The Minnesota Money Game

At some point, every emerging capitalist needs more capital. In this in-depth feature, we look at the diverse dynamics of getting funded.

In a classic “South Park” episode, the boys encounter a community of diminutive “underpants gnomes” who steal underwear from children’s bedrooms in the dead of night. Comically unaware of its gigantic flaw, the gnomes proudly present their three-part business plan.

Step 1: collect underpants
Step 2: ?
Step 3: profit

Though real-life business owners are considerably more capable than these pint-sized thieves, this only-in-”South Park” scenario actually illustrates an important point: no matter how great your business idea, it likely won’t come to fruition without a well-defined plan — and the means to turn that plan into action.

Minnesota’s entrepreneurs use just about every trick in the book to launch and scale their ideas. Here’s a comprehensive look at the general financing considerations that any budding entrepreneur needs to take into account, the pros and cons of various common financing options, and the overall strengths and shortcomings of our fair state’s early-stage funding ecosystem.

To finance or not to finance?
Bootstrapping & Self-funding
Shark Tank for churches?
Notable Minnesota Kickstarters
Angel Funding
Venture-Capital & Private Equity
Other funding options for Minnesota entrepreneurs

To finance or not to finance?

For early-stage entrepreneurs gaming out their nascent companies’ futures, that is truly the question.

Every company needs startup capital. The big variables are how much, when, where it comes from and what’s given up in return.

John Montague, a serial entrepreneur, investor and Chief Aspiration Officer/co-founder of sports drinks startup ASPIRE Beverage Company, warns: “Business owners must remember the Golden Rule: ‘He who has the gold makes the rule.’”

In other words, there’s no such thing as outside financing with no strings attached. If you want to grow rapidly and don’t have enough of your own capital to make it happen, you need to cede some control.

“Once your company accepts outside financing, it’s not really your company anymore,” says Maslon Edelman Borman & Brand LLP Partner Terri Krivosha, who advises business owners at every stage of the corporate lifecycle and teaches a popular startup law class at Mitchell | Hamline School of Law. “On the other hand, if you own 100%, you are your own board.”

Though every startup is different, Krivosha — like virtually every impartial early-stage business expert — advises entrepreneurs to bootstrap until they can’t anymore, whether because they’re not willing to invest any more of their own liquid assets or because they want to scale faster than bootstrapping allows. The longer companies grow by bootstrapping, the more they’re worth when they approach outside investors.

When outside financing becomes necessary, business owners need to choose their investors wisely. “If you’re not willing to accept investor-friendly terms, you may want to reconsider raising outside capital at all,” says Montague. “That said, your investors’ objectives and long-term vision for your company should align, not conflict, with your own.”

Dilution is a big concern as well. Founders who accept financing from equity partners, such as angel investors and venture capital firms, should try to get value in return: management expertise, industry connections, distribution partners, customers. Likewise, though startup employees often expect some degree of equity compensation (such as stock options), founders shouldn’t be too generous with equity.

“When you give equity away, you need to be thoughtful,” says Krivosha, who advises clients to game out their entire business plan — up to and including exit — before starting out. “You don’t want to cede control too early.”

Since equity investors often take seats on company boards, founders should try to retain majority ownership, and the sway that entails, if at all possible. Failing that, they can balance investors’ board seats with reliably loyal seats — again, if possible.

The goal is to avoid getting forced out of day-to-day leadership — a highly disruptive, even traumatic blow to the company that can be personally devastating to founders as well. Leadership fights are harrowing, even when founders prevail: Krivosha once worked with a majority-owner executive so worried that they’d be fired by their board that they “struck first” and replaced the board — good for the founder, but probably not a great look for a young company striving to project discipline and stability.

“If the thought of asking investors for money and then managing those relationships intimidates you, don’t bother,” says (Real) Power 50 alumni Scott Burns, who founded St. Paul-based GovDelivery in 2000, shepherded the growing company through multiple fundraising rounds (taking in $5M total) during the following decade, and sold the lion’s share to  Washington, D.C.-based Radnor, Pennsylvania-based Internet Capital Group, now Actua, in 2009. “Take a nice corporate job at Target instead.”

Terrified yet? Let’s take a closer look at the various types of internal and external financing available to Minnesota’s startup community

Photo by Emily Davis

Bootstrapping & Self-funding

Most businesses start by bootstrapping, and not just because it’s the smart play for profit-maximizing entrepreneurs. Few institutional lenders bother with fresh startups that lack revenues, real estate, inventory, or anything else tangible to speak of.

