Meet Patrick McKenna, partner at Comeback Capital

Comeback Capital invests in startups in underserved markets, particularly those in 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.

Patrick McKenna is a partner at Comeback Capital. 

VatorNews: What is your investment philosophy or methodology? 

Patrick McKenna: Comeback is built on this very clear thesis that there's talent everywhere, but that talent is under capitalized and, frankly, under networked. Our idea is to bring in more people, in more places, who have different problems, who will bring unique and different solutions. Those people with those problems, and those challenges, also need access to sophisticated capital and the knowledge networks to allow them to create and scale their solutions.  

With Comeback Capital, we've put together a network of very sophisticated LPs, primarily based on the coast, but not exclusively. There are a lot of successful entrepreneurs that are based across the heartland who are interested in this thesis of bringing more funding, more talented people, and helping them stay in the communities that they're based in, but our view is that the these entrepreneurs need to get connected to capital now through our LP network. Not only do they get our expertise of how to shape a fundraise, how to plan out their milestones, how to think about the full capital cycle, but then get access to mentorship and they get access to LPs who would be helpful and understanding the next round of financing, or introduce them to their next capital partners as they go along in the creation of their companies.

VN: When you say underrepresented founders, can you tell me exactly what you mean by that?

PM: Comeback has a geographic lens at looking at the market. So, if you graduate from Carnegie Mellon University, and you move to San Francisco, you have a certain set of opportunities; if you stay in Pittsburgh, you have a different set. It's actually probably less of a set of opportunities, even though it would be the same person in both places with the same background. We are looking at the people who are in places like Pittsburgh, Columbus, Detroit, Nashville, Salt Lake; 80% of the venture capital goes to three states and we think that the talent that is building companies in places like Milwaukee and others has a very unique lens on problems that need to be solved and a unique lens on the solutions that are needed. That's what we're really looking for is talented people, unique problems, and unique solutions. 

VN: I would imagine that over the last year or so that probably became easier to connect those people because everybody was connecting to each other on Zoom. Did you see any change thanks to COVID?

PM: It really made a big difference. COVID opened up investors to this idea that companies can operate with remote distributed workforces. While people move to places to access new talent, from an investment perspective this is the thing that changed the most. It may seem quite obvious but a lot of companies were funded in 2020, and all of the diligence, from the first introduction to checks being written, was done remotely. All the board meetings that followed on beyond that were all done via Zoom and other video environments and so this idea that you had to live or work close to the sources of capital has now has gone to the junk bin in history. What that means for Comeback is that our thesis of investing in the pre-seed and early stage of a company, one that has the goal of staying in Detroit or Columbus or Pittsburgh, we can say with more confidence that investors in the institutional seed or the Series A are going to be more likely to invest. So, it increased our confidence that the companies that we're helping get to that first stage are going to be able to attract the capital that they would need to build viable, scalable companies outside of Silicon Valley. 

In the past, companies based in Columbus, once they got to a certain point, they may have had to have actually gone to Silicon Valley to find the capital to get to that Series A or B; what the pandemic proved is that if you have a successful company that’s scaling and you're based in Indianapolis, the investors will be willing to actually invest and keep you there and there's a lot of advantages to that. That's one of the big changes coming out of the pandemic.

VN: What are your categories of interest?

PM: We're less vertical and more geographic. That's a little counterintuitive, because most funds have a vertical thesis that they bring expertise to; of course, software is a key thing for us. We don't do life science, but we will do everything from a Path Robotics, which is doing robotics welding, to FinTech and FloatMe, which is doing microloans. We're pretty broad in terms of the vertical but what both of those companies have in common is that they're working on problems that are unique to the founders where they started; they had a solution that was a good match for the geography that they were choosing to scale in. 

When I'm thinking about an investment, I generally ask four questions: "Why this?" Every investor says, “Why this?” Then, "Why now? What's the catalyzing event that makes this the right thing to invest in now or build a company around?" The third is, "Why you?" People always talk about the team, but it's like, "Why this team? Why this founder? Why are you the one at this time to solve this problem?" Those are the typical three questions that investors ask. What we really focus on is the, "Why here?" If you're starting your company in Detroit, we’re really interested in why you think Detroit is the place that you should start this. Is it because it's a FinTech company, or its mortgage tech, and you have LendingTrees there? There should be a specific reason why you are choosing that location. So, when we look at that geography lens, we have the three questions everybody else has, but we're looking for a competitive advantage that the founding team has in the place that they're focused on. 

It also could be, "We're fully distributed and remote, so we're going to access talent in a lot of different places and our product solution is built to leverage talent from a lot of places." That's a competitive advantage with lower cost and more scale. So, the geography element is what makes Comeback unique versus even other early stage investment funds that are focused on the Heartland. 

VN: What's the big macro trend you're betting on?

