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Startup Fundraising: What Works in Minnesota | Part 1

No word is uttered more often in startup circles, here or anywhere, than that dastardly F word. More ink is spilled and blather thrown around about it than virtually any other topic in the startup world. Who scored a round this week? Why is raising money so hard? When will we have more funding in our town (state, region)? Blah, blah, blah, and more blah. Multiple media outlets fall all over each other to breathlessly report on any successful VC raise (and even sometimes angel raises) as if it’s the equivalent of being drafted into pro ball or something. And I’m not just talking Minnesota — reporting on fundraising news and tracking the ongoing raises of startups is a veritable global industry unto itself.

Why is the topic so ever-present? Should we really be spending so much time talking and worrying about the process of attracting other people’s money? Or, as many founders might suggest, would you be better off to just shut up and bootstrap, focusing on attracting customers instead? 

Well, here at Starting Up North, we wanted to probe the minds of a bunch of folks we know and admire here in our state—founders and investors (many of whom also serve as mentors and advisors), plus some recently successful entrepreneurs— to get insights from their experience, and some useful advice. 

What have they learned about raising money here in Minnesota? What works to get a startup going? What doesn’t? What’s realistic? What isn’t? Our objective was to try to help you better understand what really goes on out there behind the scenes, not just what you may hear, or read in various reports and stuffy press releases. And also to maybe break some stereotypes. [In my interviews, I asked the founders a similar set of questions, and of course, a different set of questions for the investors. The viewpoints of each didn’t always align exactly with their peers, but they were all quite forthcoming, for which I’m most grateful – and, hey, we all benefit, right?]

Think Before You Raise

One piece of advice that came up more than once about startup fundraising related to the question of why. “Make sure you really need it,” said Chip Pearson, cofounder of JAMF Software [which was acquired by Vista Equity Partners in late 2017 for… a large number] and now at Bootstrappers.MN. “There seems to be a missing component in people’s thinking regarding funding and business plans. If you don’t have a plan on how you can run your business without funding – albeit slower — then you should really spend the time on that problem and then raise money. The other thing is many people starting out see fundraising as a finish line and not a starting line. At best, fundraising is a distraction.t worst, it becomes the only thing that founders think about.”

This raises the question of, can you generate revenue? “Currently, Minnesota angels like to see traction in the form of revenue or meaningful market validation,” said Sara Russick, cofounder of Gopher Angels and a partner in the Capita3 fund. “They want to know the entrepreneur understands how to sell the product. This is a change from when we launched Gopher Angels in 2012. Then, angels were coming in earlier. Now, there are so many companies to look at, and a limited number of angel investors, so we’ve seen a shift in the stage where they want to come in. This is hard for early entrepreneurs because they need that really early, pre-seed capital. Gopher Angels does follow-on in about one-third of our companies, helping them get through that seed stage.”

One founder’s caveat: “A focus on revenue is the most important thing,” said Markus Mueller, cofounder of, based in Duluth. “However, it’s important to focus on the right revenue — not all revenue is created equal. We coined the term ‘toxic revenue’ for that which is opportunistic and does not really grow the company to being profitable and sustainable. Revenue, yes — but only if it’s generated the right way and secures the future of the company.”

I asked another founder how she feels about focusing on customer revenue instead of raising outside investment. “It’s extremely important to pursue customer revenue right out of the gate,” said Mary Fallon, cofounder of Kidizen. “Outside investment is meant to accelerate the growth of a proven business model. No one will invest in you these days unless you have demonstrated that many customers will pay for your solution, however you define ‘payment’. It needs to be a repeatable interaction. In the ‘either/or’ scenario of this question, it comes down to how much of your business you’re willing to give up to accelerate that growth.” 

Warning: Are You Ready?

Dave Russick, cofounder of Gopher Angels, offered this advice to founders: “One, do your own diligence on your future investors. Make sure you find ethical and non-predatory investors. Secondly, make sure you raise enough. Don’t low-ball your funding needs. Raising takes a lot of time. A founder does not want to have to seek funding every six months. What if you don’t achieve your optimistic projections? And, finally, have a funding strategy. Know what your funding needs may be through the next two or three rounds, and plan accordingly.”

