William Leonard

Ladies and gents welcome back to the Atlanta Startup Podcast. I’m William Leonard, your host, and investor at Valor Ventures a leading seed-stage venture capital firm here in Atlanta, Georgia. Today, it’s my pleasure to welcome Carlos Antequera, Co-founder and Managing Director at Novel Growth Partners. Carlos, thanks for joining me today, man.

Carlos Antequera

Of course, great to connect with you, William, and the audience for your podcast. Excited to be here.

William Leonard

Awesome, man. Well, before we dive into the conversation, I really just want to thank you for joining us as a judge at the 11th showcase of Startup Runway back in March. It was a great event. I hope you were able to meet some great companies there and would love to maybe have you back on the 12th showcase judge panel.

Carlos Antequera

Yes, thanks for the invitation. But it was my first Startup Runway as a judge and it was great fun, just being able to hear from that diverse set of entrepreneurs and being able to connect with a few of them in particular, and try to provide a little bit of advice and be a little bit of a sounding board for them was great. I thought you guys did a fantastic job selecting some really high-potential companies. Excited to have participated and I’m definitely coming for the next one.

William Leonard

Yeah, thanks again, man. I know our listeners are certainly eager to learn a little bit more about you, Carlos, and Novel Growth Partners. Can you give us a 60-second intro into the firm?

Carlos Antequera

Novel Growth Partners is a Kansas City-based early-stage venture firm. We take a little bit of a different approach in our investment as far as the instrument that we use. Instead of investing in companies with equity, expecting a return through the sale of the company, we invest using instruments called revenue-based financing that allows us to invest in a larger set of companies that don’t necessarily have to have the growth requirements that the traditional VCs look for. And so with that instrument, we were able to make the investment and we get our return to small royalty payments up to an agreed return. We’re excited that that provides a different toolset, if you will, to entrepreneurs that depending on where they are in their journey, or what they’re trying to accomplish might give them a different form of capital and different options for them.

William Leonard

That’s awesome, man. That’s certainly a very unique way to invest. What types of companies are you looking for? Are you location-agnostic or sector agnostic?

Carlos Antequera

Definitely investing across the US focused on B2B software companies. Now the companies that we invest in, given the instrument that we have, have to be past the idea stage and have to have revenue. With revenue-based financing, we need to have a revenue base to do the investment. But from a geographical point of view, we’re investing across the US. Definitely, we have a soft spot for the flyover country, the Midwest, and other areas that are outside the coasts. We tried to do the double effort there. But it’s in finding companies that have a good neutral face, and that we can help in other parts of the country, we’ll definitely look at those. 

William Leonard

I think that’s awesome. You mentioned something interesting there. Your location, you’re in the Midwest, and as you said, some people do see it as flyover country. But for us investors, we see it as a burgeoning tech ecosystem. Can you kind of elaborate a little bit as to why the firm is located there, and why it’s so crucial to be in the Midwest right now?

Carlos Antequera

Yeah, and it ties in a little bit of, kind of like my background and history before Novel. My background is from the entrepreneurial side. I had the opportunity to start a software company in early 2000, a B2B software company, and just imagine the challenges of entrepreneurs fundraising normally, and this is 15 years+ ago in Kansas City. The options were even dramatically more limited with fewer angels. At that point, I think there are one or two VC firms in the Midwest, and really not a lot of options for capital for entrepreneurs. And on top of that, I didn’t know it then, but I was in an industry that was not seen as very sexy. I was in EdTech. We’re building software for a school district and even though we have customers and we have revenue of about a million dollars when I first did my first fundraising, about 100 customers. After eight months of doing the rounds, I found myself empty-handed because once, there weren’t a lot of options. And second, folks at that time were looking for e-commerce type companies, something that was a little bit again, sexy, for lack of better word. Fast forward to 2015, when I sold my company and I started angel investing, I realized that the picture, although better than a few years back, hadn’t dramatically changed. The options for entrepreneurs were still very limited. Entrepreneurs were constantly complaining that they didn’t have the options for capital to grow their companies. They were being forced to sometimes look at the coast as the only option. And so that was really not the only but part of the impetus to say, “Hey, how can we help those entrepreneurs?” They’re good entrepreneurs here as in other areas, and how do we give him the opportunity to succeed? And that was really kind of one of the key elements in launching the Novel.

William Leonard

Got it. Awesome. You mentioned your operational experiences, it’s something I really want to dive into a little bit more. You were CEO of a company for 15 years. You said it was an EdTech space, correct?

Carlos Antequera

Correct. Yep.

William Leonard

Got it. How did those 15 years as an operator really work too, let’s say, shape some of the frameworks for you as an investor in the current day?

