Kansas City Angel Investors: The Definitive Guide
The Next Mecca For Angel Investors Is In…[Drumroll]…Kansas City
As Kansas City angel investors, we hear the phrase ‘Silicon Valley’ every day of our lives. It’s bad enough that most of the tech publications focus almost exclusively on that region, but worse when our fellow Kansas and Missouri entrepreneurs mention that we should be “the next Silicon Valley.”
The world will always benefit from the real Valley, and a lot can be learned from their ecosystem and the startups they breed. Tulsa, Des Moines, Overland Park, Cincinnati, and all places similar are never going to be Silicon Valley – nor should they try. Our goal is to encourage entrepreneurs that building startups in places like Kansas City is as good of place as any; we also want to remind Kansas City business investors that it’s still about ROI, which is not just a calculation of how much you earn, but also how much you spend.
We urge the major angel networks in Silicon Valley, NY, and LA to consider adapting their thesis statements to reflect the reverse gold rush that the Internet has created. There are thousands of hockey-stick poised ventures that got that way in-large part because they weren’t founded in a major market.
We haven’t exactly unearthed the first dinosaur fossil here; there are already an increasing number of Silicon Valley-based VC firms investing in startups that aren’t located in the valley, or any other major market for that matter. Just to name a few: CrossChx (Columbus, OH), ChannelQ (Chicago, IL), Dwolla (Des Moines, IA), Imgur (Athens, OH). InsideSales (Provo, UT), and AgLocal (Kansas City, MO).
These are not anomalies, and there are going to be thousands of them this decade. Why? For the same reason it’s smarter to purchase a 4x4 in Miami and a convertible in Denver: supply and demand. An angel investor should chase the most profitable exits, not the largest ones. Economically speaking that’s not in Silicon Valley anymore – it’s in places like Kansas and Missouri. These are the reasons why smart angel investors call Kansas City home.
It’s Cheaper To Start & Grow Businesses In KC
Look at this list: Overland Park, KCK, Olathe, Independence, Lee’s Summit, Shawnee, Blue Springs, Lenexa, Leavenworth, Leawood, Liberty, Raytown, Gladstone, Grandview, Belton, Prairie Village, Raymore, Grain Valley, Ottawa, Lansing, Excelsior Springs, Merriam, Mission….
Everything about living in cities like these is cheaper than living in a place like San Francisco; legal fees, office space, gas, insurance, employees – literally everything. Bootstrapping in California or New York is an oxymoronic statement because it’s impossible. This means there are more per capita startups achieving natural product/market fit in all of the small markets combined, than the big ones individually. As all good business investors can attest, more opportunities means better investment decisions.
Critical Mass is Easier to Achieve
Companies like Twitter, Airbnb, eBay, Uber, and many other modern startups rely on a network effect before the consumer experiences true value. In other words, the more people using the product, the more valuable the product becomes. Angel Investors traditionally shouldn’t, and don’t, invest in these types of companies until they’ve proven an ability to see a network effect on a smaller scale.
As an example, this is why Facebook only launched on Harvard’s campus when it first started. A quality network effect is directly proportional to critical mass, and critical mass is best achieved with smaller sample sizes. It’s easier for startups in middle-sized cities, like Kansas City, to achieve critical mass, because the city itself represents a smaller silo.
Don’t Forget the Scientific Method
The scientific method lays out a simple formula for turning educated guesses into facts. The formula dictates that you keep all variables the same except the one that you’re testing. Thus, fluctuations in data can be attributed to the single variable and not anything else. When you launch successfully in San Francisco you still have no idea if it will work in Overland Park, Kansas City, MO, or Lee’s Summit.
A Californian might as well be an extraterrestrial when it comes to spending habits compared to the average American. Whereas if you successfully launch in Olathe or Prairie Village you can be pretty sure it will work in cities like Wichita, Orlando, or Albany. There are way more people that live in all of the combined American cities, than there are in SF, LA, and NY. So if a startup is going to test somewhere, they should do it in a place that will provide quality data that can be extrapolated into a bigger and more relevant market if successful.
