companies $20,000 in seed capital along with free coaching, mentoring and branding services. As best as I can recall, about 15 companies applied to the program. I served on the panel that interviewed the applicants and saw enormous potential among many of the companies that applied. Hopefully, Zeal will be able to systematize their accelerator program and have a new class of seed-stage companies go through its accelerator programs once or twice per year.

Post-Seed Stage Capital Needs in Sioux Falls

It would be much more difficult to create significant new local sources of post-seed stage capital from private equity firms. We would really need a new generation of Steve Kirbys, Gene McGowans and Paul Schocks to start a local venture capital firm to create a significant source of new private equity dollars coming out of Sioux Falls. I personally don’t think this is something that Sioux Falls has a strong immediate need for, since companies that gain significant traction can raise money from outside of the state.

One positive news item in the private equity space is the creation of South Dakota Equity Partners (SDEP), which is a local private equity firm funded partially by the state of South Dakota itself. The fund hopes to raise a total of $30 million and will invest in “earlier stage to more established middle market companies with a goal to diversify its portfolio across industries and investment stages.” SDEP will also focus on “companies seeking to expand existing operations in, or relocate to, South Dakota.” SDEP has not launched yet to the best of my knowledge, but I anticipate that the firm will be able to start writing checks later in 2017 or in early 2018.

Join the Conversation.

I created a discussion group on Facebook called Sioux Falls Area Entrepreneurs. Join the group and have your say in what the city of Sioux Falls needs to do to better foster entrepreneurship and make more capital available to entrepreneurs.

the first meeting of Open Startup Coffee in Sioux Falls

Building an Entrepreneurial Ecosystem in Sioux Falls Part 1: Creating Community

A couple of weeks ago, I highlighted four things that I believe Sioux Falls will need if it wants to follow the footsteps of Austin, Boulder and other startup communities and become a city that regularly spawns startups that create new jobs, attract investment capital and foster economic growth. We will need opportunities for collaboration and connection, better storytelling to inspire future entrepreneurs, better educational opportunities for people that want to build businesses and more capital to fund startups.

No single person or organization can meet all of Sioux Falls’ startup needs, but we can start to chip away at each of these issues and start to build a true startup ecosystem in Sioux Falls. I believe I can personally make the most impact in building a startup ecosystem by creating entrepreneurial community that will foster the creation of business relationships and future startups.

Why Community Matters

Every city with a thriving startup ecosystem has an active community of entrepreneurs working to promote entrepreneurship in their city through meetups and other events. There are meetup groups, educational lectures, networking opportunities and other events that gather entrepreneurially-minded people in the same room on a regular basis.

These events serve a variety of purposes.

  • Events allow newer entrepreneurs to learn from and be inspired by entrepreneurs with a track record of success.
  • Events allow founders the opportunity to meet potential team members and co-founders for their businesses.
  • Events allow entrepreneurs to make connections that can result in partnerships and valuable business deals.
  • Events also allow entrepreneurs to get immediate feedback on their ideas from other entrepreneurs.

In short, good things happen when entrepreneurs get together. People get inspired, teams get created, businesses get founded, people get hired for jobs and partnerships form.

I can personally attribute many business “wins” to entrepreneurial community groups and events. For example, I never thought it was possible that I could write a book until I met a local author (Andy Traub) at an entrepreneurial networking event. I now have eight books out. I met one of my employees, Rebecca McKeever, through an entrepreneurial community group. I’ve also implemented many strategies and tactics in my business that I learned through entrepreneurial community groups.

Where Entrepreneurial Community Happens Now

Fortunately, we are not starting at ground zero. Entrepreneurial community is already happening at hubs for entrepreneurship, such as the Zeal Center for Entrepreneurship and Queen City Bakery. There are a variety of tech, art and startup meetup groups in Sioux Falls that are organized through Meetup.com. We have weekly and monthly events that promote entrepreneurship, such as 1 Million Cups and Zeal’s Entrepreneurial Insights. We also an annual event, Innovation Expo, that celebrates entrepreneurship.

