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Banking on KC – Darcy Howe of KCRise Fund

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Kelly Scanlon:

Welcome to Banking on KC. I'm your host, Kelly Scanlon. Thank you for joining us.

Kelly Scanlon:

On this episode, we welcome Darcy Howe, the managing director of the KCRise venture capital fund. Darcy has been an angel investor for 25 years. And she was a founding member of the Women's Capital Connection. And that's a network of accredited investors who invest in women-led early stage businesses. She's been a regional leader in Kansas City's entrepreneurial ecosystem for the last several years, helping to connect entrepreneurs with funders and advisers. Welcome, Darcy.

Darcy Howe:

Thank you, Kelly. It's great to be here and I love the work that you're doing to spotlight KC. That's what I think about 24/7.

Kelly Scanlon:

The KCRise Fund. It's a co-investment fund. What does that mean?

Darcy Howe:

So we invest in generally high growth technology companies. We have a few consumer products companies, but primarily high growth technology companies. And our investments then in order to get an investment from the KCRise Fund, there has to be another institutional investor in that round of funding. So we help the entrepreneur go out and find those other institutional partners who might be interested in what they're doing and invest. And then we can invest. We have about 175 funds that we show deal flow to. And we've partnered with about 44 of them around the country.

Kelly Scanlon:

And in what timeframe have you done this? Because this is still fairly new organization. What, maybe five, six years old?

Darcy Howe:

It's actually only three and a half years old.

Kelly Scanlon:

Wow.

Darcy Howe:

Which is kind of amazing. It feels like five or six years. Probably in dog years I'm about 120 years old right now. We actually opened the fund October of 2016. We closed the fund one to new investors October of '17. We've made 20 investments in the first fund and we've raised $19 million. We've made 20 investments in that first fund. And then we've raised in fund two another 24 million, and we've made six investments so far going to 20 investments there. And our investments are all in the State of Kansas or Western Missouri. So we're very hyper-focused. We think this is part of our secret sauce of really knowing these entrepreneurs well, helping them to become camera-ready for venture capital.

Darcy Howe:

It's a very small sub segment of all the great businesses that are being built out there, but they are our companies that we're literally looking for an opportunity to make a 20 times return on our first check into the company. So it has to be something that really is a very, very big idea that has a very big addressable market, a pain point for either a group of companies or individuals who need this product or service. And then they build a team that knows how to scale that into a, not just a US, but in many cases, a global business.

Kelly Scanlon:

You had said that the early stage businesses, and that term gets tossed around so much, but you also talked about how they've built a team. So these are companies that are past just the idea stage. They're actually already in business. Are they cash flowing yet typically?

Darcy Howe:

Yes. They typically have some early customers. They typically have revenue in the $50,000 to $100,000 a month in revenue. So they've had some investors prior to us generally, and they tend to be angels or individuals who are willing to take a risk on a very, very early company. Usually angels come in when they might be pre-revenue just early product, trying to get their product market fit as they say. Even when venture firms come in, they're still not always clear on their product market fit, or they may be trying eight different things to find that product market fit. And part of our job in governance is to help them to fail fast in the areas that look like they're not going to gain traction, or they don't have enough money to try and do it all, let's focus on a few things.

Darcy Howe:

So we tend to be a little bit later than the idea stage. And even in the angel stage we're really considered the first institutional capital end, where if they haven't already, we help them form a governance board and serve on that board to help guide, to bring resources to, and really keep them on a very focused path or create a very measurable key performance indicators as to how the businesses is going. Because in venture, it's really a team sport. You get a lot of folks around the table, some angels, some institutional investors, sometimes there's a strategic investor who might be a customer as well. And the idea is you give them a little bit of money to get enough traction to kind of get to the next phase. And then you give them a little bit more. So take several rounds of funding in order to get a company to a really big time humming on all cylinders place in their business life. And that's part of what we do.

Kelly Scanlon:

You talked about how local you are and that you really know these companies that you're investing in. But a common talking point, a common complaint, if you will, that still persists in Kansas City's entrepreneurial community is that there's just not enough capital to fund local innovation. And I know that thanks to KCRise Fund and your partners and some of the others that are out there that that's been changing. And so what's your take on the current funding situation for early stage companies in Kansas City?