Valuations Are Lower
Valuing a startup is more of an art than a science. A true valuation is based on a multiple of an earning, but startups only have hints as to what those earnings could be. Sure, early revenue can be extrapolated, but now we’re back to guessing. This means that valuations tend to be created using a geographic comparable, as in what are other teams with similar DNAs in this region valued at?
Silicon Valley is stunted in this department because everything around them has artificially inflated valuations. Not high valuations due to sophisticated methodologies, but instead through more artificial ones. Some of this is due to a startup’s costs, like the high cost of living, demand for high quality programmers, and salary-based opportunity costs. Unfortunately, some is also due to value inflation rooted in geographic ego and entitlement.
A startup that moves from Leawood to Silicon Valley will probably double their valuation the second they get on the plane. Why? Did their revenue spike? Did their founder have a proprietary epiphany on the plane? Did their audience just double? Did their code just improve? No, no, no, no…
There’s Less Competition From Other Angel Investment Groups
In Silicon Valley a lot of investors find themselves pitching to entrepreneurs; everywhere else it’s the opposite. VCs should take some of the money from the millions they’re losing fighting for deals in The Valley and spend it on a few good scouts in states like Kansas and Missouri that don’t compete for a startup’s equity.
Well, Mr. or Mrs. Kansas City Capital Investors, there you have it: a simple reminder that the foundation of Kansas City angel investing is still based on buying low and selling high. Midwestern entrepreneurs are just as smart, just as focused, and debatably harder working than the major VC markets. With such a risky asset class to begin with, diversification of your portfolio to represent middle-market cities is in your best interest.
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Managing Director At Mid-America Angels
CEO/President, The Enterprise Center of Johnson County
The Mid-America Angels (MAA) is the longest running, most sophisticated, and traditionally organized angel group in Kansas City. They boast more than 120 active accredited investors that span a wide range of industry expertise. When describing them to startups in the BetaBlox portfolio that are looking to find capital investors, we say that ECJC (The Enterprise Center of Johnson County) is their on-deck circle, and pitching to MAA is being up to bat in the majors. In other words, ECJC is a growth stage incubator and co-working facility that doubles as a vetting and preparation pipeline for Mid-America Angel deals. Their most successful deal to-date was with Zave Networks (lead by George Hansen and Thad Langford), which was eventually sold to Google for approximately $150M (this is a private number, but rumors tend to spread fast throughout the Kansas City region – so take this stat for what it’s worth). George Hansen eventually came back to Kansas City after his stint migrating Zave into the Google framework, and now heads up The Enterprise Center of Johnson County. Don’t get it twisted though, these are sharks (and when BetaBlox says ‘sharks’, we mean it in the most complimentary fashion); MAA is strictly for expansion and growth capital. Meaning they’re not funding ideas and recently launched startups. They’re funding later-stage deals that are looking to add gasoline to what they have proven already works. ‘Proven’, being the key word there. So if you don’t have serious traction, please don’t tell them we sent you – because we didn’t.
- Apply to pitch online with an executive summary
- They review the info and provide feedback for those that don’t make the cut; those that do are scheduled to present to the group.
- Selected companies pitch to the group for 15 minutes with 10 minutes of Q&A.
- If selected to the next round, they enter into a 60 minute presentation to the MAA group to discuss the most pertinent issues the group sees.
- If selected to the next round, you enter into a due diligence phase where the opportunity is dissected in greater detail. Revisions should be expected.
- If selected, negotiations begin on the term sheet.
- If the term sheet is mutually agreed upon, entrepreneurs re-pitch to the MAA group and commitments from the angel investors are accumulated.
- Final paperwork is signed, forms filed, checks are cut.
- MAA members, especially those that chose to invest personally, continue to add value post-investment; a board seat is probably taken. Follow-on investment is possible.