Challenges in The Status Quo

The biggest challenge that the startup community faces is awareness. We have a handful of high-quality entrepreneurship events and meetups, but they are attended by a relatively small subset of people. Many people that would love to participate in entrepreneurship community events simply do not know about them. They are focused on their business and their industry and simply are not aware that these events exist.

I believe the primary cause of the lack of awareness for these events is the siloed nature of Sioux Falls’ largest industries (banking, healthcare, retail, agriculture, technology and education). My sense is that because there is not a lot of cross-industry collaboration, business people just don’t often network or talk business with people outside of their industries. This lack of cross industry pollination has lead to many of Sioux Falls’ largest industries being underrepresented in the entrepreneurial community.

People that think of themselves as entrepreneurs attend entrepreneurship events, but business leaders in the healthcare industry do not because they see themselves as doctors and administrations (and not as entrepreneurs). The same thing could be said about business leaders in most other of the city’s major industries, with the notable exception of banking. Many bankers do attend entrepreneurship events, but they are specifically motivated to attend these events because potential clients for their business also attend these events.

Next Steps to Create Entrepreneurial Community

There are four initiatives that I am currently working on to promote entrepreneurial community in Sioux Falls:

  • 1 Million Cups – This is a weekly networking event created by the Kauffman Foundation. You may already be familiar with it if you are involved in the enterpreneruial community in Sioux Falls in any way. This event has been going on for more than three years and I started helping organize it last fall along with several others. You’ll see me on stage emcee regularly. I also take care of the groups finances, recruit sponsors and recruit speakers.
  • The Sioux Falls Area Entrepreneurs Facebook Group – This is an online community group that has assembled nearly 1,000 entrepreneurially-minded individuals in Sioux Falls. This group serves as a community discussion forum for people to discuss what they are working on, what problems they face and organize interest-driven events. This group has become very active and dozens of people are posting and commenting every day.
  • Open Startup Coffee – This is a “beta” event that I started based on the recommendation of Brian Ardinger out of Lincoln (who admittedly stole the idea from Boulder, CO). The idea is to get a bunch of entrepreneurially-minded people in a room together on a regular basis and just let them talk about startups. There’s no formal agenda or topic ahead of time, just a place for people interested in startups to talk about startups. We had the first one of these on June 5th and will be having the second event on June 15th (details here).
  • Startup Sioux Falls – This is an informational website that I am building in cooperation with Michael MacFadden that helps people get connected to the enterpreneruial community in Sioux Falls. Our first effort will be an events calendar that lists every community event that may be interesting to entrepreneurially-minded individuals. We hope to launch the first iteration of this website in the next two weeks. Over time, we hope to create a one-stop resource for entrepreneurship in Sioux Falls. Visit Startup Sioux Falls at http://www.startupsiouxfalls.com.

The Future of Entrepreneurial Community in Sioux Falls

I don’t have a grand vision for what a complete startup ecosystem with a thriving startup community looks like in the city of Sioux Falls, but I do know that we have a lot of work to do if we want to get there. The four efforts mentioned in this article are my first major attempt to move our community in that direction. I hope you will join me on this journey.

Introducing Startup Sioux Falls

We are pleased to announce the launch of StartupSiouxFalls.com, an online community resource designed to accelerate the growth of the Sioux Falls Startup Community. Matthew Paulson and I (Michael MacFadden) hope to start increasing the visibility of the start-up community in Sioux Falls and the surrounding area and make it much easier to see what events are going on, what resources are available and how you can get involved.

We have ambitious plans for Startup Sioux Falls over the next several months, but we wanted to move quickly and get this site online so that we can start helping the entrepreneurial community in Sioux Falls immediately. In the near future, we will be rolling out much more website content and news, as well as hosting a variety of local events ourselves.