Darcy Howe:

I would say for sure that there is not enough proof of concept money. That means somebody has an idea, and this is a classic time period right now during the pandemic. It was like the last downturn in the economy in '08, '09. It creates lots of entrepreneurs opportunities for people to start their own business. Either they got laid off or they have a great idea that the larger business they're in is not taken care of. And so we see a lot of individuals interested in starting a company. And so that proof of concept where they only need $25,000 to go to a lawyer, get the IP registered, hire a software engineer to really start building out the app or the product $50,000, $100,000. We are lacking for sure, in that area. Why did I choose venture, which frankly, I would say at this point, if it's a really great venture bankable idea, capital is not generally the problem in Kansas City. It's you got to figure out what you're doing that you're not attracting capital once you get to that stage.

Darcy Howe:

But why did I choose venture over where we also need money and proof of concept? Because my original north star was to help educate and grow more early stage investors in Kansas City, both corporations and families, multiple generational families. And in order for them to do that, they've never invested in early stage companies that are risky and have a lot of potential for failure. I wanted to give them the best opportunity for an experience that can be successful. And that means they have to be a little bit more seasoned in order to have a higher probability of succeeding.

Darcy Howe:

And then once those families and corporations have a successful event, we've had a couple of exits already where people have received two times their money back, for instance. So it's real. They can say, "Wow, it's real. I didn't just make a United Way donation to Kansas City. I actually invested in some very cool companies that are finding buyers for us to have a liquidity event. And then those investors will turn around and do it again, because that was really fun. That was interesting. And boy, I'm helping Kansas City and I'm making money." And so that's why I chose venture versus earlier stage. But I would say there, it's a valid complaint that we do need more proof of concept money, those $25,000 to $100,000 type subjects.

Kelly Scanlon:

And as you said, once there are some successes within the group. It's been an educational process for you. I mean, there is money here, but especially for some of these ideas that to some people sound really out there, it's like, how is that ever going to work? Or it's going to be decades before I see any return on something like that. And for somebody like you to be out there advocating and educating more than advocating, but educating people that do have the money to invest, that was a big step for Kansas City.

Darcy Howe:

Well, one of the things we were very fortunate in Kansas City to have a few very generous angel investors, individuals who would write checks, but what the average Kansas City and who might have a couple of dollars that are really excited about this idea need to understand it's just like the rest of your portfolio money. You need to take a portfolio approach. And in our business, the statistics would show if you are not investing in 20 companies, 20, then your likelihood of success plummets.

Kelly Scanlon:

Wow.

Darcy Howe:

So if you take a flyer because your brother-in-law said, "This is a cool deal, and I'm really interested in this app" or whatever it is, your probability of success is below 50%. You take a 20 portfolio approach. What will happen is two or three will be screaming winners, a few will be give you just a little bit of your money back. Maybe some will just give you barely your money back. And they're going to be some that are going to fail completely and you'll get zero. That's how you build a portfolio.

Darcy Howe:

So when people say to me, "Oh, I'm going to just throw $10,000 into this company. That's not a big deal." well, really what they need to do with $10,000 as your number, then you have to have at least 50% add on capital. So that means you really need to put 10 in now and save 10 back for the next round because that company is going to need more, more money. And then you need to build a portfolio of 20 companies. So before you know it, that's a $400,000 commitment to really do it well and have a high probability of success. And you just thought all you were doing was committing $10,000. So maybe if that math helps your audience to understand what it really takes to invest in this category, there it is.

Kelly Scanlon:

You talk about some of these wins for some of the investors. And I know that you're nearly finished compiling the results on a survey of some of your portfolio companies. Can you share some of those preliminary results with us?