PM: Software is going to continue to eat the world; that's the famous Andreessen Horowitz saying about software. "Software is eating the world." We believe software is going to continue eating the world, but it's now going to be eating the world in all geographies across the country. So, the problems that are being faced in places like Madison, Wisconsin, where we recently invested in a company called GrocerKey that's doing an e-commerce platform for stores. That's what’s continuing. So, we say, "Software continues to eat the world," but we're looking at that trend from a geographic perspective. So, now distributed work, work at home, capital being deployed more broadly across the country; those are the macro trends that will continue this bigger trend of software recreating the entire economy.

VN: What are some of those problems that are more specific to those areas like Detroit and Columbus? What problems do they have that are different from place like San Francisco or New York?

PM: I mentioned them a moment ago, but this is a really good one: Path Robotics is a welding company using robotics. That's just a problem and a team and a solution that wouldn't necessarily make sense to build in San Francisco, frankly. Think about it: the industrial heartland is where all the customers are, the companies that are going to be deploying these robotics solutions are actually in the industrial Midwest. The expertise in how to run these companies, how to design them, those are based there. The customers and the talent are in the industrial Midwest, so companies like that, which actually have a unique insight on the problem, and then have a unique insight into the solution, that's a really good example.

VN: What is the size of your current fund and how many investments do you typically make in a year?

PM: The current fund that we just launched on July 1 is $10 million. It's pre-seed, so our investment amount is $100,000 to $200,000. We anticipate doing 40 investments in the next three years out of that fund.

VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?

PM: We're very clear about this, actually. It’s really, really important for us to understand where the company is around this very key thing: how close are you to a catalyzing moment that is going to be a key milestone that will unleash, or enable you, to raise an institutional seed or the next phase of capital? We're really focused on that early, pre-seed stage where something's coming together; you have a team, you’ve identified the problem, you maybe have a beta or a pilot, you have something going on that you're showing signal of traction, but you need $300,000 to $500,000 of capital to get to a very specific milestone that will open up much bigger access to capital. 

We invested in a company, and I won't say the name, but they have $3,000 a month of MRR. So, pretty small revenue, but they had thousands of people on a waitlist to get the product, they just didn't have the capital to onboard the clients. We were able to look at that and say, “If these if this team can show that they can just get the same unit economics with this initial group, but with this backlog, then they would have more of a track record to be able to then raise a larger scale round," and so we invested at that stage, but with a very specific target of the milestone of onboarding a subset of those waitlisted clients. That then gave them the proof points to go and raise another round and they ended up raising quite a large round within a year and a half of our investment. So, that's a good example. It could also be that they have one client that's in a pilot where it's not paid and they need time to actually prove out some key milestones that then convert it into a paid engagement. That would be an example where we’re just giving them the runway. 

What we don’t do is invest in the discovery stage where it's unclear what the solution might be and they're still working it out. That would be something different than what we're focused on. We're actually looking for a six month catalyzing moment to bring our network to help them raise a more traditional full seed round that puts them on the path to growing a business.

VN: Do you want to see your product at that point? 

KM: We do want to see a product, yeah, absolutely. Now, the product doesn't have to be built out to scale, that's the thing. A lot of times you can have a product that shows features, usage, but it's not built out with all the bells and whistles to allow that version of the product to scale. But we need to see some market validation. That's what I mean when I say that we're not investing in discovery, we're investing in some milestone that will prove that the company can raise a more traditional seed. That's why we call ourselves a pre-seed fund, or a scout fund.

VN: What is it about those founders that makes you want to invest in them? I know you mentioned a little bit earlier about how it has to be region specific, but what are the intangible aspects of those particular entrepreneurs, those founders, that make you want to invest in them?

KM: Everybody definitely talks about the team, especially in the early stage, because everybody's investing in the early stage knows where the company is going to end up is going to be very different from where it begins. That's just the reality of this stage of investing. So, what we like to see is an entrepreneur who understands the problem in a very deep way. With this regional investing, we think that we should be able to find entrepreneurs who can actually understand the problem in a deep way that will allow them to adapt and evolve to where the market is responding to their solution in a way that somebody who's like, "I see a problem, I'm really smart, and I have a lot of technical chops, and I'm going to go build something for a market," can’t. That can be successful but it has its own challenges. We're looking for founders who actually have some deeper insight; they've worked in the industry, they know the industry, they have some technical expertise in this industry, and so that gives us the confidence that they know something that others don't know just yet. 

Every investor will look for an entrepreneur who feels relentless. This is a calling for them, and they're going to figure out a way to be successful. It's hard to measure that but I tend to think that people who understand the problem deeply, and then they want to commit some portion of their lives to solving it, they're going bring a level of passion and perseverance to being successful, whereas people who don't understand the problem very well might move on a little quicker.