Our first major undertaking is to offer a community wide events calendar where you can find out about events and meetups for entrepreneurs, small business owners and startup founders in the Sioux Falls area. Our goal is to connect as many people as possible to the Sioux Falls startup community and create collisions among entrepreneurs that will launch new startups and other businesses.

As we receive feedback about what’s working, what’s not working and what’s still needed, we will identify and execute on other ways this site can provide value to the startup community. In the mean time, check out our Events Calendar, feel contact us with any suggestions and join the discussion on the Sioux Falls Area Entrepreneurs group on Facebook.

What Else Sioux Falls Needs to Grow its Entrepreneurial Ecosystem

A few weeks ago Matt Paulson authored a great piece entitled “Four Things Sioux Falls Needs to Become an Entrepreneurial City“. In Matt’s post, he identified four main things that the Sioux Falls community needs to foster entrepreneurial growth:

  1. More Collisions – between potential partners, founders, employees, etc.
  2. Better Story Telling – of our entrepreneurial success stories.
  3. Better Education – focused on the many paths to entrepreneurship.
  4. More Capital – from local and national investors to fuel growth.

The post has been rattling around my brain for the last two weeks and I thought I would pile on by giving my perspective. The community most definitely needs the four things Matt mentions in his post, but it needs a few additional things.

Community Identity

It might be controversial to say, but the Sioux Falls Entrepreneurial Community lacks a strong identity. We have individual successes, individual efforts, individual organizations all running in different directions. It seems that we have many small cliques, rather than a broad and cohesive community. We are worried about “duplication of services” and “turf”. Getting people to come out of their caves is often very difficult. Why is this important? It is very hard for individual people or small businesses to influence policy, economies, education etc. A community that coalesces around similar values, objectives, and needs carries much more weight. A large enough community represents a critical mass of consumers, voters, donors, etc. that is capable of influencing change.

In his post, Matt identifies that we need better story telling. I agree. But beyond just lauding individual successes, we need to start exporting the success of the entire community. There needs to be a visible “scene” here in Sioux Falls. When a startup says they are from Silicon Valley; Boulder, CO; Austin, TX; there is a little bit a weight that comes with that, since those areas have great reputations for pumping out success stories. The community’s reputation is what drives investors to continually scope out those scenes.

Developing and exporting a strong community identity will help drive local change and increase our national visibility. We need to figure out what it means to be part of the Sioux Falls Scene. Who are we? What are our values? Why is this a great place to start and grown a business? What is uniquely Sioux Falls? We then need to have a community focused attitude where building and promoting the community is as important to us as building and promoting our individual businesses. We want more capital, more co-working options, more top talent. Development of strong and visible community is the only way that is going to happen in a meaningful way.

Entrepreneurial Culture

A commonly voiced opinion is that Sioux Falls needs to do better in developing, attracting, and retaining people with startup / entrepreneurial interests. This includes founders as well as people willing to work for a startup / small business. For this to happen, we need to work on the culture. For a small town, Sioux Falls has a fairly “big business” feel to it. Healthcare, Financial, Agricultural, and Education are four monster industries that have significant influence Sioux Falls business community DNA. Entrepreneurs are often looked at as a strange subculture of people who just don’t want to go and get a “real job”.

Startups are risky, but they are not crazy. For the most part, people who put their all into starting businesses are not lazy, lost, foolish, or flaky. Yet when they fail, they are often labeled as such. Over 50% of all businesses don’t make it to 5 years, and nearly two out of three of businesses make it to 10 years. Failures are not something to brag about, but they are a part of the game. We need to accept folks who give it their all and don’t quite make it. We need to respect their effort, and do everything we can to lift them back up on their feet. A community that accepts failure and provides a safety need for those who tried, will find that many more people will be willing to try.

Too often we push highly talented people with entrepreneurial interests into traditional jobs via social pressures. These people are often miserable, so this is not only bad for the individual, it is also bad for the community since that person could have gone on to do something truly great.  Our leaders, teachers, parents, and financial institutes all need to embrace entrepreneurs as a key part of the future of Sioux Falls. They need to provide cautious but optimistic support. Sioux Falls needs to “legitimize” the startup. We need to propel entrepreneurs forward, applaud their successes and pick them up and dust them off when they fail.