Darcy Howe:

Yes. I'm really proud of several statistics that our companies are beginning to show to create more economic prosperity in the Kansas City region. And it's one of the drums I beat loudly around Kansas City that we need to pay attention to the sector, not just as investors, but as an economic development. And it is entrepreneurship. It is people starting businesses and creating opportunities for others to work in, in these businesses. And a couple of stats that are leading us to show that one is, it does take capital. And our capital is just a small part of it. Our companies, now we have 26 total in the two portfolios, have attracted $334 million of investment capital. Seventy-eight percent of it is from out of town.

Kelly Scanlon:

Wow.

Darcy Howe:

So the first statistic is it takes capital, but it doesn't necessarily have to be all of us writing checks in Kansas City. We're just writing the catalytic check and we're going out and helping to find that other capital. And what's happening today is institutional investors are not saying, "Oh, you've got to move to Silicon Valley, or you've got to move to Dallas or Chicago or wherever." And you can stay right where you are in Kansas City or in outstate Kansas or outstate Missouri, and build your team. And we will fund you. One, the capital from outside of the region realize how long our companies have bootstrapped. And they've really been very... Bootstrapped is a term we use for if they've used their own resources and money to try and get the company off the ground. Two, how reasonable our labor is. Great, hardworking labor of individuals who stick around with the company and don't change companies every six to 12 months like they do out in Silicon Valley.

Darcy Howe:

There's a lot of reasons why I was very attracted to what's going on in Kansas City capital from outside of Kansas City. So that's one step that we are really proud of. And we know that that capital is going to help fuel more jobs and more economic development in Kansas City.

Darcy Howe:

The other is just the number of jobs. It's still very early. We just got started kind of monitoring what the revenue and jobs look like. But I believe the end of December last year, our portfolio companies had created about 700 jobs and we are getting up pretty darn close to a thousand jobs now in August of 2020. So think about what's happening in the rest of the world today. People are losing jobs. People are being furloughed. And our companies, not all of them, but the companies that are succeeding in all of this are actually gaining employment. So that's one is the jobs are growing in our area.

Darcy Howe:

And the other is why are the jobs growing? Because the revenue of these companies is growing. We looked at the revenue the end of February for our portfolio companies, and then the revenue the end of June of 2020 for our portfolio companies, and revenue actually is up about 35%. So again, we have some companies that are suffering and some that are just going nuts. And I can give you a couple of examples of that if you'd like.

Kelly Scanlon:

Yeah. I'd love to hear those because I'm curious to see, since you focus so much in the tech industry, and we were already shifting to where we were becoming more and more reliant on tech, but right now it feels like we're totally reliant on it. So is that part of the reason they're doing so well?

Darcy Howe:

Absolutely. Well, let me give you one. It's a very basic industry that you'll just like, oh, be surprised. But also it makes so much sense. So used cars, and these are used cars like in the $5,000 to $8,000, $10,000 range. Those are hard cars too for dealers to find. They're hard for individuals who really are buying that first car. And so the used car business essentially has been your used car goes to a live auction and hangs out with her friends, and it's a great culture, and they buy cars, and they go back and then they sell the cars on their lot.

Darcy Howe:

Well, during COVID, guess what? Nobody can go to a live auction. The live auctions are shut down. So even these folks who maybe are not early adopters for technology, but who want and need to serve their families, feed their families and also serve their customers were forced to go to online auctions to buy. BacklotCars based in Kansas City, which when we invested in BacklotCars June of 2017, they had about nine folks down in a very basic southwest boulevard. You can imagine it, little warehousey kind of area.

Darcy Howe:

They now three years later have taken over an entire floor of the Lightwell building, the old city center square building, and have about 80 employees in Kansas City and another 80 employees out in the field. And what do they do? They have a marketplace where you can buy and sell used cars. So you can be a dealer, a new car dealer who gets a trade in, who needs to get rid of a car, or you could be a used car dealer who needs to buy a car. And now it's not just what you can find at a local auction. It's something that you could find it in Toledo, Ohio, or in Arizona, or wherever.