Angel Capital Group – Kansas City, MO
Chapter President, Angel Capital Group KC
CEO, Venture 360
The Angel Capital Group is the second most powerful angel investment group in Kansas City, but it’s more than just a single group of angels. At it’s inception, the founder and serial entrepreneur Rachael Qualls saw an ability to create a long-tail network effect. In other words, instead of building the biggest angel investor network in Kansas City, she built a handful of angel networks across the United States (cities like Charleston, Denver, Ft. Lauderdale, Knoxville, Nashville, and obviously KC). How it works is a company applies to the mothership where it’s then digitally vetted through a software they built in-house called Venture360 (which has since been spun off into it’s own successful entity). If chosen, companies enter into a due diligence process where the finer details are hashed out and then displayed on a hot-sheet that the investors in the angel network are provided at pitch-time. Then the chosen entrepreneurs travel from ACG chapter-to-chapter and pitch their business – sometimes digitally through video conferencing tech, and sometimes in-person. Investors throughout the country’s chapters then decide to invest individually or as a group. They tout an impressive portfolio, some of which are from Kansas City – including ABPathfinder and Moblico.
Women’s Capital Connection – Kansas City, MO
Network Manager, Women's Capital Connection
The Women’s Capital Group is a network of Kansas City-based female angel capital investors, who exclusively provide business investments to women-led, growth-stage, companies. Much of their makeup and application process is similar to that of the aforementioned Mid-Ameria Angels (MAA). Think of them like brother/sister angel groups. They both stem from the same origins (that of the re-architected KTEC), and utilize The Women’s Business Center and The Enterprise Center of Johnson County as their vetting and prep center.
Flyover Capital – Kansas City, MO
Thomas A. DeBacco
General Partner, Flyover Capital
General Partner, Flyover Capital
General Partner, Flyover Capital
General Partner, Flyover Capital
General Partner, Flyover Capital
Flyover capital are the new kids on the block. The team is made up of a handful of general partners with serious entrepreneurial and fund management expertise. They hope to leverage those skill-sets to create Kansas City and the Midwest’s next generation of successful technology entrepreneurs. Their level of investment, for the Midwest, is a little larger than a typical angel deal – so they were almost left off this list. They’re hovering over the arbitrary line between angel investor and venture capitalist size investments. They invest in “seed stage” ($500K-1.5M) and “early stage” ($1.5M-3M) companies (those price ranges are their definition); all under a thesis that the next great company can come from the central corridor – about as West as Colorado, South as Texas, North as Minnesota, and East as Tennessee. Although they’re new, they made big splashes after deployment into three different ventures in their first several months – Bulu Box, innaraHealth, and opendorse.
What Is An Angel Network?
BetaBlox gets asked this question often, and it really depends on a lot of variables. Much like business incubators, there are many different models that have been created to address the wide-ranging needs of entrepreneurs in the market. These are the basic models that all fall under the umbrella of ‘angel network’ – and all of them are represented in Kansas City:
-Angel Investment Club (showcase)
An angel investment club that emphasizes a “showcase” strategy means that a group of high net-worth individuals meet regularly (usually monthly) to find deals, curate the best ones, and show them off to the group as a whole. Then, individual members decide whether they want to invest. Zero, one, more, or all of them could choose to invest – and typically when they do they do, it’s under their own personal name, rather than that of a formal angel investment business.
-Angel Investment Clubs (pooling)
Angel investment clubs that emphasize pooling means that a group of people have banned together and they pool their money. This means a check is written by individuals that want in the club on either an annual, quarterly, monthly, or “call” (right before the fund invests) basis. Said check is made out to the formal business that represents all of their interests (that are organized mostly as either LLCs, SLLCs, or C-Corps). Then, as a group they find, curate, and pick the best companies to invest in. It’s done so via a majority share vote; and once a company is chosen the money is deposited into the startup’s account directly. This has a couple of advantages because now there’s only one entity on your capitalization table (as opposed to multiple, or many, individual investors). It also means checks are written faster because the money has already been pooled, or if they haven’t their is social pressure from the group to do so.
-Angel Investment Syndicates
So to make something abundantly clear right now, crowdfunding for equity to the public is illegal without jumping through so many hoops that it’s not worth it. It’s called general solicitation and it’s why things like Kickstarter only do pre-production orders, trinkets, and special privileges to “funders”, as opposed to any sort of equity. It’s illegal because you can’t take money from someone for anything that falls under the definition of security (meaning there could be a financial gain/loss resulting from the transaction); there are caveats to this last statement, but for the most part it’s that simple. Many online angel investment networks have gotten around this by pre-screening people/entities as being accredited (quick definition: provably rich) that want to digitally shop for angel investment deals. What happens is multiple individual groups and/or people organize to raise the full amount the company is asking for.