What does bootstrapping look like? In a phrase, making the most of what’s around you. For many, it’s working with borrowed equipment, space and/or time. For others, it’s tapping friends and family for small loans. For still others, it’s taking out a home equity credit line or judiciously using business credit cards. For the very risk-tolerant, it’s leveraging non-traditional financing options like margin loans against equity portfolios.

And, for anyone who qualifies, bootstrapping is entering competitions and contests (such as MN Cup). Even if you don’t win five-figure prizes and attendant recognition, you get valuable pitch practice, concept validation, and mentorship from experienced entrepreneurs.

Matt McGinn, a coffee shop turnaround specialist, launched Minneapolis-based Blackeye Roasting in 2013. He proudly admits to taking an “all of the above” approach to bootstrap his fast-growing cold-brew coffee startup.

McGinn started his bean-roasting operation on borrowed equipment at a Minneapolis-area coffee shop. He soon realized he’d need his own equipment to attract investment and turn his operation profitable, so he posted a Craigslist ad for a roasting apprentice. The only quality response came from Pentair employee Jake Nelson, who was so enamored with McGinn’s idea that he plowed $6,000 into the business.

“That was lucky,” says McGinn. “I had no money, and I just happened to find someone who had some and was willing to take a gamble.”

McGinn and Nelson used the money to design a logo, website, bottles and caps. Short on funds, they sought a free or low-cost space to brew their increasingly large batches. They found Quixotic Coffee, a failing St. Paul coffee shop with a huge basement suitable for brewing, and in the right hands, a ready-made supply of operating cash. They bought the place for far less than asking price, flipped it to profitability within a couple months, and started scaling their basement cold-brew operation. For expansion capital, McGinn and Nelson turned to their dads, who kicked in $10,000 each.

That was pretty much the end of the bootstrapping road for Blackeye. As the company grew faster than either thought possible, McGinn and Nelson (who since sold his stake in Blackeye to focus on Quixotic) intentionally sought larger partners who could “help us on a commercial level” — providing in-kind value, not just capital.

Those partners included Minnetonka-based Lucid Brewing*, which provided critical brewing capacity and kicked in a financial investment; and Anheuser-Busch (yes, that Anheuser-Busch), which allowed Blackeye to scale its distribution network and “handle a national account like Target or Whole Foods by 2017,” says McGinn. (Anheuser-Busch is not a financial investor, however.) This spring, Blackeye opened its first branded store in the Minneapolis skyway, with several more high-profile locations planned for other Midwestern cities, and moved into a brand-new, 29,000 square foot manufacturing facility in St. Paul.

Biz Briefing
Blackeye Roasting
Headquarters: Minneapolis
Inception: 2013
Leadership: Matt McGinn, founder
Revenue: Undisclosed
Description: Brews and distributes nitro and traditional cold press coffee on tap and in cans throughout the Midwest.
Web: blackeyeroasting.co

Photo by Emily Davis

*[Editor’s update: Lucid recently moved to Minneapolis and has rebranded as North Loop Brewco.]


Crowdfunding is part and parcel with bootstrapping, but it’s worth calling out separately. In traditional crowdfunding campaigns, individual “investors” provide small sums of money — $10, $20, $50 — in exchange for rewards, such as a prototype product. Popular online crowdfunding platforms include GoFundMe and Kickstarter.

“I chose to crowdfund because I wanted to keep all my equity,” says Urbain principal Logan Ketterling, whose Minneapolis-based handmade jewelry startup raised more than $15,000 on Kickstarter earlier this year. Ketterling rewarded backers with bracelets from his first production run: “I also wanted [my backers] to feel like they were buying a product, not just giving me money.”

Ketterling advises crowdfunders to begin promoting their concepts at least two months, and preferably longer, before their campaigns’ planned start dates. Ketterling had an average of three meetings per day with anyone who’d listen: fashion bloggers, jewelry experts, potential retail customers, members of the media, random friends and colleagues.

Still, Ketterling’s success turned on a major stroke of luck. With his 15-day campaign stalled at 20% funding four days in, he went door-knocking in his neighborhood. At one house, he met an advertising hand who liked his idea and advised him to reach out to the media ASAP. He went home and fired off emails to every Twin Cities broadcast network affiliate. Within three hours, he heard back from FOX 9, which ran a spot on Urbain that night. Twenty-four hours later, he’d exceeded his campaign goal.