VN: Are valuations different for the companies you invest in than companies on the coasts? Do they raise funding as a lower valuation?

KM: Yes, definitely. That's absolutely true. We look at valuation and typically it's safe notes on a two and a half or three to six post money valuation. And so, this is very low versus the coast. Our view is that, in a pre-seed environment, if you can raise less money, say $300,000 to 500,000, at a valuation that's fair, and then if you hit a milestone that's clear, you will then be able to raise much more money at a higher valuation. That's the magic. Depending on where you are stage wise, if you wanted to raise a full seed round, maybe $1 to $2 million, your valuation probably wouldn't change very much based on the geography and stage and stuff like that, but you'd be raising a lot more money that would be very diluted. With access to a fund like Comeback, where we're specifically focused on this pre-seed stage, we're going to take the risk; we're also willing for you to be a little undercapitalized for the full cycle and to take less money than you might otherwise take, so you don't have as much dilution at this lower valuation. The idea is that you would be able to hit a milestone and then, with our help, attract a bigger round at a higher valuation. That's the model.

VN: When COVID first hit, there was some fear out there that nobody was going to be able to raise anything. Maybe for a couple of months, it became a little bit more difficult for companies to raise, but then it bounced back. And I think we actually had a record year for venture capital last year. So, how did you see valuations affected over the last 18 months?

KM: Well, a lot of that big money was actually follow-ons, so it didn't affect our market nearly as much. So, follow-on money definitely saw a huge increase in valuation, no matter where they were located. You saw that everywhere, and was very positive. What the venture market learned last year was that you can diligence companies remotely, and you can manage them, from a corporate governance perspective, remotely. Those are two huge things that the venture market learned and so, going forward, a lot more traditional investment in traditional venture funds are going to be more and more open to investing in companies not based close by, which is going to increase valuations for companies not based on the coast. 

Now, there's another thing happening: if you actually look at the investment stack, seed and pre-seed, there wasn't as much of a spike in that market, and a lot of venture funds are struggling to get access to promising companies earlier. So, that's a part of the market that's still being built out. When you think about how hard it is to find deal flow outside of Silicon Valley or New York, that's actually a place where Comeback is really focused on bringing that signal to market, because we built out a pipeline where we have partnerships with accelerators and incubators and universities and super angels in most of the cities we have identified as having large pools of talent, and really positive entrepreneur ecosystems. We want to be that signal for the larger funds, where we can identify a company, get them to a couple of milestones and then elevate them. So, directly to your valuation question, there's been a lot more expansion of valuation above the seed level, and less so below.

VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?

KM: What LPS really want to see is deal flow; they just want to see more broad access to deals. Many of our LPs actually sidecar, or take pro rata, on deals that we source. So, an LP wants to, from a financial perspective, get access to the deal flow in the fund, but also see things for follow-on investments and direct investments, which are all things that we are very comfortable with. Many times, if we get an over allocation beyond what we've decided we want to put, we share that out to our LPs. They are very interested in diversifying their deal flow and, frankly, they also have been on a mission and they want to help companies succeed. And so, many of our LPs also see the value in developing these startup ecosystems outside of Silicon Valley. 

This is a not a zero sum game: when I talk about companies outside of Silicon Valley growing and succeeding in building, this doesn't mean Silicon Valley goes down. Silicon Valley is going to continue to put up epic numbers. What's different is that places outside of Silicon Valley are, for the first time, getting legitimate access to sophisticated capital and networks. The big thing that's different is they're being encouraged to build their companies where they founded them. That's a huge difference, because in the past, you'd be like, "Okay, take seed, maybe A, and then, when you're going to get the $50 million check, some people are going to have to move to the Valley to be close to the VCs." That's changed, that's totally changed. The differentiator for Comeback is we have a geographic focus, which means that we actually have a lot of empathy for the founders and the challenges that they're going to have. We understand how they should structure their entities, we can help them tell their story, help them their milestones and tell their story for investors, and then connect them to the bigger ecosystem. If the alternative is taking local angel money, that's great, but, if you can take Comeback’s money, you're going to get access to expertise and you're also going to get access to a bigger network of LPs that are going to help you down the road. Those are the three big differentiators.

VN: How do you differentiate your fund to entrepreneurs?

KM: What's very appealing to entrepreneurs is that, of the partners, two of us are founders and both of us are currently involved, either as CEO or Executive Chairman, with operating companies. Phil Hagerman is the CEO of a company based in Flint, and my company, Facet Wealth, we started in Baltimore and now it’s full remote. So, we're very operational and we're very, very empathetic to the entrepreneurial journey. And Scott Shane, who's our managing partner, he's a professor of entrepreneurship at Case Western, and so he's also very keen to the challenges of entrepreneurs and thinks a lot about it from that perspective. So, if that's a value to an entrepreneur, to have access to investors who have walked the walk, and have that empathy, then I think that is something that a certain set of entrepreneurs really value.

