So, You Want to Fund a Tech Company
Navigating angel investors, VCs, private equity firms and lending institutions
Often referred to as “Silicon Mountain,” Colorado’s technology industry is attracting interest from across the country.
From startups to major technology corporations, nearly 11,000 tech-centric companies are located in Colorado, including global corporations such as AT&T, DISH Network and IBM Corporation. With more than 146,000 technology and information industry jobs each year, tech workers in the Centennial State make more money — 98% more — than the average private sector workers, too.
Through investment, local entrepreneurs can not only generate the capital that they need to get their ideas off the ground, but they can also leverage the know-how, advice and contacts that a particular investor may have. And a recent report revealed Colorado ranks eighth nationally in venture capital investment.
As the state’s tech ecosystem advances, it’s bolstered by capital from a number of local and non-local sources. But who’s deploying that capital?
These are usually high net worth individuals, often retirees, who provide financial backing. They want to be involved and can be great advisors. Because angels usually invest in the entrepreneur starting the business rather than the viability of the business, they focus on helping startups take their first steps instead of the return on their investment.
In exchange for equity ownership, angels deploy capital in early-stage companies in hopes of seeing the next generation of entrepreneurs succeed. However, it can occasionally be difficult to work with angel investors if entrepreneurs or startups need more than $1 million because it becomes very time consuming to organize so many different people. But angel investments are ideal for entrepreneurs who are still financially struggling during the startup and early phases of their business.
While our state lacks Google and Facebook millionaires, we have thousands of “accredited investors.” Examples of local angel investors active in the Colorado tech space include Rockies Venture Club, a company that creates value for investors by identifying and investing in early-stage companies with high potential, and Boulder Investment Group (BIG), a group consisting of 250-plus accredited investors interested in furthering their knowledge of various asset classes and gaining access to attractive deal flow.
Venture Capital Funds
These are groups that invest professionally into startups, they write bigger checks, but with that money comes higher expectations of performance and professionalism. VC firms in Colorado, such as the Foundry Group and Zero G Capital, typically deploy $1 million to $10 million per company, and some pre-seed VC firms even invest before there is revenue for the business. Most venture funds ultimately want to own 10% to 20% of the company when they invest.
For reference, Zero G Capital invests when there’s about $40,000 or more in monthly sales, with demonstrated solid growth. On the other hand, bigger coastal funds, including Warburg Pincus, Accomplice and Sequoia Capital, don’t tend to get involved until there is more than $500,000 in monthly sales.
Private Equity Funds
Much like a mutual or hedge fund, a private equity (PE) fund typically refers to a pooled investment partnership in which funds are utilized to invest in private companies. Typically partnerships with fixed terms, private equity funds often manage a number of distinct PE funds and will attempt to raise a new fund every three to five years as the previous fund is fully invested.
We have a handful of private equity groups in Colorado. From local funds such as Bow River Capital and Lariat Partners to bigger players like Warburg Pincus and Partners Group growing much more actively involved in the Colorado technology space. Warburg Pincus often won’t enter into a deal with less than $50 million, but they are actively seeking out deals in Colorado right now. Partners Group, on the other hand, is based in Baar, Switzerland, but has offices around the world, including in New York City and Houston, and the fund recently relocated its North American hub from San Francisco to Denver.
While PE funds might also look like a VC fund, their investment style is quite different. PE buyers will buy the entirety or a controlling interest in the business. Additionally, PE funds are often looking for companies that are profitable and will generate cash. In fact, most PE groups in Colorado are looking for companies that generate $2 million-plus earnings before interest, taxes, depreciation and amortization (EBIDTA).
Banks and Credit Funds
These are the most conservative investors. While bank loans can be a valuable financing option if you are able to secure favorable terms, it can be quite difficult for a startup venture to get a loan from a commercial bank due to the risk involved. From your shortage of experience as an owner to the lack of customers your company has, there are plenty of reasons for banks and credit unions to deny funding.
However, it’s not impossible to secure a bank loan, and some banks like Silicon Valley Bank actually specialize in providing the loans that can extend your runway in the face of a lengthy development schedule or slow sales ramp.
While Colorado’s tech sector doesn’t necessarily feature one dominating vertical (cleantech, agtech, adtech, martech, fintech, etc.), the diversified tech economy here is beginning to attract global interest. Investment is picking up and will continue to increase in the coming years, and the impact is expected to be felt long term. As these tech firms develop and mature, they’re eventually going to employ hundreds and thousands of people across the state and have a massive ripple effect down the road. One thing the state lacks on a per capita basis is Fortune 1000 companies, and it’s unlikely we’re going to convince those companies to move here, but we can build them here — and tech investment money allows us to do so.
Sasha Shtern is a seasoned entrepreneur with deep ties to the Denver startup community. He is the CEO of Zero G Capital, a technology investment firm, and is the former President of Entrepreneurs Organization of Colorado.