Carlos Antequera

I’m a big believer that you’re a byproduct of your experiences. It definitely shaped the approach that I take as an investor, you’re one of the key elements of our firm, for example, we will only work with companies and invest in companies that we believe we can help from an operational perspective. And not because we have to take board seats, or legally, they’re bound to work with us, because they really see the opportunity and the value in that help. We don’t over-promise, we’re not going to help on everything, we don’t have expertise in everything. But we think in particular, around sales or marketing is one of the key areas that entrepreneurs really struggle with. From our experience, similar to my background from the computer science side, we tend to find that entrepreneurs in the software space, in particular, either start as technologists or they start as industry experts that saw a problem in their industry that hasn’t been solved, and they decided to tackle the challenge. But in certain cases, those folks have no expertise around sales. And so usually, once they get to a certain point that gets carried by the quality of their product, or by the network they have in the beginning and their understanding of their industry, eventually they hit a wall, and they don’t know how to get past this black box of, “Why is my product not selling anymore?” And so we think that that’s one of the critical aspects in which entrepreneurs really need help, in addition to capital, because otherwise, you can get a lot of capital. And if you don’t really tackle the right things, you are going to spend that capital really quickly, get diluted, and not really make the headway or progress that you need to and we think kind of high-level revenue can cure a lot of problems. If you figure that part, you’ll give yourself a better chance. That’s literally one of the keys to how we looked at how we work with entrepreneurs.

William Leonard

That is certainly a unique approach. I kind of want to pivot back to the revenue-based financing approach versus the traditional equity approach. Maybe for some emerging fund managers out there, how do you decide if you want to leverage a revenue-based financing approach or the traditional equity? What are some of the pros and cons and some of the day-to-day things that you’re seeing across your investment strategy?

Carlos Antequera

Yeah, definitely the traditional equity VC investment. From one perspective it’s kind of more well known, there are more traditional term sheets, entrepreneurs understand that. From the revenue-based financing side, we find ourselves having to do a little bit more education, people are less familiar with that as an option. And therefore, we educate entrepreneurs also when to use the right tool, if you will. We see ourselves as another tool in the toolbox of entrepreneurs, and it’s appropriate for certain times in your journey, it’s not appropriate for some others. As I said, if you’re in the idea stage or the R&D stage when you’re just developing the product, the equity VC side of angels is going to be the route that you need to go for your pre-revenue. Generally, at that point, the revenue base that you have is not big enough to sustain you and the risk at which stage you’re at, in a way, aligns with that. Or if you have a very capital-intensive thing, if you’re trying to develop the next chipset that’s going to compete with Intel and AMD, you’re gonna need a certain amount of capital to get off the ground. You have to understand that will be kind of what your business model is, where you are in your journey, to choose the right tool, and as an investor, at the same rate, it’s kind of what you are passionate about. If you’re passionate about finding the next unicorn then you’re going for a smaller number and more concentrated bets. A bunch of those are not going to pan out, but hopefully, the good ones are really going to make up for the rest of the portfolio. In our approach, we take the reverse of the traditional approach where two out of 10 will be the super success. In ours, we’re counting that nine or 10 will be a success, maybe a more moderate success. But really going for a little bit of a different portfolio approach. I think it kind of depends on what your passion is and what your focus is. Ultimately, that’s I think, kind of what makes a good investor, right? It’s really to follow your heart along with the decision-making process that you have in an area that you really feel excited to make a difference for entrepreneurs. 

William Leonard

I think that’s great advice and insight into the contrast of revenue-based financing, investing and equity investing. The firm has been investing since 2018, what have you all seen from the Midwest ecosystem over the last three to four years? How has it evolved? What are you projecting some of the big, vertical, sectors will be out of the Midwest?

Carlos Antequera

There’s definitely some trends right here and some strength around some industries. In general, I think it seems like the lines are getting blurred, especially with the pandemic, and folks are getting a little bit more used to connecting remotely around investors. Definitely more investors from the coast are looking now at the middle of the country, I don’t know if it’s just because again, technologically, it’s in a forcing function with the pandemic over, they just identified again that the same thing that many of us have seen that they need these companies in these areas as well. And in many cases from a traditional equity perspective, you can get better valuations, or even from an entrepreneur perspective, you can be pretty capital efficient and make your money go a long way, which both things are positive both for the entrepreneur and for the investor. But in terms of industries, in particular, I think around the Midwest, we’re very strong around some of the financial sectors, engineering, architecture, construction, there’s definitely in particular around the biotech corridor, Animal Health corridor. There are industries that I would say, around those kinds of more stable blue-collar type of industries that definitely are going through an innovation period and that obviously creates opportunities for entrepreneurs and investors.

