Go Fund Yourself

When it comes to fostering and attracting innovative business, does the Capital Region have enough capital?

Back Longreads Dec 11, 2018 By Jeff Wilser

The centrifuge is to a chemical engineer what the anvil is to a blacksmith. For scientist-turned-entrepreneur John Bissell, the centrifuge was the critical bottleneck in the early days of his company, Origin Materials. Centrifuges can cost $10,000, but amazingly, Bissell found one used for $22. It looked like a 1970s washing machine merged with a ’60s-era NASA control panel — “like it could launch the Gemini mission,” Bissell remembers — but it worked.  

However, it required polyethylene jars, which cost $2,000 each. “There’s no way we could afford $2,000 jars for a machine that cost $22,” Bissell says. One day, in a mix of desperation and sleep deprivation, his cofounder bought cheaper glass jars and set out to see if the setup could ferment sewage into biodegradable plastic.

Related: Which Path Forward? How to fund a business

The machine whirred to life; it spun the jars at approximately 10 Gs — 10,000 times the Earth’s gravitational force. Then, the jars shattered. “It didn’t fail a little bit,” Bissell says, “It failed spectacularly.” Every seam of the centrifuge was coated with glass, dust and what Bissell refers to as “shit paste.” Without money for a new machine, he and his business partner spent four days with paper towels, scrubbing away the fecal goo.

These are the things that young, hungry founders do when strapped for cash. Bissell and his team at the West Sacramento-based startup needed to grow — they had dreams of transforming abstract, next-level chemical equations into new materials that could make plastic bottles more eco-friendly.

Could they get funding? That’s a question every entrepreneur faces. The Sacramento region is ramping up efforts to position itself as a strong ecosystem for startups — efforts like the Greater Sacramento Economic Council’s push to recruit tech companies, and the new Sacramento Urban Technology Lab’s goal of connecting government, academia and startups. Yet attracting and retaining growing businesses takes money. So, does the Capital Region have enough capital?

The short answer is yes. And no.

MONEY MATTERS

After he finished wiping sludge from the centrifuge, Bissell struggled to find enough funding in the region. “Historically, it has been challenging to find that financing locally,” he says. Bissell was able to cobble together $500,000 from his extended personal network but says Sacramento lacked an “active angel network,” and that the pool of financing “wasn’t very deep.”   

That was 2009. It’s the same environment investor Lokesh Sikaria wanted to change when he launched Moneta Ventures in 2013, based in Folsom and targeting primarily local companies. His goal was to invest 70 percent of the fund locally. Investors were skeptical; people told him he wouldn’t find enough deals.

“We’ve always had really wealthy people in town, but they’ve invested in things like real estate. Venture capital has not been their cup of tea,” Sikaria says. For that first fund, 60 percent of the $25 million raised came from outside the region, state and country. “I went out seeking money here, locally. And that’s when I realized that there’s no local money to be had.”

Once Moneta had the $25 million, it had no trouble finding worthy investments — over 70 percent went to local companies, including HomeZada (an app for digitally managing your home), TeleMed2U (a remote health care provider), Pocket Points (an app that incentivizes students not to grab their phone in the classroom) and a dozen other local firms. The fund is now tracking a 20 percent return for the year, according to Sikaria. “That was very telling,” he says. “People said, ‘Wow. You can actually invest in companies in Sacramento, be based in Sacramento and actually make a good return? Why wouldn’t we invest in that?’”

Sikaria doubled down on the strategy. He took the first fund’s success as proof of concept to regional small investors. He pitched them on local companies being not just the right investment, but a profitable one. His second fund grew to $65 million — 70 percent of which came from local investors. And, once again, he plans to spend 70 percent on local companies.  

Lokesh Sikaria (center) founded Moneta Ventures in 2013 and prioritizes investment in local companies. photo: Terence Duffy

In addition to Moneta, the region’s capital ecosystem includes funds such as DCA Capital Partners, Central Valley Fund Capital Partners, Velocity Venture Capital, Akers Capital, AGR Partners and the Sacramento Angels. Asked to ballpark the total pool of capital across all of these funding sources, Sikaria estimates $500 million, with about half of that actively invested. (Other local investors gave similar estimates.)

But is that pool of capital enough? More specifically, is there a sufficient pool to support the existing entrepreneurs who are already in the region, and is that pool big enough to lure companies from Silicon Valley?