Rewards-based crowdfunding comes with a downside: to protect backers, concepts don’t receive any funding unless they reach a pre-determined goal. So, while Ketterling’s Kickstarter netted a cool 15 grand for Urbain, fellow crowdfunder Bharat Pulgam walked away from his Kickstarter campaign empty-handed.

Pulgam, a Wayzata High School senior whose mXers Audio earbud startup earned big press coverage this winter, approached nearly 200 investors in late 2015. “We weren’t taken seriously,” he says. “Lots of ‘good job, kid,’ but no commitments.”

A small GoFundMe campaign “ kept us running for a few months,” says Pulgam. But mXers needed more money for product development. In early 2016, Pulgam polled some successful Minnesota Kickstarter campaigners (for instance, Zivix, which raised nearly $1 million for its jamstik+ guitar) for pointers and feedback.

“If they thought our campaign was good, we figured we had a chance,” says Pulgam. He launched mXers’ Kickstarter in February.

Unfortunately, the 30-day campaign closed in late March at just 20% of its funding goal. “It’s hard not to feel discouraged, but we’re not quitting,” he says. mXers entered MN Cup’s youth division this spring, plans to participate in Twin Cities Startup Week this September, and has other ideas in the pipeline.

And if he could do the Kickstarter thing all over again?

“We’d reach out to the media earlier; realize that our real target backers were parents buying headphones for their kids; and tap parents’ professional networks to drum up more press.”

Biz Briefing
Logan Ketterling - Urbain
Headquarters: Minneapolis
Inception: 2015
Leadership: Logan Ketterling, principal
Employees: 1 permanent, multiple contract
Revenue: Undisclosed
Description: Designs and sells handmade jewelry and clothing accessories using local labor and raw materials.
Web: urbainmn.com

Photo by Emily Davis

Shark Tank for churches?

Is startup investing a godly activity? Edina’s Colonial Church says yes. Minister of Mission, Communication & Technology Brian Jones calls Colonial’s Innové program “Shark Tank for churches”. It’s a multi-stage startup boot camp and funding contest that leverages the talents of 150+ congregation members (“lots of lawyers and business leaders,” says Jones).

Participating companies must be social enterprises with young (under 35) leaders. Winners split a $250,000 prize pool; congregation members mentor and support indefinitely. Jones aims to run the contest every other year (2017 would be the next), but is even more interested in replicating the concept at other churches in Minnesota and nationwide. “We want to connect congregation members’ weekday work with their Sunday morning faith,” says Jones.

Notable Minnesota Kickstarters

These fully funded Kickstarter campaigns funneled desperately needed startup capital — in some cases, vastly more than the original funding goal — to individual entrepreneurs or early-stage companies based in Minnesota:

Zivix jamstik+: An app-connected “smart guitar.” Minneapolis. Raised $813,803 from 2,991 backers. Original goal: $50,000.

Janulus TOB Cable: Multi-use cable for charging, video, audio and more. Clarkfield. Raised $97,126 from 1,343 backers. Original goal: $20,000.

FLUID: A “learning” water meter. Minneapolis. Raised $116,381 from 595 backers. Original goal: $95,000.

Slim – The Thinnest Wallet Ever: “A super thin, card-carrying overachiever…designed for minimalists.” Minneapolis. Raised $203,488 from 6,237 backers. Original goal: $10,000.

Travail: A restaurant devoted to “democratizing fine dining.” Robbinsdale. Raised $255,669 from 1,090 backers. Original goal: $75,000.

Spark Core: A tiny WiFi development board that dramatically simplifies IoT hardware prototyping. Minneapolis (since relocated out of state). Raised $567,968 from 5,549 backers. Original goal: $10,000.

HidrateSpark Smart Water Bottle: An app-connected water bottle that tracks fluid intake and user hydration. Minneapolis (since relocated out of state). Raised $627,644 from 8,015 backers. Original goal: $35,000.

Angel Funding

Angel investor funding is suitable for companies that have grown past the startup/acceleration capital stage. They need to raise money faster, and in larger amounts, than is typically possible through bootstrapping.

Some angel investors operate independently. Due to the amount of work required to find and analyze deals, however, many Minnesota angels join local angel networks, such as Gopher Angels and Twin Cities Angels. Networks generally find promising companies, whittle down lists of suitable investments, and present to their member investors, who decide individually to participate or not.

To keep capital flowing and ensure that promising companies actually get funded, angel networks often require member investors to make minimum funding commitments. For instance, Gopher Angels asks new members for at least $50,000 within two years of joining.

