Lehr is VP of strategy and business development at UnityPoint HealthRead more...
4490 Ventures focuses on funding companies from the Midwest
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Robinson has a blend of venture capital investing and startup operational experience. He was a Managing Director at Palo Alto based Peninsula Ventures, and a cofounder and COO of Cogent Technologies, an enterprise software company that successfully exited via acquisition to a publicly traded company. Robinson has invested in approximately 20 early-stage startups over his career.
He has a Master of Business Administration from the Tuck School of Business at Dartmouth and a Bachelor of Science in Economics from Arizona State University.
VatorNews: What is your investment philosophy or methodology?
Greg Robinson: An important part of the way we see the world is due to our backgrounds; I spent the bulk of my venture career on the west coast in Silicon Valley, and my partner Dan spent the bulk of his investment career out in New York. Now we’ve come together to build 4490 off our learnings from the last 20 years of seeing what works on the coasts and we're trying to apply it to the underserved market of the middle part of America.
Our view, or our thesis, is, to some degree, oriented around the geography that we’re in. We’re in the Midwest for a reason, because we believe that there’s outsized opportunities here, based off of lots of talented people, lots of Fortune 500 companies, lots of domain experts, and, relatively speaking, limited capital. So, we’re here to focus on that geography, that dynamic, and then we couple that with our focus, which is largely on B2B software. We see a lot of big legacy industries that can be impacted through the next generation technology or business models. We look at software, or what we consider connected software, which is software that’s connected to a proprietary data pool or proprietary piece of hardware, that can go and build a solution that will disrupt these big legacy industries that you would see in this part of the country. Whether it’s healthcare, manufacturing, transportation, all of types of industries that have been incrementally automating and improving. You see now more radical, widespread technology adoption and more disruption.
From our perspective, it’s a really interesting time to be investing in this part of the country, with these industries, and trying to take what we’ve learned from our prior roles investing on the coast and bring what is applicable to our investing here. There are certain things that work in Silicon Valley, for example, but the size and scope just doesn’t work here, so we try to be prudent and rational about applying what works here. We take the good that we can from 50 years of investing in Silicon Valley and try to apply some of it here and bring new and fresh thinking, so to speak, to this part of the country.
VN: What's the big macro trend you're betting on?
GR: We see a couple of things. Clearly there’s a lot of industries that have evolved and that’s good, but it’s probably not sufficient going forward and now they have the opportunity to revolutionize either their business model or key components of their business. It’s looking at those industries, and looking at people who are domain experts coming from those industries. They're people who have the 10 or 20 years of experience so they keenly understand where the pain points are in these industries and know how to go about solving those things. We think being closer to those industries, closer to where those domain experts will roll out of, is a real advantage for us.
I think it’s a 10 or 20 year cycle that you’ll see in different parts of these businesses and, clearly, the last three to five years you’ve seen a ton of stuff happen in spaces like insurtech. I think it’s still early innings when it comes to those types of things, but they’ve made a lot of process and a lot of people are spending a lot of time and money trying to do that, and it certainly fits squarely with what we’re trying to do.
VN: What is the size of your current fund and how many investments do you typically make in a year?
GR: We have a high conviction, high concentration fund model where we’ll do one, maybe two, investments per partner, per year. So, it’s a very deliberate pace, which allows us to provide more time, more effort, more money to a fewer number of companies and, hopefully, that leads to being able to make more of a difference to the companies that we do get involved with. That’s how we think about it.
We’re investing out of about a $75 million fund right now. We typically invest in Series A companies, so a $4 million check is our sweet spot, and we’ll reserve quite a bit for follow-on and have capabilities to do quite a bit more on the back end if need be. We try to support the companies through their entire life cycle until they start to raise big growth rounds where it might make sense for us to step back a little bit but, by and large, we’re in on the Series A and we’re there to support the company through all of its venture financings.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
GR: There’s multiple ways to get confident that a company should raise a $6 to $12 million Series A, and some of that is revenue, sometimes that’s users, something it’s something else, but there’s usually something at the Series A that you can hang your at on.