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?

PM: We talked about Path Robotics, and I think that's a great example. There's another one that I will bring up that I really love, It's called FloatMe, and this is micro loans and they were splitting a team between San Antonio and Cleveland. It was like a company that had a lot of early traction, but not traditional access to financing and we saw them early and were able to put some capital to work with them, and then also helped introduce them to a bigger network of investors. 

Another one that I think is really fun to talk about is GrocerKey, which is based in Wisconsin, and this is a company that's doing e-commerce for midsize markets. This is a company that was solving a problem they knew really well and they had local markets using it and they were scaling up locally. And still, they wanted to get a bigger network of investors evolving around the company and we were able to both invest and then connect them to this bigger network of investors. TBD on how any of these companies go but really going well across the entire portfolio.

VN: Tell me about your background and how you got into venture.

PM: I started my career in the army. I was a technology officer in the army after college and then I went to Wall Street where I worked at Morgan Stanley in mergers and acquisitions in New York. None of this has to do with entrepreneurship but I was building up a lot of experience. Then I got a call from a friend in Silicon Valley who was starting a company funded by Benchmark Capital and he recruited me out to help him launch it. I spent a couple years helping him build that company, which got me to Silicon Valley. I was thinking about, "How does technology shape the economy and workflows," all the sort of stuff that was happening in the early aughts. As a result of being in Silicon Valley, and working in a venture funded company, I co-founded a company called LiveOps, where we innovated the work at home customer service industry. We ended up raising $50 million led by Menlo Ventures and that's when I got my first firsthand experience with venture investing and building a scalable venture business. We eventually sold that business and then I went on and started a couple other companies, and then started angel investing because I was like, "What do I know that I can help other entrepreneurs and put some capital to work?"

I grew up in a small town called Placerville, California, which is just about a couple hours from San Francisco, and a place that has really great high quality people but not everybody gets the opportunity to go and work in Silicon Valley. As I progressed in my career, I saw this match to places like Cleveland and like Pittsburgh, where there's a ton of talented people; I could actually bring my network of capital, my actual dollars, other people who want to invest, and then this knowledge network of know how. Things like, how to build product, how to think about the industry, how to think about strategy. "What do you think about your software solution, and how it's going to change your workflow and turn it into a business?" And so, all of this led to me thinking that one way I could really impact the market was to do early stage investing, and put capital as well as operating experience to work. And then, on top of that was this insight that there's talent everywhere, because I started some companies and had a personal background of not being from New York or the Bay Area; all three of those things came together with what is still early stages, but we have a really deep insight on more people in more places getting a shot at building scalable industry transforming businesses. And, frankly, in the early stages, this is a place where we can shape the more chances for people to take a shot.

VN: What are some lessons you’ve learned as a VC?

PM: We're so bad at picking winners, to be honest with you; anybody who says, "I saw that I knew it was going to be successful," that is actually usually not true. Here's the thing: with venture investing, you really need to take a beginner's mind mentality. You really need to just look fresh at every single pitch that comes in, every team, and put down your preconceived notions. You're looking for pattern recognition, like, "Is this a problem? Is there some innovation to it?" but I believe that using a beginner's mind mentality of just like, "What's fresh about this?" is something that can scale and you're going to find bigger winners there. That's something that I've learned how to do, versus saying, "I'm looking for something that does this." Actually be open to what the entrepreneurs are bringing. 

The other thing that I would say, and this might be something that entrepreneurs should look out for, but it goes both ways: if you feel like you need to tell the company a lot of ways for them to run their business in the initial pitch, it’s probably not a good fit for you and it's not a good fit for them. If they haven't figured things out enough and have enough of a vision and you have enough confidence in them, not that you don't have some ideas to share with them but just think about it: you're hearing their pitching and being like, "Oh, that should be a subscription business. Why are they selling it this way?" If you have those kinds of questions where you think they should change their business a certain way, that's a bad fit for them and it's a bad fit for you.

VN: What excites you the most about your position as VC?

PM: I love the passion that the entrepreneurs bring. It is always inspiring when an entrepreneur sees a problem and they're willing to take the absolute professional risk, and overcoming the fear of failure, to tackle a problem, is inspiring every single day. Period, full stop. That's what gets me excited about this business.

VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?

PM: At Comeback, we really think about the network. We are always looking for collaborators on the pipeline and finding companies with unique insights and we want to work with local angels and other regional investors. When it comes to things that we found, we never want to take a full round, because we want to have other people participating. So, we just always want to think about ourselves as building a network around a pipeline of new companies to look at, as well as investors. We are trying to model a way of capitalizing companies that brings more people to the problem and more people, frankly, to the solution. That's what we would want people to think about us; think about Comeback as a collaborator and a partner in building your company and financing companies that you're involved with.