William Leonard

I agree. I think we’re seeing some of the same trends and sectors really starting to assert themselves across the southeast and the southern part of the country as well. Definitely can relate to what’s going on right now in the Midwest. You’ve been investing for some years now, Carlos, and part of investing is taking pitches on a day in and day out basis from founders. I guess my question to you is what are some of the common traits that you’ve seen in successful pitches, and maybe not so successful pitches? And as an investor, what are you wishing that founders would do more of in these 30-45 minute meetings that they’re having with investors?

Carlos Antequera

Yeah, that’s a great question. And again, our approach is a little bit different, because we’re looking for revenue, I would say for being early stage. We invest in companies normally that have $500,000 minimum revenue up to about $5 million in revenue’s kind of our sweet spot. One of the things that we spend quite a bit of time doing is really looking at the performance of the company today. Your numbers and your metrics will tell this story in a way more than the entrepreneur will. And what we find in many cases is that entrepreneurs are super excited about their products and around their visions, and that’s great. You have to have some of that, but at the same time, in many cases, lack a basic understanding of what is your revenue? What was your churn last year? Some pretty concrete metrics. What we try to do is take an approach of being respectful with the entrepreneurs on their time, we know that you’re wearing multiple hats, because we’ve been in your shoes, and we try to get to a yes or no answer relatively quickly, within 10 days on a pretty transparent process. And in order to be that efficient, though, we need to have your data and your information and we need that fairly quickly. Sometimes you’re getting in all that excitement and the view of entrepreneurs of what the fundraising and pitching process should be. I think sometimes we see a lack of those kinds of fundamentals. We can have a conversation, but we won’t be able to move forward if we don’t understand what your numbers have been for last year, and where are you going this year? Your question about what’s missing, sometimes, that’s an area that we see missing. Now, the other thing that we really like about our approach, and we think, again, is a little bit different, because we’ve talked a little bit more matrix oriented, if you will, we think in a sense it’s fair and less prone to bias. Because I don’t care where you’re from if you’re in Silicon Valley, if you’re here if you’re in a rural area, or you’re in a city, if you are a particular gender, if you are of a particular race, I’m looking at your numbers and the work that you have done, your performance in a way is going to speak to me. I hit up all those things. And that’s a great equalizer. 

William Leonard

You mentioned something really interesting there. The transparency aspect, I want to touch on that a little bit more. How important is it for a VC to be transparent about their process? Personally, I know some VCs who are pretty closed off about their process. Others may just have it on their website. What is the healthy balance there and can you share a little bit of insight into the process at Novel Growth Partners?

Carlos Antequera

We try to be really transparent again, because, as you mentioned, we’re talking to hundreds of entrepreneurs, and both for our own efficiency as well as the respective entrepreneurs, if you’re fundraising, and again, having been in that journey myself years ago, and the fundraising process, and even now when you’re fundraising for a fund, you still have to be out there. I really appreciate when folks were pretty clear with me when it’s a no, right? Especially if they give me feedback on why it is a no. I can adjust or learn from that process. We tried to take those lessons and apply them to entrepreneurs, and let them know that when this is not gonna work, let them know quickly, so they know what they have in their hands, and they can move on. And in the same process, let them know why it’s not working right. In many cases, we get many entrepreneurs that might have $400,000 in revenue, and we tell them no, the $500,000 minimum is a hard line. It sounds like a great company. But let’s talk in six months, we’ll talk in a year, when you get past that builds that revenue line, right? Or if it’s a particular burn ratio or metric that we’re looking at, again, we’ll tell them, “Hey, your burn is too high, the amount of capital that we will deploy, you won’t roll out to more than a couple of swarms, it doesn’t make sense, you’ll be in the same place in a couple of months, right?” We try to be as transparent in those conversations and hold it to the timelines. We tell them we will get back to them. “Okay, after this conversation, we’ll get back with you in X number of days.” And we try to honor that as much as we can. That again, they know what they have in their hands.” 

William Leonard

I agree. You know, there’s been a huge push for investor transparency I’d say over the last year and a half. I think it’s something that’s really going to push the ecosystem forward and create a healthier relationship between founders and investors. I know there was some tension at one point just because VCs showed a lack of transparency into how they were making decisions, not giving thoughtful feedback, and things like that. I think firms really allow people to see into their process and be just 100% transparent as to why they’re yes or why they’re no, I think that’s really something that’s going to advance the ecosystem. Glad you all are doing that. Shifting here a tad bit, you’re the Co-founder and Managing Partner at the firm, while thinking about a thesis to invest on what was the conversation around this being a specialist investor, versus being a generalist investor and how did the team kind of come to that decision?