Mentorship

Starting a successful business is not easy, and despite whatever “fad-process-of-the-day” might say there is no cookie cutter path to success. There is plenty of research out there that demonstrates that entrepreneurs with strong mentors are significantly more likely to create successful businesses. Mentors can provide:

  • Valuable insight drawn from their own successes and failures;
  • Much needed reassurance when times are tough;
  • A larger network, beyond your own personal contacts;
  • Unbiased analysis of critical business issues;
  • An emotional outlet to talk about your fears;
  • And much more…

A successful mentor-mentee relationship is mutually beneficial. Spending time with young, energetic, hardworking people is very motivating and inspiring. When the mentor gets to play the role of the “more experienced” entrepreneur in the relationship, it is a confidence builder; it is a reminder that they have had some success and that what they have learned is valuable. When giving advice, mentors often realize that they themselves need to follow the very same advice. Serial mentors will tell you that they have gotten just as much out of the relationships, if not more, than the mentee. It’s also just good karma to put out in the world.

I have noticed a lack of mentorship in the Sioux Falls community. Many startups do not have mentors, or advisory boards. Many entrepreneurs who have started to have success simply disappear from the community and do not actively find less experienced entrepreneurs to mentor. Entrepreneurship is life long journey with a spectrum of experience. No matter how experienced you are, you can always use a mentor. Likewise, no matter how new you are at the game they is someone you can mentor. Even if you are only 6 months in to your first business venture, there is a college kid somewhere who is wondering how to start. Successful entrepreneurs and business people need to view mentorship as a moral / ethical obligation to the community.

So, if you are just starting out, seek out a mentor. If you have had some success, make yourself available to the community and find at least one person to mentor.

Grass Roots Community Participation

Many people have voiced the challenges that they have encountered in trying to start businesses. They often share thoughts on how the community should and must evolve to better support them. However, having ideas is not enough. We need people to take action.  As much as the city, the Chamber, the universities, and the non-profits in the area care about these issues; community identity, culture, and mentorship can really only be driven by the entrepreneurs themselves. All of these organizations can provide amazing support, but WE the entrepreneurs need to be driving the bus. It’s OUR community, OUR culture, OUR insights, OUR successes that will transform the community, and we can’t sit around and hope that others will create it for us.

Many people don’t take action because they aren’t sure what to do, or how to make an impact. If this is you, I encourage you to reach out to others in the community that are taking action and offer to help, they may have ideas for you. Others may feel like they are too busy focusing on their business to effectively contribute to the community. This is a challenge for sure since entrepreneurs are notoriously stretched thin. Unfortunately, if everyone one is too busy to build the community, the community will never grow and it will never get easier. We must take the long view and invest time and energy now for a payoff in 5-10 years. I encourage everyone to find 2 hours a month to contribute. What can you do?

  • Come to a happy hour and share your experience.
  • Write a blog post about your experiences.
  • Offer to be a guest lecturer for a high school or university.
  • Find someone to mentor.
  • Talk about the community to people from other parts of the country.
  • Respond to questions on our Facebook Group.
  • Bring new faces to events.
  • Many other unique ways…

Summary

While this post focused on a few more things we need to do as an entrepreneurial community to grow, Sioux Falls has a lot going for it. Great quality of life, low cost of living, a warm and welcoming community, a strong local economy, etc. However, if we focus on what we need to improve, Sioux Falls can significantly accelerate the growth of the entrepreneurial community over the next 3-5 years.

