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Investing in Iowa

State’s shallow venture capital pool remains a challenge, but ‘good deals are getting funded’

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Building innovative companies requires ready venture capital that is willing to bet on companies that might come up with the next big thing or just as easily fizzle. 

Iowa, along with the Midwest, lays claim to just a sliver of the venture capital dollars that flow copiously from Silicon Valley, New York and Boston. Looked at from a basic economic perspective, the demand for venture deals in the Midwest outstrips the supply of Midwest-based venture capital by a ratio of 3-to-1, according to Adam Claypool, a principal with Bridgepoint Merchant Banking in Des Moines. 

The relative scarcity of venture capital makes it a more challenging market in which to find funding in Iowa, but seasoned entrepreneurs and investors alike agree: Solid deals are going to attract and find capital. 

“There is always funding available for good companies, because there are high-net-worth individuals and investment groups in Iowa that are looking for opportunities,” said Mike Vasquez, a serial entrepreneur in Des Moines who has launched more than a half-dozen successful venture-backed companies over the past 30 years. “The difference here compared with a Silicon Valley is that you have a plethora of opportunity there, so the volume is just so much higher. Obviously, in Iowa, the deal volume is not as high.”  

As a region, the Midwest accounted for just 1.7 percent of venture capital deals that were funded in 2018, compared with 38 percent funded on the West Coast and and nearly 25 percent in the Mid-Atlantic states, according to National Venture Capital Association data. 

“That is a real negative in the Midwest,” said Iowa venture capitalist John Pappajohn. “There is just not as much money available as there is in the Silicon Valley or in the Boston area. The universities and schools have yet to help come up with the funds to help many of these startups make it. But if you try hard enough, you can find money. You’ve got to knock on doors. You start with family, you go to friends. We have access to money depending on the technology and how attractive it is. If the deal is good enough, I can finance it on Wall Street.” 

According to data from the National Venture Capital Association provided by Bridgepoint Merchant Banking, Iowa ranked 33rd in the country for venture capital funding last year, with approximately $85 million in venture financing occurring in Iowa — just six-tenths of 1 percent of all U.S. venture funding.

California — home of Silicon Valley — is the overwhelming leader in venture capital, accounting for nearly 60 percent of transactions and just over one-third of the total U.S. deal volume in venture capital last year. New York and Massachusetts were the second and third most active states, with about 11 and 9 percent of the transactions, respectively. 

As Bridgepoint Merchant Banking’s Claypool sees it: “There continues to be a shortage of capital in Iowa and the Midwest — and it’s made our culture different.” 

Claypool noted that over the last five years, the amount of U.S. venture capital invested as first-time funding has dropped from 34.8 percent to 23.7 percent nationally. “So there are fewer first-time fundings and more follow-on fundings. However, that’s not the case in Iowa, which has consistently had the majority of funding as first-time funding,” he said. 

Nearly three-quarters of venture funding in the Midwest in the past five years has been first-time funding, while the remainder has been for follow-on funding, Claypool said, citing National Venture Capital Association data. Consequently, there’s substantially less capital available in Iowa for subsequent funding rounds. 

“That has created a different mindset,” Claypool said. “If I’m a startup company in California, my goal is: How do I get my next financing round? In Iowa, the mindset is: I’ve got to grind my way to profitability as soon as possible, because I may not get a follow-on round of financing.” 

Over the past five years, 214 Iowa companies have received venture financing, and nearly half of those companies received follow-on financing, according to data compiled by Bridgepoint. And about 1 out 12 of those Iowa companies has had a buyout or another “liquidity event” in that period that enabled investors to recoup their investment returns. 

“So this ecosystem, this entrepreneurial group and business community, has figured out how to attract capital, do multiple rounds of capital, and return shareholder capital to investors,” Claypool said. “I’m really impressed with the amount of follow-on financing that these companies have attracted. They’ve done enough to justify to investors that they should qualify for another round of capital.” 

From Craig Ibsen’s perspective, venture capital in Iowa has never been “less scarce” than it is right now. Ibsen is managing principal of Next Level Ventures, a Des Moines-based venture capital fund launched five years ago that successfully raised about $40 million and has built an initial portfolio of a dozen Iowa-based high-growth startups, with minority investments ranging from $1 million to $4 million. 

Another Iowa-based venture fund, Midwest Growth Partners in West Des Moines, announced in January that it raised $113.5 million for a second fund, which has further added to venture capital availability. 

As additional evidence for the old saying that venture capital investing is a team sport, in 2015 venture capital groups from across the state came together to form the Iowa Venture Capital Association to facilitate collaboration on deals and promote venture investing in Iowa. The organization now has 12 seed capital/angel capital firms, six venture capital firms and four private equity firms as members. The organization’s members meet formally twice a year — and actively invite regional funds to attend, said Ibsen, who is also an IVCA board member.  

“Good deals are getting funded in Iowa,” Ibsen said. “We’re getting calls from Midwest venture capital players in Chicago and Omaha looking for opportunities, and jumping in when it’s appropriate.” 

As an example of that regional collaboration, last fall the Greater Des Moines Partnership hosted a venture firms pitch event, “The Best of the Midwest,” that attracted angel capital investors from across the Midwest to pool their funds and collectively pick participating startups in which to invest. 

An investment from that event, along with investments by Iowa-based EMC Insurance and Next Level Ventures, enabled MakuSafe LLC, an Iowa software startup, to close on a $3 million round of venture funding this past year.
“There’s never been a better time to look for deals in Iowa,” Ibsen said.

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