I asked Chip Pearson if founders understand how long it realistically takes to raise a round of angel or VC funding? “Not at all,” he said. “It is a tremendous distraction with a number of levels to it – pitch, term sheet, closing. I was surprised how long it took even with two different, highly capable, experienced CFOs running the process.” 

What Fundraising Options Are Founders Pursuing in Minnesota, and Why?

Raising money from Friends & Family.  Several I spoke with had something to say about this option. “Many professional investors love to see a friends and family round prior to investing,” said Chip Pearson..” The logic is that founders may not care about losing institutional money, but they don’t want to face a Thanksgiving dinner where they lost their parents’ money.”

Another viewpoint was offered by Jeff Robbins, a partner at Avisen Legal, and founder/organizer of investor group Angel Pollination. “Doesn’t matter. Good investors evaluate an investment potential on the opportunity, the team, and the progress, regardless of how the founders move the ball.”

Several of the founders I talked to for this story raised money from friends and family as their first outside money, including Markus Mueller of FashionBrain; Mary Fallon of Kidizen; and Susan Langer, founder of LiveGiveSave. More from them later.

Seeking out Angel Investors.  For most startups, significant funds first come from this source. It’s a big topic here in Minnesota, discussed daily in every corner of our startup community, because, quite simply, it’s how the vast majority of pre-seed and seed-stage startup funding has traditionally happened here in our state.

A favorite question is this one: just how risk-averse are Minnesota angels? Do they deserve the reputation? “For the most part, Minnesota angels are conservative,” said Gopher Angels’ Dave Russick. “There are a handful making bets, but most that do are investing in  low dollar amounts to spread the risk.” Gopher Angels now has about 80 members and meets every other month, said Russick, and between 40 and 50 attend a typical meeting, depending on the time of the year. “We live stream and record each meeting. There are usually up to an additional 10 to 15 participating via the live stream or watching the recording after the pitch meeting.”

Dave’s wife, Sara Russick, cofounder of Gopher Angels, has this view: “First, if you’re investing in any startup at all, you’re not risk-averse. Minnesota angels value quality. They’re smart and experienced, and bring an analytical lens to how they invest. They’re not ‘heart and gut’ investors, not chasing the next shiny object. This also means that they’re committed to the success of the startups they invest in. They give lots of time and make meaningful intros—they’re really available to the entrepreneurs.”

What’s the perspective of some of the founders I surveyed for this story regarding angels, and their personal experiences? 

Eric Martell, cofounder of a new startup called Pear Commerce, who’s working out of the Osborn 370 startup hub in downtown St. Paul, has had a variety of experiences with angel investors – in both Minnesota and Wisconsin. “My first startup, EatStreet [Madison WI], has raised $49M to date, $45M of which was raised while I was there,” he said. “Those raises spanned regional angels to midwestern VCs to nationwide funds to international funds. Admittedly, I was riding shotgun to my cofounder, Matt Howard, who is still CEO at EatStreet. Locally, I raised $1.5 million from angels to get Gener8tor Minnesota off the ground. This was a great learning experience for both raising local money and also running a micro VC fund. Most recently, Pear Commerce participated in the Brandery startup accelerator and received an investment as part of our participation. We haven’t announced our other funding yet, but watch for some news coming!”

Eric continued: “Here in Minnesota, I’ve raised from both local angels and regional VCs and think both work well. I’ve found angels to have a slightly lower risk tolerance than VCs — which might surprise some people. I have a theory about this: If you’re an angel, unless you’re very fortunate to have investable time and cash to build a true portfolio, you probably will err on the side of more caution because you can’t make the sheer quantity of investments a fund makes — time and cash! If you have three shots in a game of horse, you’re probably not taking any of them from half-court. A fund has a bit more of a luxury to place safer bets — more traction — and take a couple of those half-court shots because, if one goes in, you know you’re going to cover the whole fund. I think the best path to more early-stage fundings in Minnesota is for more funds to supplement the incredible activity of our local angel scene, which I really admire. We need a few more local VCs. But, much love to all the existing local VCs!” [Note: we’re not addressing traditional VC in this article, as we’re focusing on early-stage fundraising.]