-Angel Investment Networks
Angel investment networks are like the in-person version of angel investment syndicates. They are an alliance between several (or many), smaller angel groups across the United States that share the load of finding, researching, and implementing angel investments. The Angel Capital Group in Kansas City is the best example of this method.
How Do You Find Angel Investors In Kansas City?
Finding angel investors in Kansas City is surprisingly easier than it sounds. To dumb it down, there’s two crucial steps. The first is that you get on their radar. Meaning, in some way the entrepreneurial community of KC as a whole needs to sorta know what you’re doing and that you’re picking up steam. There are tons of pitch events such as 1 Million Cups, The Kauffman Foundation Demo Day, Tech Cocktail Pitch, Startup Weekends, OneWeekKC, and many more. Then there are more exclusive ones held by things like The Sprint Accelerator or the BetaBlox Business Incubator Demo Day (the largest pitch event in Kansas City – this last year we sold out Union Station two days in a row and went through 15 kegs of craft beer). Also, you should be blogging, reaching out to press, showing to networking events, and digitally following/connecting with the leaders of the angel investment community of KC. Remember, at first you’re just trying to get on their radar as you pick-up the much needed traction that they will require to even make it passed the first email.
Once you’ve done these types of things, and reached the stage of your business that is referred to as product/market fit – then just go to the aforementioned websites and follow their application procedures. These people are professional capital investors, which means anything more creative than following their well-explained processes on their website will probably be more insulting than anything. So just apply on their website. If you did step one correctly they’ll be excited to meet you to get a more in-depth story from what they’ve heard on the street.
There are A LOT of other people out there that believe “step two” should be to get a referral, or warm lead, to one of the decision makers at the fund. This is good advice, to a point; but at its core it’s manipulative and contrived. For example, BetaBlox goes through each and every single application that comes through our doors. It’s our job to go through applications in-depth. We have a process, a system, habits, and things that help that process remain effecient. You manipulating your way into a coffee with one of us will take far longer than just going through the basic process spelled out on our website. We also find ourself being far more harsh and critical of an entrepreneur when they’re asking for “advice” in a one-on-one sit-down at their request, than we would be in the middle of a scheduled series of interviews. We’d venture to say the percentage of people that get into BetaBlox whom applied on our website without an intro from someone else VS the percentage of people that get in via a warm intro from a friend is dramatically leaning towards the former being the better route.
KC Angel Investment Is Dependent Upon Two Variables
Although the Kansas City angel investors listed on this essay are the main players, there are others – especially if you expand your reach beyond Kansas City to places like Oklahoma City, St.Louis, Wichita, or Omaha. That said, when finding angel groups to court, stay as disciplined as possible when regarding two main traits that fall within their investment thesis.
Stage of business, and industry relevance.
If they’re a growth stage capital investors, and you’re at the idea stage – you’re burning a bridge with them by going to them early. The reverse is also true: if you’re in need of a private equity round to bridge you while you prep for an IPO – you’re too far along for an angel investor in Missouri.
Secondly, is industry relevance. People like the Sprint Accelerator, for example, invest in mobile-facing healthcare products. Put another way, they exclusively invest in not only just healthcare, but also solutions to problems in that industry that are solved with mobile technology. That tight vertical makes them better at mobile healthcare technology acceleration than probably any other firm like theirs in the world – which is a good thing for the world, and a bad thing for the average entrepreneur in Kansas City that needs an angel investment (because the competition is fierce from across the world, not just in the heartland).
So never forget – seek a Kansas City angel investor with a thesis that fits your stage AND their industry focus.
What Makes An Angel Investor In Kansas City Different Than Other Types Of Capital Investors?