“We don’t want to be a social club without any actual investing activity,” says co-founder and managing director David Russick. No doubt due to the minimum investment requirement, Gopher Angels has invested more than $10 million since its 2012 founding.

Nearly every angel fund (and venture capital fund, too) has a well-defined lifecycle that occurs within a specific timeframe — usually five to seven years, sometimes longer. First, an individual or individuals with alternative investment experience catalyzes the fund, working out an investment thesis and approach that guides the fund’s activities.
“[Fund founders] are normally people who are well-known, well-regarded entrepreneurs or investors, says Brad Lehrman, an attorney partner at Soffer Charbonnet Law Group, co-founder of MOJO Minnesota, and Gopher Angels board member. A few years back, Lehrman started his own fund, largely trading on his experience as a serial entrepreneur who’d founded and exited three companies.

The fund then raises capital, mostly from individuals and small family offices. (Institutions rarely play in the angel space.) That takes a year or two. Next, the fund looks for promising investment opportunities and deploys its capital in initial and follow-on investments. Once the fund exhausts capital marked for initial investments (“dry powder”), it becomes terminal — closing to new investment opportunities, incubating portfolio companies to acquisition or failure, making follow-on investments as necessary, and finally returning capital to investors.

Company founders seeking angel funding sometimes secure more favorable terms by courting older funds that still have dry powder to deploy. Since they’re up against hard deadlines for deploying the remainder, they’re more likely to invest on founder-friendly terms.

In Minnesota, angels play a vital role. According to Lehrman, venture capital firms in general (and Minnesota firms in particular) are increasingly uninterested in early-stage companies. They favor established, lower-risk companies. Instead, an issue for startups has been the lack of access to capital because venture-capital firms are, in general, better suited for investing in later stage companies rather than early-stage investments. “Minnesota’s angel community has stepped up to fill that [early-stage] need,” he says.
However, more so than venture capitalists and private equity firms, angel investors strive to keep their funds local. That’s great news for Minnesota companies looking for hands-on, in-state investors, but also adds a problematic zero-sum element to their efforts: when angels leave Minnesota, they usually take their money with them.

“People tend to invest in their own backyards,” says Lehrman. “So the angel community is somewhat fragmented geographically.” That’s rough for Minnesota and other Northern states, from which retired business leaders tend to migrate to sunnier locales. It’s somewhat offset by veterans’ desire — many would say obligation — to mentor the next generation of leaders where they made their own success. (GovDelivery Founder Scott Burns, now an active angel investor, says: “I focus on St. Paul, because that’s where I live and work. It’s my way of giving back to the community.”)

Efforts are underway to strengthen the Minnesota angel community’s connections with regional and national peers, however. This September, the Midwest Angel Conference, organized by Gopher Angels, the Angel Capital Association (a national organization), and others, will bring angels from around the country — including Boston, Chicago and Silicon Valley — to the Carlson School of Management for a day of networking and idea-sharing. And the Minnesota Department of Employment and Economic Development’s angel tax credit has done wonders for the local angel ecosystem, says Burns.

Recent Angel investments in Minnesota
Notable Minnesota startups that recently received angel investments, per DEED:

  • SportsHub Technologies LLC: $2.5m
  • Marker Therapeutics: $1.685m
  • Invenshure LLC: $1.254m
  • Founding Fathers Products LLC: $1m
  • Total Expert LLC: $700k
  • Seven Sundays LLC: $700k
  • Equals3 LLC: $617k
  • Precioustatus LLC: $600k

Biz Briefing
Headquarters: St. Paul
Inception: 2000
Leadership: Scott Burns, founder/CEO [pictured]
Employees: 200+
Revenue: $35 million
Description: The leading provider of online marketing automation and communication solutions for public-sector entities.
Web: govdelivery.com

Venture-Capital & Private Equity

Venture capital is suitable for more mature, but still rapidly growing, businesses with thoroughly validated concepts, experienced leadership, solid revenues and strong growth (or growth prospects). In Minnesota, the venture capital niche is widely regarded as underdeveloped and fundamentally conservative.

“States and regions that excel in small business formation and growth have strong talent pools, lots of connectivity [accelerators, competitions, conferences] for entrepreneurs, and ample capital available for investment,” says Leslie Frecon (pictured), principal at LFE Capital, a Minnesota-centric growth capital fund. “Minnesota excels on talent and does pretty well on connectivity, but falls short on capital.”

According to Frecon, Minnesota’s low unemployment rate and high-visibility Fortune 500 employers mask an underlying economic weakness. Our job creation rate actually lags the national average, partly because local companies struggle to find local growth capital. As a result, many ambitious entrepreneurs move to greener pastures — Silicon Valley, Boulder, Boston, even seemingly out-of-the-way startup hubs like Columbus, Ohio.