Susan Langer, founder of fintech startup LiveGiveSave, based in Red Wing, also found her way to obtaining angel funding: “To date, we’ve raised just shy of $500,000 from family, friends, and a local angel group through two convertible notes. The first note did not mandate conversion to the equity round; the second did.” What worked best for her here in Minnesota? “The community! I was able to build on and network through existing relationships, as well as tap into the growing ecosystem in the Twin Cities metro and Southeast Minnesota. It was a labor of love, as I met with old and new friends to share my vision. Meeting Neela Mollgaard, former executive director of Red Wing Ignite, was a godsend. [Neela is now head of Launch Minnesota, an initiative of the Minnesota Department of Employment and Economic Development.] She connected me with valuable resources, all of whom offered, and continue to offer, measurable support — from mentoring and professional services, to pitch competitions and funding. Four years later, all have contributed to getting us where we are today – a working product in the App Store generating revenue.”

How did Kidizen get to angel funding and ultimately a VC round? “Like many startups, we began with seed money from family and friends and worked contract gigs to make ends meet,” said Mary Fallon, cofounder. “Concurrently, we pursued a few startup competitions, which helped subsidize our bootstrapping and helped us get our name out. Google for Entrepreneurs was one of the competitions that really propelled us down our path. In turn, that helped us raise our first round of convertible debt from angel investors. We followed up with a Series A round led by Origin Ventures in Chicago. We’ll be looking to raise our next round in 2020.”

Markus Mueller of FashionBrain: “Under our previous name (Tryon Media), we did a family and friends round, which obviously was after we had invested our own savings in the company. We then also raised angel funds — about $2 million from 2014 through 2016. Some investors also carry notes with the option to convert to equity.”

What has his experience been with angel investors in the Duluth area? “When I first convinced a few local angels to invest, they opened their networks to help me identify other potential investors. Several of our investors have invested more than once, and a few have more than tripled their initial investment.”

Alternatives: What About Bootstrapping?

I asked some founders how they scraped by early on. Is bootstrapping a viable option? How far can it take you? “We grew my previous company from $3000 pooled from the founders to mid-six-figure revenue per year while we were still students [at UW-Madison],” said Eric Martell of Pear Commerce. “I think timing and opportunity need to line up, and it’s totally possible. But my current company could never exclusively bootstrap to scale. It really depends on what you’re building that determines if that’s a viable path.”

Susan Langer of LiveGiveSave: “Before raising funds from family and friends, Red Wing Port Authority, Southern Minnesota Initiative Foundation, and a small amount from a newly-formed local angel group, my husband and I depleted our emergency and retirement savings. I obtained loans secured by our home and life insurance. In hindsight, I would not have done that with our home, as it created a significant barrier for us when we wanted to get a home equity loan to pay off personal debt.”

Markus Mueller of FashionBrain told me how he bootstrapped: “We started out in a floral-wallpaper adorned former master bedroom and moved out when we were five people, then moved to a 300 square foot office space in Duluth’s Canal Park. We still bootstrap on office space and are actively considering remote work for the entire team and company. We also bootstrapped in other ways. However, it’s wrong to think or assume that bootstrapping can help you avoid fundraising. We bootstrapped to be conscious of the use of funds — not to avoid having to raise funds.”

Mary Fallon, cofounder of Kidizen, which began in 2010, had some great insights: “If you’re choosing the bootstrapping path, you’re willing to take little or no salary while working more hours than you’ve ever worked before. It’s often not a choice but a decision you make based on the passion for your solution paired with a lack of independent wealth. It helps to have a strong support system made up of those who are most affected by this decision, which for me is my family. When Dori, my cofounder, and I started out, we were told that we weren’t your typical startup cofounders. ‘Typical’ meant you were young, male, and willing to sleep on peoples’ couches to circumvent rent or a mortgage. We had husbands and young children and were not in our twenties. We failed many times on our path to now. Bootstrapping is viable, yes – if you can produce strong revenue growth while keeping operating costs low. Then your chances of scaling without outside funds are better.”

Another amazing, more recent story about bootstrapping comes from Mary Kay Ziniewicz, founder of Bus Stop Mamas, which we wrote about here.

To Be Continued! This is the end of Part 1 of our fundraising article. Click to read Part 2, which includes: Two Approaches, One Tech Founder … How Easy (or Hard) Is It Getting That First Check? … Can the Crowd Help? … What’s the Current State of the Minnesota Angel Community? … and What Does the Future Hold for Startups Trying to Raise Capital in Minnesota?

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