For us, it tends to be less revenue-based, because sometimes early revenue might not be a great indicator of what the long-term opportunity is. We tend to focus on more on the size of the market opportunity that we see, and look at the team and the projected product offering that they have and how big we believe that can be. That tends to be a bigger driver for us than just revenue or some type of users or other traction that you can point to. So, our Series A companies will range anywhere from pre-revenue because we’re confident in other parts of the story, to one of our Series A companies had almost $5 million in revenue. Those are two extreme examples but that demonstrates that we tend be somewhat flexible on what the company looks like in terms of revenue and sometimes even traction if we think it’s the right team going after a really interesting, complex problem that, at some point, somebody with really deep pockets will really care about.
VN: What do you look for when it come to team and product?
GR: From a team perspective, there’s a couple of things. One is the vision of the leader and do they have a big enough vision and the ability to go after that vision? That’s more important here than in it is the Bay Area or on either coast, where people tend to have huge visions and often times fall short of being able to execute against those. Sometimes, in the middle part of the country, people tend to be more rational, maybe to the point of thinking a little bit too small, so we tend to gravitate towards founders that have grand ambitions and some proof they can execute against it.
The second piece of the team that can’t be underestimated is that the leader that you back needs to be able to build out a team. That ability to attract others to be able to tell a story, and attract others to buy into that story, is so very critical. A great leader clearly has people that will just follow them around from one company to the next, so you’re really looking for somebody that has the ability to have people follow them company to company.
On the product side, we tend to be attracted to products that tend to be complicated or the problem is very difficult in many ways. There’s a lot of really good businesses that are built and get scale that are probably not terribly interesting or sophisticated from a problem solving perspective. We tend to gravitate toward people that are solving something in a novel and difficult way so that when somebody sees what they’re doing at some point, they can look at, they can try to copy it, but they can't copy that difficult, complex thing. Most importantly, the acquirer that looks at this, looks at the buy versus build equation, and says, “This is worth a lot of money to me because I can see how hard this going to be for me to build.”
VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?
GR: Clearly from the time that I started until now there’s been a fairly dramatic change in valuation. Some of that is driven by the fact that what we called the seed round before is probably something different than it it is today, so some of this is hard to compare, it’s apples to oranges when we’re talking about rounds and sizes and valuations from an absolute perspective. Just looking at the last five or six or seven years, there’s been a ton of really early stage activity, so a lot of companies got started and because there’s more money the prices started to go up, and what happens at the seed round ends up impacting us because there’s built-in expectations. Also, structurally there’s some challenges in terms of trying to price a round maybe lower than the seed round would kind of situate it. I would say the valuations have gone up, but I think they’ve come down in the last couple of years as some of the seed activity has slowed down a little bit and people are trying to digest all this and there’s been of a cream rising to the top, so there’s been a bit of the ability to rationalize some of this.
In this part of the country it’s still probably higher than we’d like, but it’s still pretty rational; it’s probably half of what you’d see in the Bay Area, by and large, for a comparable company based off of industry and team experience and problem and traction, all that stuff. It’s hard to say, “Series A is this” because there’s such a wide variety of different things that factor into that pricing, but I’d still say prices are half here what they are in the Bay Area. That’s for Series A and that number probably goes up two to three times for later stage rounds.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
GR: We draw from two buckets of LPs. One is somebody who has an affinity for, or some other tie to, the geography we look at, which is mid-continent. And then we have your traditional investors that has no ties to Midwest, they’re just looking for returns. Everybody’s looking for returns, obviously, but the people that are in Ohio, for example, are going to have a slightly different criteria for investing. So, we have those types of LPs but the more interesting one, and the one that’s probably more impactful long term to what we’re doing, are the third party allocators that, historically, have 95 percent of their capital deployed in places like Silicon Valley and New York and Boston, and the historical tech hubs that you’d think of. If you talk to them, over the last five years they’ve gone from being mildly interested in underserved markets to being really interested in how to deploy more money outside of Silicon Valley, because they feel like they’ve got a lot there and that prices and deals have a certain dynamic that doesn’t always necessarily favor their interests. They’re trying to figure out how to get more money into the Chicagos of the world, versus trying to pump more and more money into the big legacy tech hubs.