Darcy Howe:

So their business has doubled in the last four and a half months. Doubled. And their business has gone up 60 times since we invested three years ago, six up revenue, 60 times revenue. You see the employment that they have. You see the numbers they're creating. This is the kind of company that something can happen. There is always something going to happen. They haven't had a liquidity event yet, but this is something where our investors will make a significant percentage assuming that all continues in the right path of their investment, actually a significant percentage of the entire fund just from this one company.

Kelly Scanlon:

Right.

Darcy Howe:

So that's one that I think is really amazing during the pandemic where really it's a paradigm shift in used cars.

Kelly Scanlon:

Yeah. I like that example because I think right now when people think about technology companies are going gangbusters, they're thinking more about the Zooms of the world, the virtual meeting type of software platforms, and really it's cutting across all industries. Do you have some other examples you can give us?

Darcy Howe:

Yes. I do have anther example. CC Capital, the mergers and acquisitions arm of Country Club Bank, called us and reached out about a company called Cariloop because Cariloop was looking for investors and CC Capital happened to have a relationship and said, "Hey, you guys want to take a look at these guys." And they are not by the way in Kansas City. They're based in Dallas. So why would KCRise Fund even invest in something based in Dallas? And I'll tell you that in just a moment after I tell you what they do.

Darcy Howe:

Cariloop is a technology platform with human beings they call care coaches who help families at that time when you need something you've never done before. Mom needs to go to a nursing home. Your child has just been diagnosed as autistic. And today, the big need, which is why their business is just going gangbusters is childcare.

Kelly Scanlon:

Of course.

Darcy Howe:

Now any entity that has Cariloop, and they've primarily been an employee benefit for large corporations, they're going to be branching out in other ways, but if you're in a company that has Cariloop as an employee benefit, you can call them and they'll assign one of their care coaches to help you find that childcare situation or that nursing home, especially when we don't all live in the same city for mom or dad lives in a different city, or you need to send your autistic child to a school that might not be close by. You might need scholarships. You might need... Who knows what you need? They have human coaches, but who have a very sophisticated technology platform that helps put all of your medical records together, et cetera. So that's a really interesting, again, basic business, particularly important today during the pandemic when people have childcare situations that are ever changing.

Darcy Howe:

And why did we invest in Cariloop, which we ended up investing in Cariloop, is because they have lots of connections already to Kansas City through some of their investors and some of the folks that they are doing business with such as Lockton and Holmes Murphy, but also they would like to build out part of their business in Kansas City. So we have a university investor who said they want to create a care coach accreditation program. We have a number of corporations who now are looking at Cariloop to put them on their platform because of our introductions.

Darcy Howe:

So Kansas City should feel really confident that not only can we grow them here, but we can actually attract companies from outside of Kansas city to build out their company and create jobs in Kansas City. And we're grateful to Country Club Bank as an investor in our fund. And you don't have to be an investor in our fund to be able to help us that way. If you know of a customer that you can go to kcrisefund.com and look at our portfolio. And if you think there's a great introduction that you might be able to make for one of these portfolio companies to someone that you know, we would be all ears about that. And that's how the community helps these companies to be successful.

Kelly Scanlon:

That's a great point because I think a lot of times people do just think in terms of the financial side of things, and you're also looking for good companies to invest in, and that might be somebody that lives down the street from you or a family member. And so you need those referrals. You need those warm introductions like that. Again, go out to the website at kcrisefund.com. And there's a space for you to do that. You are talking about the results of your survey. And I want to go back and ask you about wages. You talked about jobs, but how do wages in these companies compare to wages in more established companies?

Darcy Howe:

Oh boy, Kelly, am I glad you asked. You just teed that up for me, didn't you?

Kelly Scanlon:

I did.

Darcy Howe:

I believe the average wage in Kansas City is in the low to mid $40,000 a year. And granted in our portfolio companies, there are folks who have software engineering degrees. And so they are obviously well-paid and paid above the average wage. But the software engineers only represent 25% or 30% of the company. The rest of the company are just regular business folks, customer success, enterprise sales, accounting, you name it. They are your regular business.