Angel investors have the broad definition of investing capital into a young enterprise looking to take their early-stage venture to the next level. This typically means checks from high net-worth individuals in the range of $50K-to-150K, or from angel groups in the range of $100K-500K. Venture capitalists don’t enter the picture until around the $1M mark, minimum; this means if you need some sort of awkward funding level, like $750K, what you’re probably gonna have to do is accumulate an amalgamation of business investors to make up the entirety of your angel funding round. The smarter solution however would be to lessen the amount you’re asking for and with it lower the goals of the milestone you want to accomplish with the funding. Then, once you’re at the next milestone you might be ready to acquire venture capital dollar-range, or raise another smaller round with the new milestone to boast. Then there are a slew of other options that aren’t relevant to this essay; things like small business grants, bank loans, sponsorship, pitch awards, and crowd funding.
To Find Investors In Kansas/Missouri, You Must Know This Information
Smart angel investors that do this for a living care about a lot of things when deciding when to invest, but two variables stand out above all else. The first is the cost of customer acquisition, and the second is the lifetime value of the customer. If you can prove these two variables – with real life data from real customers, not just projections or cheesy research – your chances of raising angel investment capital in Kansas/Missouri just skyrocketed.
Let’s break this down a bit…cost of customer acquisition means how much does it cost to acquire a customer? A quick example would be if “Startup A” buys Google Adwords at $5 a click, and then 1 out of 60 clicks to her website garners a sale – it cost $300 to acquire the average customer.
Then, the next big question is – what is the value of that customer to the business throughout their lifetime (as a customer)?
If the product that the consumer just purchased is $1,000, with $300 being profit, that’s a good start.
$1,000 revenue – $700 cost of goods sold = $300 profit.
But then, if it’s proven that for each customer the entrepreneur acquires, one-out-of-three of them convince a friend to buy the product as well, that’s an additional $100 in profit to the lifetime value of the product (now we’re at $400 profit with 1.333 customers).
Viral co-effecient of .33 x the original single customer = one third of a customer
One third of a customer x $300 profit per customer = another $100 in profit
New subtotal of profit from buying that original customer = $400.
Then, if she can prove that every-other customer buys a second product about 18 months later – that’s .67 repeat customers, multiplied by the $300 profit received from each product sold…and bammm…another $201.
At this point in the story, she has 1.33 customers x 50% because every-other customer comes back at least one more time = .67 people that buy the product a second time.
.67 customers x the $300 profit margin per product = $201 in additional profit
The old subtotal of $400 + the new profit from the repeat purchase customers of $201 = $601
So now, after accumulating the lifetime value chain of a customer, we’ve determined that the average new customer eventually turns into $601 in profit (not counting the original cost of customer acquisition – the Google Adwords). Then, if you add in the cost of the Adwords, minus the final profit before taxes is $301.
New subtotal of $601 in profit – acquisition cost of $300 (Google Adwords) = $301 in total profit
Now we play the extrapolation game, which is a Kansas city angel investor’s favorite game. If, on average the business spends $300, and makes $301 profit because of those actions – the business investor will extrapolate that data times what his or her cash infusion will do for the venture. For example, if $300,000 is spent on Adwords using this example, then the company will turn it into $601,000 with $301K of it being straight profit. Then the company reinvests the profit, over-and-over again, until it’s grown to a size where worthy of an acquisition. Then the angel investor will more than likely get back substantially more than they otherwise could have gotten with any other asset class such as real estate, art, or mutual funds.
This will be a very simplified version of their decision making process:
-What is the cost of customer acquisition? Is it provable (as in real data)? How many times did they run these experiments (the more times, the more valid the numbers you present will be)? Are the acquisition methods sustainable/replicable (if they were things you can’t do on a big scale, or won’t ever work again, then none of your work thus far really matters that much)?
-What is the lifetime chain value of a customer? Is it more than the cost of customer acquisition?
-How much do I have to give them to gas up this proven system (albeit on a small scale) to ensure they can get to their next milestone?
The stipulation we’d like to expand upon from these last questions the Kansas City angel investors will be asking themselves is that of the sustainability of the acquisition channel; or in other words, was the method used to acquire said customers done in a replicable fashion? In this example, it was – because she used Google AdWords. Google will always take more of your money and display more of your ads. This means the strategy scales smoothly. Whereas if you’re trying to tout an impressive profit on your customer acquisition costs, but it’s because you had a random video go viral – this won’t be as impressive. This means that to continue to grow, or ramp up the speed at which it’s growing, you’d have to create another viral video. Which is obviously, not very likely.