Carlos Antequera

As far as getting the initial thesis and even the instrument, I have to give credit to my co-founder, Keith. He was in a more traditional VC role in his previous roles. We connected with trying to find a way to help more entrepreneurs with capital, in particular in the Midwest. When we started, one of his observations was, “Well, we can try to be just another investor. But we know that being a really good investor is a long road, just like many other careers, and we don’t want to look back 15-20 years down the road and say, oh, we’re just another average investor, right? So how do we take a unique approach that might be in a way a little bit riskier, a little bit, the road less traveled, but at the same time, we have a chance to really do something special, something different.” And so that’s in particular how we chose revenue-based financing. We knew that there were some other funds that were serving the Midwest or from a VC equity perspective. These gave us a different tool to invest in a larger set of entrepreneurs that was maybe different. In some cases, there’s an overlap with traditional VC equity but gave us a different tool. That was kind of one consideration. And then the other one, as far as being specialized in a particular vertical especially in the range that we play in that’s below $5 million in revenue, we think that in enterprise software, in particular, B2B SaaS, a lot of the challenges and opportunities that companies have are very similar, regardless of industry. There are obviously nuances in each industry, but the underlying business fundamentals are very similar. I mentioned before in identifying challenges around sales if somebody is around a million dollars in sales, and they’re stuck there for a couple of years, if they don’t figure that machine there, if you don’t figure out how to predictably grow their revenue, and identify the customer in an efficient manner so that customer acquisition costs are managed, directed very far, right? And regardless of what industry you’re in, we see those kinds of common challenges, and again, common opportunities to help entrepreneurs. And that was the basis for saying, ’Hey, we’re going to go broad with a generalist as opposed to narrow on particular verticals.”

William Leonard

I think that makes perfect sense and really justifies the team’s expertise experience. I guess wrapping up here to two more questions for you, Carlos. One, how can investors get in touch with you if you know, they think they fit the criteria of the firm? What’s the best way to reach you or the team?

Carlos Antequera

Yeah, definitely contact us via our website, we have a ‘Contact Us’ form there. If you want to reach me directly, carlos@novelgp.com. Be happy to connect with anybody that thinks this might be a good vehicle for them.

William Leonard

Awesome. Awesome. And lastly, Carlos, what are you most excited about for 2021? In terms of, let’s say an investment thesis or particular vertical, or just in general, what gets you excited about this year?

Carlos Antequera

I think in particular with our thesis, it seems like, over the last couple of years, in particular, there have been more outgoing open eyes, if you will, by entrepreneurs around all their options of capital, rather than the traditional equity option. And so I think, entrepreneurs, as you mentioned, they’re looking for more transparency in the process. They’re looking for different capital that meets different needs and their growth in their journey.  They’re getting educated around all these options. I think, given technology, innovation, I think the capital markets and investment in general as well are evolving. I think just the general evolution of the investment, tools, and opportunities for entrepreneurs, is exciting and entrepreneurs I think are waking up to all those options. I’m excited for the next few years, not just this year, about this transformation. I think that’s going to make folks better investors and entrepreneurs given better opportunities to grow their company.

William Leonard

Certainly, I think as a whole, the industry is projecting in the right direction here. I’m excited to see what this year and what the decade brings for investors, founders, and all beneficiaries. Carlos, it’s been a great conversation, man. I think our listeners will find some true value in your insights on deciding a fund thesis, into the Midwest, and what’s really driving the innovation scene out there, and really just the overall advice that you gave founders and investors today, so really appreciate you coming on the podcast, Carlos. Let’s try and get you back on here sometime soon, man, okay?

Carlos Antequera

Definitely. Thanks for the invitation again, William, kudos for all the work that you do and the team there in Valor are doing. Any way that I can support that or continue to the ecosystem company.

William Leonard

Awesome. Awesome. Thanks, Carlos. Have a great day, man.

Carlos Antequera

You too. Bye-bye.

Lisa

Thank you for listening to the Atlanta Startup Podcast. You know, we’re not just a podcast, we’re a community, and we’d love to see you at one of our digital or physical events, go to valor.VC and sign up for an event that makes sense for you. We have events for founders and the investors who back them. Another event you might enjoy is Startup Runway. The Startup Runway Foundation is a Valor organization that provides $10,000 grants to founders who are women or people of color building next-generation software products. Applications are free and we’d love to hear from you at startuprunway.org. And as always, thank you so much to the organizations that make this podcast possible. Not only Valor Ventures, but also Write2Market, a tech marketing and PR agency in Atlanta, Georgia, and the Startup Runway Foundation and Atlanta Tech Park Valley’s headquarters, and also headquarters for over 100 local entrepreneurs, building global businesses. See you next week. Please bookmark the podcast and join us.