Early-stage venture fund New Stack Ventures just raised $42.6 million for its second fund aimed at injecting capital into founders that don’t come from the educational pedigree or location that we typically see with entrepreneurs.
Touting itself as one of the “largest single-partner U.S. funds ever raised between the coasts,” the Chicago-based firm prides itself on being unique from other venture capital firms, and that stems from the founder and general partner Nick Moran, who previously worked for Danaher in M&A and product management, where he developed an analytical device for testing compounds in drinking water.
When Moran began angel investing, he found the whole process of startup fundraising to be confusing, so he started a venture podcast back in May 2014 called “The Full Ratchet,” to interview other VCs and provide funding transparency.
New Stack raised its first fund of $6 million in 2018 and has since gone on to add 38 companies to its portfolio, including Hologram, Cybrary, Fairmarkit and Tovala. It makes angel, pre-seed and seed investments into B2B SaaS startups in sectors like finance, healthcare, cybersecurity, supply chain, construction and real estate.
I spoke with Moran about how the firm’s focus between the coasts and how investments there have evolved. The following was edited for clarity and length.
TC: The current portfolio is largely enterprise/B2B, with a few notable investments in food tech. Why are those areas attractive to you?
NM: I come from the B2B enterprise world, so about 75% of our portfolio is enterprise SaaS. When I got back to Chicago and was an angel investor, people weren’t focused on some potential unicorns and didn’t invest in areas like food tech or social commerce, which have become breakout successes. We didn’t start with a thesis there, but due to lack of capital and networks in the Midwest, we had our choice of backing those founders.
TC: It looks like you were looking in between the coasts a bit before it was popular. What were the initial challenges?
NM: A lot of ingredients have to come together for it to work — a founder network, a talent network and a capital network. Raising the first fund, the thesis of investing in outsiders and the middle of the country was a difficult task. We just closed the second raise, and the thesis landed, and we have 100 investors and people who are motivated and excited. We think the bigger story is the migration of Midwesterners back to the Midwest who had to locate in the Bay Area for work. That has been a huge tailwind for us.
TC: How have those ingredients improved?
NM: The capital and talent networks are now robust, especially with remote work. We still have to go to the coasts when it comes to Series A and Series B, but more coastal investors are embracing Midwest founders. At the seed stage, it is initially hard, but once you get the traction and investors to see the value, we have seen the appetite for investing in our companies. We are starting to see our portfolio companies raise Series B and Series C rounds, and our first D round is coming up. Those would not have happened for Midwest companies when I first started, but now with tech, you can find networks everywhere.
TC: How many companies are you looking to invest in with fund 2?
NM: This one will be 35 investments, with average check sizes increasing from $400,000 to $1 million.
TC: Diversity is paramount in venture capital, in both the firm itself and the companies in the portfolio. How is your firm addressing diversity?
NM: An important part of our outsider thesis includes those that have been marginalized or underrepresented. The founders of our portfolio companies are helping to break the traditional stereotypes in tech. I’ve learned in hosting “The Full Ratchet” that more diverse teams outperform those that are less so. We are excited to announce some new hires to our core team in the coming months that will help us embrace and promote gender and racial diversity in venture capital. In order to help “young outsiders” break into venture capital, in 2020 we launched the New Stack Fellowship. The graduates of this program were 58% women and 85% underrepresented, and many have gone on to full-time jobs or internships in VC and tech. This group drove material impact for New Stack, and we look forward to teaching and benefiting from the next generation of great investors.
TC: Why should founders want you in their cap table?
NM: From the beginning, the venture capital industry has chronically lacked innovation. They used to investing in the same kind of industry and the same type of person, but we are seeing a future where this is changing. We are innovating with our podcast, where we have founders reaching out to us. If you ask founders why they chose us, in the Midwest, most other VC firms know analysts or associates at all of the Series A firms. But very few know founding partners and general partners at 90% of the Tier 1 Series A and B firms. We can claim that because we have been interviewing them and building relationships. Founders want access to decision-makers, and we provide that warm on-ramp to firms on the coasts.