Four Things Sioux Falls Needs to Become an Entrepreneurial City

Over the last several months, the business community in Sioux Falls has taken a renewed interest in the role that entrepreneurship plays in bettering the city. The Zeal Center for Entrepreneurship has become more prominent in the community with their recent rebrand and remodel, as well as their launch of an accelerator program. The closure of The Bakery has lead many to ask “What’s next for the entrepreneurial community in Sioux Falls?” Jason Ball, the new president of the Sioux Falls Area Chamber of Commerce, has expressed interest in growing the entrepreneurial community in Sioux Falls. Jodi Schwann is highlighting many local businesses in her new publication, SiouxFalls.Business. Local entrepreneurship groups, like 1 Million Cups, continue to pound the drumbeat of entrepreneurship and provide inspirational content, education and networking opportunities.

Given this renewed focus on entrepreneurship, I think it’s an appropriate time to take a step back and ask what Sioux Falls really needs to become a community that fosters entrepreneurship. There are four key changes that I believe need to occur for Sioux Falls to truly become an entrepreneurial community: more cross-industry personal networking and collaboration, better storytelling of the successful entrepreneurs that are already in the city of Sioux Falls, better educational opportunities for entrepreneurs and more capital to fund the growth of businesses in Sioux Falls.

More Collisions

Businesses get launched when people with different skillsets get together and discuss how to solve problems and create opportunities. Two ambitious people meet at a networking or entrepreneurship event. They start talking ideas, find an idea they are both excited about and begin to pursue a business together. A notable example of this is Scratchpad Tees. The two owners, Chris Bierle and Craig Brown, met through The Bakery and eventually started a successful t-shirt company together.

Collisions among future entrepreneurs already happen at hubs for entrepreneurship, such as the Zeal Center for Entrepreneurship and Queen City Bakery. They also happen at events like 1 Million Cups, Zeal’s Entrepreneurial Insights and Chamber mixers, but it’s a relatively small subset of business people and entrepreneurs that attend these events. Many of Sioux Falls’ largest industries, including banking, healthcare, retail, agriculture, technology and education are underrepresented at these events. Some of the Sioux Falls community’s brightest minds are left out of the conversation because they simply never show up.

Imagine what kind of new businesses could be founded if we all stepped out of our siloed industries, took time to learn about each other and looked for opportunities to work together on projects. What if a banker and a programmer teamed up to create a mobile banking experience that wasn’t awful? What if a group of educators teamed up with technologists to develop new and more efficient ways to deliver content online? What if retailers worked with Sanford and Avera to create a more consumer-friendly healthcare experience? Opportunities to create new businesses and collaborate across industries abound, but there must be an environment where entrepreneurial connections can form. Then, people just have to show up!

Better Storytelling

There are many entrepreneurial success stories in the city of Sioux Falls, but we don’t hear about most of them. Most of us know that Warburg Pincus purchased a majority stake in Docutap last year, but there are many companies doing things that are just as exciting but that haven’t been widely covered by the media.

Here are some exciting companies that you may not know about in the city of Sioux Falls:

  • Equinox – This company is working on a promising medical device that could stop or slow the progression of glaucoma.
  • Eye Brain Medical – This company identified that many migraines are caused by vision alignment issues and developed technology that works in glasses to correct the issue.
  • Grand Prairie Foods – This company produces a massive amount of processed foods for hotels, gas stations and food service companies.
  • Learn Create Build Academy – This company hosts numerous summer camps and online learning opportunities so that the next generation is inspired to get into STEM programs.
  • Montessorium – This company has developed a series of educational apps that have had more than 1 million lifetime downloads.
  • Sioux Falls Seminary – Sioux Falls Seminary is reinventing graduate education and creating new contextually-relevant, competency-based education programs—and lowering tuition by 75% in the process.

These organizations are all based or were founded in the city of Sioux Falls and are doing incredibly creative things. We need to do a better job of telling the stories of these companies and highlighting what they’re doing so that future entrepreneurs can see the success that others are having and think “I could do this too.”

Better Education

Sioux Falls has plenty of traditional academic programs that teach business, between Augustana University, the University of Sioux Falls (USF), Southeast Technical Institute and University Center. Some of these programs, such as USF’s MBA program, are quite good. They provide a broad base of education on a variety of business topics, such as accounting, human resources, marketing and finance. They don’t meet everyone’s needs though. Signing up for a multi-year degree that costs well into five figures is not practical for many would-be entrepreneurs. Ironically, getting a traditional business degree might actually keep you from starting your own successful business because of the cost and time involved.