“Not everyone sees that we have an issue here,” says Frecon. “Without a healthy entrepreneurial ecosystem, you have a weak link in your economy.”

Regardless of Minnesota’s venture capital shortcomings, one thing is abundantly clear: For venture capital funds, money — more accurately, cash flow — talks.

“VCs anywhere are rarely willing to invest in an unproven revenue stream,” says Chris Carlisle, co-chair of Gray Plant Mooty’s corporate and entrepreneurial services practice group. “VCs care about customer validation: they need to see the runway.”

Structurally, venture capital funds share superficial similarities with angel funds. However, per Carlisle, venture capitalists tend to be less tolerant of failure. They also tend to invest in larger amounts, and attach more strings to their investments.

“Most VCs aren’t in the business of firing founders, but that can definitely happen if it’s in everyone’s best interest,” says Carlisle. ‘Everyone’ often includes the founders, who frequently retain substantial equity stakes after they leave.

Come Up Capital, a new Minneapolis-based venture capital firm founded by finance veteran Dave Mao and overseas partners, tries to ally with founders whenever possible. “Frankly, lots of people come to us before they’re ready for institutional investment,” he says. “We’re happy to offer advice and steer them toward more appropriate funding sources.”

Come Up Capital targets high-growth companies at the seed or Series A stage, typically investing $500,000 to $5 million. It’s building a diversified portfolio of 15 to 20 companies, mostly in the IoT, smart device and big data niches.

According to Mao, suitable funding candidates must have, at minimum: a clear, detailed business plan; actual customers; demonstrated ability to scale; keen understanding of team’s strengths and weaknesses; realistic growth milestones; and a well-articulated exit strategy, such as an IPO or strategic partnership.

The exit is particularly important: “You need to know how you’re going to return the money,” Mao stresses. “The last thing we want is an outstanding investment that needs to be sold at a discount as we wind down our fund.”

Venture Capital in Minnesota, by the numbers
Minnesota isn’t known as a venture capital hotspot, but it’s not a total dead zone either. Here’s a “then and now” look at venture capital activity in 1996 and 2015, the most recent full year for which data is available:

  • 1996: 48 deals valued at a total of $165.9M
  • 2015: 30 deals valued at a total of $371.7M

Biz Briefing
Come Up Capital
Headquarters: Minneapolis
Inception: 2015
Leadership: Dave Mao, managing partner
Employees: ~5
Revenue: Undisclosed
Description: New venture capital shop headquartered in Minneapolis.
Web: comeup.capital

Other funding options for Minnesota entrepreneurs

Funding opportunities are everywhere. Depending on your business’s profile and life stage, one or  more of these options may be suitable:

Acceleration Capital: Earlier-stage unsecured financing for companies with actual revenue and at least a year in business. Lots of online options, including OnDeck, Avant, and Lending Club. Easy application, rapid approval (often 1-2 business days). St. Paul-based Sunrise Banks offers a “local option” — up to $25,000 unsecured. “Our solution has a human element that [online-only lenders] lack — you can push a button and speak to a real person at any time during the process,” says CEO Dave Reiling.

Convertible Debt: Debt instrument that can be converted to equity under certain conditions or after certain timeframe. Similar to, but more flexible (and often friendlier to founders), than preferred stock.

“We would have preferred to use convertible debt,” says GovDelivery’s Burns, whose company issued preferred stock in the 2000s, “but it wasn’t widely used at the time.”

Equity Crowdfunding: A newer type of crowdfunding made legal by MNvest and the federal JOBS Act. Allows companies to raise money quickly by soliciting sums from many individual investors, offering equity in return. Suitable for companies of any size. There are significant downsides; talk to a financial professional.

SBA Loans: Earlier-stage financing for businesses that may not qualify for traditional commercial loans, backed by the Small Business Administration. Multiple options, including microloans, 7(a) loans, and Certified Development Company loans. Often made through preferred private lenders, such as Sunrise Banks. May require personal guarantee: “Our SBA loan was helpful,” says GovDelivery founder Scott Burns, “but also expensive because it had to be personally guaranteed.”

Secured Business Lending: Larger bank loans, typically six or seven figures — e.g., Sunrise is legally allowed to lend up to $14M to qualified business borrowers, per Reiling. Secured against business real estate, inventory and other collateral. Suitable for businesses with at least $5M revenue.