Darcy Howe:

So what's really interesting about the average wage of these small companies, you think, boy, they probably don't pay much, the average wage is over $90,000. $90,000. I think really, for the times we're in today, the other really interesting thing is, is those who were not in the majority all through the history of the United States figured out who had grit and ideas and figured out how to build companies, right? We have main street company. We have all kinds of companies.

Darcy Howe:

It's the same as true today. We have founders who are immigrants or their parents were immigrants, founders who are not majority in race or gender and their employees too very much look much more like the makeup of Kansas City than maybe some companies in our region do. So I think the early stage companies have attracted a certain sort of gritty independent person. It's not about what degrees or where you went to school. It's really more about, can you wear many hats and can you be nimble and really just do whatever needs to be done to get the job done. And there are lots of people like that in our community. And they cross all boundaries of socioeconomic race, age, you name it.

Kelly Scanlon:

I'm glad that you brought that up because diversity in the workplace also creates diversity of ideas. And that's what you're looking for here. That's how innovation occurs. And to have everybody that looks the same thinks the same, you're going to get the same.

Darcy Howe:

Yes. Oh no doubt about that's why innovators are attracted to people who will challenge them, attracted to those who have new ideas. Well, let's try it this way. It's a very low hierarchy kind of business. It has been very freeing for me. I had a wonderful career in a Fortune 50 company, but it's so wonderful to see how any idea can go, right? They want ideas. And we're innovating all the time as a fund and how we serve the community of our portfolio companies and the community at large in terms of educating and growing more early stage investors. So we're having a ton of fun and I may be doing the best work of my very long career.

Kelly Scanlon:

You talked a lot about what the KCRise Fund has done to elevate early stage business success here in Kansas City and how it's really elevated the community. What do you see its role in building the future though?

Darcy Howe:

I think about Kansas City in the pioneer days when we were first started, who came out to Kansas City? They weren't the people who were comfortable in their Boston or New York homes. They were the folks who went out and were willing to go into the unknown. Our history as a city is very much entrepreneurs and innovators. So I think we're just getting back to our roots frankly of this. So you look at the future of our country is the same as the future of our city. We got a lot of opportunity. We want opportunity for all. And entrepreneurship is a very important part of the economic future of our region is high paying cool companies that are growing, creating tax revenue and jobs. And all of that matters because if we want the future... Another north star for me is the next generation to feel like if you're an achiever, where would you want to be? You wouldn't want to be anywhere, but Kansas City. You don't need to be in another city in order to have a great career. You can do that right in Kansas City.

Darcy Howe:

And if these kinds of businesses are going to attract more and more young people to want to stay or come back to Kansas City and be our future, door's wide open. We welcome all of them to do that. We welcome anyone with great ideas to come to the many resources in our region to help you incubate that idea. We need a bigger funnel. We need more and more and more of this. And this is how Kansas City and our region will succeed is if we learn to support, not just financially, but in all the things that we can do as a community to help these companies thrive. I thank you so much, Kelly, for the opportunity to tell the community about this cool stuff that's going on and how it's important for all of us.

Kelly Scanlon:

Oh, absolutely. And such an important message too, but how we can all participate in this. Not everybody may be able to participate financially, but we can certainly participate through referrals, introductions, and in other ways that you described today. So thank you for creating awareness about that aspect of it too. We are all in this together and especially right now we are. So Darcy, thank you for all of the work you, your team have done here in Kansas City, and we just wish you many more successful investments.

Darcy Howe:

Thank you so much. Kelly. It takes a village, and you're a wonderful part of that village. Appreciate you.

Joe Close:

This is Joe Close, President of Country Club Bank. Thank you, Darcy Howe, for visiting with us this week to discuss KCRise Fund and the role it plays in elevating early stage Kansas City companies. Darcy champions the funding of homegrown startups with high growth potential and understands the longterm economic value of keeping them in Kansas City. As Darcy said, whether you are an investor or not, as a community, we can all play a role in creating a successful future for these companies. As a KCRise Fund investor, Country Club Bank is proud to be a part of a local network that supports and nurtures these entrepreneurs so they have the best chance of success. Thanks for tuning in this week. We're banking on you, Kansas City. Country Club Bank, Member FDIC.