Our community needs more bootcamp-style educational programs and topic-driven seminars that help entrepreneurs cover the basics and gain a working knowledge of specific topics, such as marketing and accounting. Some of the biggest mistakes that I see entrepreneurs make happen because they don’t have a fundamental grasp of basic business topics. Recently, I came across an entrepreneur that took out more than $1 million in debt from a bank using their inheritance as collateral to fund their pre-revenue and pre-traction company. If this person had taken a basic business finance class, they probably would have learned that borrowing $1 million+ for a pre-revenue company is very unusual and is almost certainly not a good idea.

The University of South Dakota (USD) and the Zeal Center for Entrepreneurship are taking some good first steps to broaden educational opportunities for entrepreneurs. Zeal is launching an incubator program and offering monthly educational seminars. USD is launching executive training programs to help meet this need. These programs are moving in the right direction, but need to be better publicized and more accessible to entrepreneurs.

More Capital

Sioux Falls faces a chicken and egg problem when it comes to seed-stage capital. There aren’t many high-quality early-stage firms in Sioux Falls, so local angel investors and venture capital firms largely invest in companies outside of our community. Local venture capital companies, including Bluestem Capital and Bird Dog Equity Partners, are largely location agnostic and have primarily invested in companies that are based out of state. This is also true in my case. Most of my angel investments are in companies located in start-up hubs, such as Austin, Boulder and San Francisco. Many local business people that have the financial means to become angel investors never take the leap and do so because there are few deals and little educational information available locally on angel investing.

Conversely, entrepreneurs have a tough time raising money locally because there aren’t many sources of early stage capital. Falls Angel Fund, the lone angel fund in Sioux Falls, has a capitalization of just $1.35 million and receives far more applications than it could possibly hear as pitches at its bi-monthly meetings. There are a handful of individual angel investors as well, but they are few and far between and they don’t do many deals. Most companies looking to raise money don’t have enough traction to attract the interest of a local private equity firm, leaving them few viable options to raise money. They often end up having to self-fund their business, grow slower than they would otherwise or take less than equitable terms from an investor looking for a deal.

How do we solve this chicken and egg problem? We need more successful deals to happen to show that early-stage private equity is a viable asset class for high-net-worth investors in the region. Falls Angel Fund is a solid first step in this direction, but the fund would need to be three or four times as large to fund all the viable investment applications it receives each year. Hopefully, Falls Angel Fund will be able to quickly deploy that capital and lead to the creation of a much larger community-based angel fund in the future. In the meantime, we need more sophisticated, high-net-worth investors to fill this gap and invest part of their portfolio into local non-real-estate private equity investments. As more dollars flow into high-quality, high-growth companies in Sioux Falls, there will be more jobs created, more successful exits and strong returns for angel investors.

Final Thoughts

Sioux Falls has taken many positive steps to promote and foster entrepreneurship during the last five years. Docutap showed us that a homegrown company can create hundreds of jobs and be sold to a global private equity firm for more than eight figures. The Bakery revealed there is a strong desire for entrepreneurial community and opportunities for collaboration. Zeal rebranded itself and made itself much more available and accessible to aspiring entrepreneurs. Falls Angel Fund provided the first meaningful seed-stage capital to be available in Sioux Falls in more than a decade. We’ve made a lot of progress, but we still have a long way to go if we want to be a significant entrepreneurial hub.

Join the conversation.

I created a discussion group on Facebook called “Sioux Falls Area Entrepreneurs”. Join the group and have your say in what the city of Sioux Falls needs to do to better foster entrepreneurship.

Update 6/11/2017 – Michael MacFadden has added his thoughts to the conversation about what he thinks Sioux Falls needs to build a true startup ecosystem. Read his thoughts here.