Most venture capital firms are based in hubs like Silicon Valley, New York City and Boston. These firms nurture those ecosystems and they’ve done well, but SaaS Ventures decided to go a different route: it went to cities like Chicago, Green Bay, Wisconsin and Lincoln, Nebraska.
The firm looks for enterprise-focused entrepreneurs who are trying to solve a different set of problems than you might find in these other centers of capital, issues that require digital solutions but might fall outside a typical computer science graduate’s experience.
Saas Ventures looks at four main investment areas: trucking and logistics, manufacturing, e-commerce enablement for industries that have not typically gone online and cybersecurity, the latter being the most mainstream of the areas SaaS Ventures covers.
The company’s first fund, which launched in 2017, was worth $20 million, but SaaS Ventures launched a second fund of equal amount earlier this month. It tends to stick to small-dollar-amount investments, while partnering with larger firms when it contributes funds to a deal.
We talked to Collin Gutman, founder and managing partner at SaaS Ventures, to learn about his investment philosophy, and why he decided to take the road less traveled for his investment thesis.
A different investment approach
Gutman’s journey to find enterprise startups in out of the way places began in 2012 when he worked at an early enterprise startup accelerator called Acceleprise. “We were really the first ones who said enterprise tech companies are wired differently, and need a different set of early-stage resources,” Gutman told TechCrunch.
Through that experience, he decided to launch SaaS Ventures in 2017, with several key ideas underpinning the firm’s investment thesis: after his experience at Acceleprise, he decided to concentrate on the enterprise from a slightly different angle than most early-stage VC establishments.
Collin Gutman, founder and managing partner at SaaS Ventures (Image Credits: SaaS Ventures)
The second part of his thesis was to concentrate on secondary markets, which meant looking beyond the popular startup ecosystem centers and investing in areas that didn’t typically get much attention. To date, SaaS Ventures has made investments in 23 states and Toronto, seeking startups that others might have overlooked.
“We have really phenomenal coverage in terms of not just geography, but in terms of what’s happening with the underlying businesses, as well as their customers,” Gutman said. He believes that broad second-tier market data gives his firm an upper hand when selecting startups to invest in. More on that later.
The third piece involves building a network of co-investors that SaaS Ventures has teamed up with. A key part of its strategy is to partner with an established firm in the target region and be a secondary investor in a startup. It won’t even go into a city where it can’t find that kind of lead local investor relationship, but it has built a network of 300 funds it works with on a regular basis.
“We partner with lead investors, and say there’s a decent number of big lead investors in each region, in each sector, etc., but there’s relatively little in the way of great investors who are willing to ride along with a local area sector lead and invest with say the best Mountain West or the best Midwestern VC, [that’s where we come in]. We don’t take a board seat and don’t need to be the lead, but still add high-value capital with a firm focus like we have in enterprise tech,” he said.
Gathering valuable data
This approach to working with established firms allows SaaS Ventures to see the best likely deals sooner, as opposed to sifting through a lot of ideas they would likely reject. This leads to lots and lots of regional data about early-stage enterprise startups in categories where they tend to invest.
“As a result [of our approach] we get this really interesting data set of what’s under term sheets from hundreds of funds across the country every quarter,” Gutman said, adding that this information doesn’t just help select companies to invest in or geographic areas to try, it creates its own intrinsic value as a unique geographical investment data set.
“The geographic spread of this kind of affiliation with more Main Street than let’s say Wall Street or Market Street [in San Francisco] is a fairly unique angle and a fairly unique level of insight into those types of startups and their underlying customers,” he said. “The data set that we’re building by seeing such dispersion of deals across different cities and what different ecosystems look like, which funds are in which places and who’s leading in which ecosystems and the like, there’s so much I think that we can build off both of those two lines of thinking.”
Making deals
So what do these deals look like?
“What’s interesting is we’re doing seed-ish early-stage deals under 15 million pre-money. And like I said, we’re not leading. So, in most of our investments the lead will put in, let’s say 750 to $1 million or $1.5 million in a $1 to $3 million seed round, and then we’ll typically be $200,000 behind them, roughly speaking, so that’s again how we get a broader portfolio of really high-quality deals behind a really high-quality lead,” Gutman said.
That has translated into 60 investments in Fund One, which just closed. Gutman said he expects to make about 80 investments in Fund Two. The deals tend to be in that $150,000 to $300,000 range.
They focused on these markets that get less attention for a reason: Gutman said his time at Acceleprise exposed him to startups with good ideas that were starved for capital because they were located outside investment hubs.
“We found there were these great companies back in 2012 to 2014 yearning for attention, capital and mindshare that were solving real core business problems, but because they were from Kansas City, Missouri and because they were working in trucking and logistics, [they couldn’t get attention from traditional VCs],” he said.
In terms of geographies, “I would say Chicago has been fantastic. Southern California, LA is a hotbed of consumer tech, but for enterprise tech is extremely overlooked. The DC-Baltimore area is great for cybersecurity and healthcare tech and has been phenomenal,” he said.
But Gutman said he has also had success in smaller cities like Bozeman, Montana and Green Bay, which benefit from having universities nearby that can act as feeder systems for startups. Some places also have active industries with their fingers on the pulse of innovation, which allows locals to generate great ideas in industries like trucking and healthcare based on their knowledge and expertise.
The company has experienced three exits so far; the largest has been Ataata, a cybersecurity and anti-phishing training startup that was acquired by Mimecast for around $25 million after raising $4.2 million, according to PitchBook data. SaaS Ventures was part of the company’s $3 million Series A in 2017.
While SaaS Ventures probably won’t ever get involved with some of the larger enterprise deals we see in Silicon Valley, the firm has carved out a niche as it seeks opportunities in out-of-the-way places where startup ideas flourish and there is an intense need for investment.