Nebraska startups attracted as many deals in 2013 as there were in the previous five years combined, and local companies are increasingly capturing the attention and investments of investors in startup hubs like Silicon Valley and New York City.
Securities and Exchange Commission filings and data from New York-based venture capital database CB Insights show at least 23 Nebraska-based startups attracted around $43 million in investments last year.
Leaders from state funds and investment groups say momentum is growing behind the state's startup community and what some investors might perceive as local weaknesses — midsize markets with a dearth of options for multimillion-dollar investments, for instance — might actually help local startups attract outside capital in some cases.
“If you're that firm trying to commercialize technology out of Stanford, you're competing with a lot of venture capital and institutional money. That money now realizes there's a lot here (in Nebraska) and they can make money here,” said Mark Crawford, CEO and investment manager at Invest Nebraska, a Lincoln-based nonprofit.
“As more institutional money comes to this state and has some wins, it's just going to follow on.”
Helping drive much of the venture capital that landed among Nebraska startups were in-state organizations like Dundee Venture Capital, Nebraska Angels and Invest Nebraska, which advise local companies, directly invest in them or help them find investors.
There were also at least 11 venture capital firms from outside of the state — hailing from places like New York City, Chicago and Silicon Valley — that placed bets on local companies with high growth potential. With out-of-state angel investors, these firms contributed to at least seven deals worth a combined $19.3 million last year.
Supplementing outside funds are investments from local funds and angel investors.
Laura Classen, executive director of the Nebraska Angels, said local angels invested about $2 million in eight companies last year. The group's membership increased by about 20 percent in 2013, and Classen noted improvements in deal flow in Nebraska and throughout the region.
Nebraska Angels typically invest between $150,000 and $750,000, a range that venture capital firms usually don't work in.
Unlike angel investors, venture firms “don't necessarily care where the investment is,” according to Dan Hoffman, chief operating officer at Invest Nebraska. “They're looking for the best deals,” he said.
The best deals, of course, are ones in which investors see a return on investment, but most startups never return investors' capital.
The upside is that companies have gotten considerably cheaper to get off the ground, said Mark Hasebroock, founder of Dundee Venture Capital in Omaha.
“Five years ago, something that would have cost $1 million now costs a fraction as much,” Hasebroock said. “With the ability to start up with a fraction of the cost and less technology required to do it, you begin to dissolve (potential investors') aversion to risk.”
Meanwhile, additional out-of-state money continues to show interest in what's happening here.
William Fisher, a partner at Treetop Ventures in Omaha, has noticed “more contacts than usual” from out-of-state firms. He also said a “very high-visibility and long-term investment firm” recently signaled interest in making local investments.
Even though venture capital deals often include an investor retaining a say in how companies are operated, advances in technology have made long-distance relationships easier to manage between far-away funds and local startups.
Ryan Broshar, managing partner of Confluence Capital Partners in Minneapolis-St. Paul, said “the game has changed significantly” for software-based startups like Lockr in Lincoln, which received $250,000 in funding in December through Broshar's firm and Dundee Venture Capital.
“We do lots of Web-based technology investments and they may be located somewhere else, but their market is instantly national,” Broshar said.
New York-based Company X invested in another Lincoln-based startup called Travefy Inc., which developed a Web-based tool that allows private and commercial users to make travel plans. The venture capital firm operates as a subsidiary of Campus Evolution Villages, which owns and manages collegiate student housing in 13 states.
That translates to about 10,000 college students to which portfolio companies like Travefy can be marketed. Travefy has a Web-based tool that allows users to invite people on trips, find a hotel, pick dates and track expenses. At the end of the trip, Travefy nets the expenses due, sends a bill, collects money and pays it to those who are owed.
Echoing Broshar, Scott Lombart of Company X said Travefy's mass appeal supersedes geographic barriers. He also noted the venture capital buck can go a lot further in a market like Lincoln, where labor and rent are far less expensive than in New York.
“You have a longer runway to use the capital you raise,” he said.
According to data from Pitchbook, another venture capital database, software startups made up 38 percent of all venture capital transactions in 2013. More than half of the Nebraska firms listed in a MoneyTree report from Pricewaterhouse- Coopers/National Venture Capital Association were software companies. And, as Hasebroock noted, one benefit they offer is relatively low capital requirements.
Another advantage is their ability to license intellectual property and “keep competitors at bay,” Treetop's Fisher said.
Still, Nebraska startups in other industries also attracted significant investments last year.
Private investments totaling $3.65 million helped Gretna-based Pellet Technology USA, a biotechnology and manufacturing firm with roots in agriculture, continue to grow. The company processes agricultural residue like corn stover — the stalks, leaves and husks left over from harvest — into products used as a clean power supplement that can be burned with coal for energy or as feed for livestock in lieu of corn.
“We're definitely a startup, but we're hoping to break ground on a very large commercial facility this year and that's the next stage we're at,” said Russ Zeeck, an owner and chief operating officer at Pellet Technology USA.
Virtual Incision Corp., which develops surgical robotic instruments in Lincoln, received $3 million, while Pacha Soap Co. in Hastings got $20,000 for its manufacturing business.
Trak Surgical, an Omaha biomedical startup that has developed technology aiming to simplify orthopedic surgeries, raised $3.2 million in 2013. That capital included investments from angel investors from California, Texas and Arizona, as well as $500,000 from Invest Nebraska.
Virtual Incision Corp. and Trak Surgical each were developed through efforts by UNeMed, which commercializes research from scientists in the University of Nebraska system, including the University of Nebraska Medical Center.
Trak CEO and co-founder Bruce Lichorowic spent the last 30 years in the San Francisco Bay Area, and while his West Coast connections have already proved fruitful for the startup, he called the Invest Nebraska funding “critical.”
“That first half-million is tough to raise,” Lichorowic said. “The Invest Nebraska money really took us over the edge and got us going.”
Like Lichorowic, Invest Nebraska's Crawford also sees value in a home-grown approach to funding businesses.
“Coming from the startup culture on the East Coast, I have noticed the community level of participation and support is greater here in Nebraska than it is in Boston,” Crawford said. And something else is different here.
“A guy on the East Coast won't say, 'I'm from Chatham or Boston and it's important for me to keep my kids here and start a business,'” Crawford said, while people here often seek to stay put. “I think that's a huge deal.”