From an LP perspective, the third party allocators that are, and hopefully will continue to be, interested in this geography will be a very positive thing for all of us. Even though there’s a certain competitive aspect of what we do, in this part of the country, because it is so underserved, it’s much more a collaboration effort and we’re always looking for other folks that have money that can be good co-investors with. I think we could double or triple the amount of money that’s deployed in this part of the country and still feel like we’re underserved, so having LPs care about us, and deploy capital, only leads to a higher level of sophistication to across the board, from investors to entrepreneurs to LPs.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
GR: To clarify, the competitive set that we compete with are, especially in Series A, a different group than your Sandhill Road crowd. So, we have probably a different argument, or conversation, if we’re trying to compete with Benchmark, Greylocks or Sequoias of the world.
Our standard message is we’re experienced investors across multiple cycles, we’ve learned the craft on the coasts, and now we’re bringing that to Midwest. We can bring all the resources and perspective from our prior lives. Secondly, we’re an institutionally backed fund, we have big, patient LPs, so we can take on more risk, both in terms of the types of companies that we back and also the stage and time horizon. That is a differentiating point of view. Also, we’re very much focused on a high conviction, high concentration model where we’re really focused on providing more time and effort to entrepreneurs. We’re not investing in 50 companies every year, we’re investing in one or two. We think that that helps us have a meaningful interaction with the companies.
Lastly, we’re fairly well established as folks that have been entrepreneurs ourselves. We’re fans of celebrating the entrepreneur, enabling the entrepreneur, and doing everything we can to make them successful, whether that’s helping them build our their board or build out their strategy. We’re there to support them, help them, and move their effort along, all the while recognizing that we’re there to support them and celebrate the effort, not the other way around, which is the old way of looking at things. We have an entrepreneur first mentality.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
GR: One in our current portfolio that plays very well into what we’re trying to do, and the types of companies we look for, is a company called Understory, which has a proprietary hardware and data pool play. We got involved very early on; it was a very young team, an inexperienced team, first time doing this. They had a lot of domain expertise, a lot of technical expertise, but really needed to figure out their go-to-market strategy and really refine their business model. We got involved in the Series A, which we led with True Ventures and Monsanto, and brought a degree of heft to the financing and stability to the financial foundation for the company. Then we tried to build out the broader extended team so that they could have the expertise to refine their business and take it to the next level.
It’s been three and a half years since we invested. It’s a very unique company so a lot of the challenges and go-to-market and whatnot have been unique to them but, after a fair amount of trial and error, which goes along with this type of project, we finally figured out the go-to-market and the business model that we think is appropriate for the unique nature of the technology and the solution that they’re build. We take a lot of pride in helping enable very talented entrepreneurs like that, who have something that we think is very unique and hard to copy and that, ultimately, if they can prove this out could be quite important and valuable to the right acquirer.
VN: What are some lessons you learned?
GR: There’s probably whole bunch of different things that have changed as my time goes on. One thing is you can’t ever underestimate what it takes to be an entrepreneur, both in terms of the challenge and the sacrifice that they make to be able to do this. I’m always amazed as just how hard it is. So, it’s easy for people, especially people who haven’t been an entrepreneur themselves, to not appreciate that and act in a way where what they do actually makes it harder for the entrepreneur to be successful. It seems obvious to me now, after the fact, but I really spend a lot of time trying to back the right entrepreneurs but then also do everything I can to enable them and to make their life easy and to help them learn from some of the scar tissue that I have from being an entrepreneur myself.
Having said that, even if you have the right market and a great product, a poorly executed plan, which usually starts with the team, can derail even the best product or the biggest first-to-market lead. So, we focus a lot on the team and, more importantly, if it’s a team that we feel we can uniquely be helpful to. There’s a lot of teams that we can be helpful to but it’s just not the right solution, or there’s a lot of teams that are doing really interesting things that we just maybe can’t see how we would be value-add to them. We have to honest with ourselves on what we can do and who we can help and how much time and effort and money and whatnot that we can bring to bear to do that.
VN: What excites you the most about your position as VC?
GR: It’s the opportunity to work with what I would consider the best and the brightest and maybe the most ambitious people out there. If you play a sport with great teammates, or if you’re building a great company with a great team, it makes a difficult thing very enjoyable. Many days I’m envious that I don’t get to be on the actual team, I’m a little bit more a coach than I am a player in this scenario, which can be very frustrating as I’d much rather be a player some afternoons. But just being a part of that that where, not only are they intelligent, but they’re ambitious and typically incredibly driven, that I find incredibly inspiring. I live vicariously through some of these folks when they have good days.
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