“I start from the premise that if it’s a good deal, you’ll always find the capital,” says James Beckwith, CEO of Five Star Bank (and Comstock’s editorial board member), which recently launched a program called Bank Tank that connects investors with hopeful entrepreneurs. “In my view, there’s no lack of capital for the organizations that are worthy.”

Maybe so, but others want to see more. “We probably need at least another three Monetas,” says Barry Broome, CEO of Greater Sacramento Economic Council, which has been trying to recruit startups to the region. “Having more funds would give us the ability to have a lot of eyes on deals, and the ability to share risk. Some people will tell you that there’s not enough deal flow for two or three more funds, 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, another 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 Institute. “Those bridges are just getting built now.”

The bridges include groups like Sacramento Metro Chamber of Commerce, StartupSac, Ag Start, Accelerate U, FourthWave, HaneyBiz, Founder Institute and the UC Davis Venture Catalyst program. Everyone seems to agree on the importance of this networking infrastructure. Whether it’s robust enough is an open question. Bissell describes the local entrepreneur 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 opportunity in the Series A range ($1 million to $5 million, Moneta’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 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 currently 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 Management guessed that there are “between 200 and 300 worthy startups” in the region, defined as “companies that are already built, have a product or service and have a leadership 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 Moneta. Or let’s say you need $10 million (who doesn’t?) and simply can’t find it locally. It’s reasonable for a local entrepreneur to wonder: Do I need to move to Silicon Valley, where all the action is happening? Is being in Sacramento a strike against me?

“Even though Sacramento might not get the splashy headlines that Silicon Valley does, and doesn’t have the hype machine, there’s just as much excitement and innovation.” Abhay Puskoor, principal, FTV Capital

“Absolutely not. Absolutely not,” says Beckwith, repeating for emphasis. “We are on Silicon Valley’s radar screen. Our region has the ability to fundamentally extend a company’s runway. If you’re in San Francisco, you have a burn rate of X. If you picked up and moved the operation to Sacramento, 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 investment 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.)

Remember John Bissell, of Ikea jars fame? After Origin Materials raised that $500,000 in 2009 locally, he still needed more. Much more. So he expanded the scope of his search, and over the next few years raised approximately $30 million from the Bay Area and New York. “Then another $80 million, and that was basically from all over, including Europe,” Bissell says. The well-capitalized company, which has 35 of its 65 employees in West Sacramento, now helps Pepsi and Nestlé create sustainable plastic bottles.

When HomeZada, based in El Dorado Hill, launched in 2011, the founders needed to rustle up another $1.2 million of capital. “We tried to get it all in the region,” says cofounder Elizabeth Dodson. They did get some local angel investments (including a slice from Moneta), but not enough to fill the hole. They pitched the Sac Angels. They weren’t chosen. Yet they kept at it, and eventually she found the rest outside the region.

“Very few firms actually care that much about geography,” says Aaron Klein, the CEO of Riskalyze, an Auburn-based firm that creates portfolio management tools. Klein found $20 million from FTV Capital, which is based in San Francisco and New York.

“We’re trying to invest in the best companies and best management teams, no matter where they are,” says Abhay Puskoor, a principal at FTV Capital, who lives in San Francisco. Puskoor likes what he sees with the Riskalyze investment, and now he’s considering a few other Sacramento-based startups. “There’s a very impressive talent pool in the Sacramento area,” says Puskoor. “Even though Sacramento might not get the splashy headlines that Silicon Valley does, and it doesn’t have the hype machine, there’s just as much excitement and innovation.”

The answer of whether there’s “enough” private capital in the region definitely depends on the context. To entice more startups to move to the Capital Region, more funding might be necessary. Yet for local entrepreneurs, the truth is that it shouldn’t matter. The capital is out there.

“The bottom line,” says Klein, “is that if you are building a great company and have the numbers to prove it, you’re going to be able to raise capital while based in Sacramento, period, full stop.” 

Comments

Merritt Erickson (not verified)December 21, 2018 - 7:58am

I have contacted you in the past but have been told Orland is out of your region. I have a working one of a kind product that kills bacteria and it is only water. Looking for funding. Who do we talk to.

mVisitor (not verified)February 5, 2019 - 2:44pm

I have contacted you in the past but have been told Orland is out of your region. I have a working one of a kind product that kills bacteria and it is only water. Looking for funding. Who do we talk to.

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