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Executives, networking helped make 2015 a watershed year for VC funding

January 23, 2016

Back in 2004, ExactTarget CEO Scott Dorsey was looking to raise $10 million in venture funding for his 4-year-old email marketing startup. Dorsey reached out to a variety of firms for the round, including Silicon Valley-based Emergence Capital Partners.

The two parties tried, but weren’t able to reach an agreement for that round. They made a run at working together in 2006 and in 2009, too, and on both occasions nothing materialized. Still, Dorsey kept in contact with Emergence, one of the leading business-software venture firms in the world.

The failed talks ultimately paid off. In late 2014, not long after stepping down from his ExactTarget post, Dorsey began to hone in on what he wanted to devote the next chapter of his life to—an operation that helps build and fund software companies. He then tapped Emergence—not for money, but for feedback on the relatively unique idea—and a few months later, Emergence helped anchor a $35 million investment in what came to be known as High Alpha.

“We said, ‘We think there’s a chance to build next-generation software companies if we bring the right level of capital, ideation and expertise into the mix,’” Dorsey said, recalling his conversation with Emergence and other investors about Indianapolis-based High Alpha. “And in the course of getting their feedback on the model, they kind of raised their hands and said, ‘Boy, we’d love to be a part of it.’”

The High Alpha investment was among the biggest venture investments in Indiana in recent years—as well as a standout financing event in a busy 2015 that saw more than $100 million pumped into high-growth Indiana companies.

Many startups, here and elsewhere, secure such funding by touting their market traction, revenue

growth and other statistics, all in an effort to prove to investors that they’re good bets. However, a look behind the scenes of High Alpha and three other big venture deals last year suggests that, oftentimes, landing capital has more to do with relationships and luck than with metrics.

High Alpha

Dorsey Dorsey

About a year after Salesforce purchased ExactTarget for $2.5 billion in July 2013, Dorsey stepped down as CEO. At the time, he had no clue that he would later secure $35 million for High Alpha. But his bricklaying started early.

One key meeting took place in late 2014 at an American bistro restaurant.

Ritter Ritter

There, Dorsey met with Emergence Capital founding partner Gordon Ritter, who was trying to coax Dorsey to join his firm. Dorsey respectfully declined, telling Ritter he preferred to stay in Indiana and build something there.

“He wanted to try to find a way to do what he loved, which was starting and nurturing companies and staying in Indy to do that,” Ritter said. “And coming out to the West Coast and becoming a venture capitalist was not his interest.”

Around that time, Dorsey was approached by a trio of investors behind Indianapolis-based Gravity Ventures—Kristian Andersen, Mike Fitzgerald and Eric Tobias—all of whom had helped launch software startups, including TinderBox and Lesson.ly. The three had been bouncing around their ideas for an outfit that creates companies and has cash on hand to fund growth, and they asked Dorsey to help.

“They wanted to dedicate the next chapter of their careers to building an organization that became proficient at matchmaking new ideas with talent and putting the right amount of capital behind it,” Dorsey said. “So they reached out to me ... and I just fell in love with the idea.”

As the idea developed, Dorsey tapped the expertise of Ritter and partners he knew at Greenspring Associates, a Maryland-based venture firm that previously invested in ExactTarget. Emergence had invested in a similar model in South America, which proved to be a useful reference for High Alpha’s operational arm, known as High Alpha Studio. Greenspring offered valuable insights for the funding arm, High Alpha Capital, given its experience investing in a variety of venture funds.

Fitzgerald Fitzgerald

Fitzgerald, one of the founding partners, said, “The combination of our operating experience and their venture experience produced some really rich conversations that helped shape the High Alpha model.”

The building of High Alpha began in earnest around the start of 2015. It officially launched in April. Emergence’s investment was mainly for the operational arm; Greenspring was responsible for a sizable chunk of the funding for the venture capital arm.

In addition to Emergence and Greenspring, Dorsey helped rally other investors around the idea, including more than 50 angel investors from around the country and Hyde Park Venture Partners, based in Chicago.

TinderBox

TinderBox probably had one of the most surprising fundraising cycles last year.

Part of its $7.4 millionround came from an esteemed coastal venture capital firm that TinderBox didn’t even approach.

The firm was Greycroft Partners, whose past portfolio companies include The Huffington Post, the news aggregator acquired by AOL Inc. in 2011, and the peer-to-peer payments app Venmo, which was acquired by Braintree in 2012.

Last summer, executives at one of Greycroft’s portfolio companies, EventBoard, a maker of employee-meeting software, were giving an update and mentioned TinderBox, an Indianapolis-based maker of sales-productivity software. The reference piqued the interest of Greycroft officers, who decided to follow up.

“They were fired up about [TinderBox],” said Mark Terbeek, a Greycroft partner who’s based in Los Angeles. “So at the meeting, I decided to jot that down and go check out that company.”

Sapp Sapp

Terbeek said his firm did its research, then contacted TinderBox CEO Dustin Sapp. More due diligence followed, including surveys of TinderBox customers, and Greycroft officers flew out to Indianapolis a few times to meet the team.

“I didn’t know Mark [Terbeek] before one of his associates reached out to us, but we very quickly got to know each other,” Sapp said. “He has Indiana roots, he’s a DePauw grad, and likes the region quite a bit.”

At the time, TinderBox was in the midst of a so-called insider round, which involves existing investors. TinderBox raised $2 million from those investors, but board members and executives decided to contact a short list of outside venture firms, to broaden the round.

Aquilano Aquilano

“Interestingly, Greycroft wasn’t initially on our short list,” said Don Aquilano, TinderBox board member and managing director at Carmel-based Allos Ventures. “They actually reached out to Allos for an introduction to the company.”

The process moved quickly, Aquilano said, because Greycroft appeared sold on TinderBox from its own research. He said new investors bring to the table not only another wallet that can be tapped for future rounds, but also “another set of experiences and another Rolodex.”

SmarterHQ

SmarterHQ raised $8 million last summer, a round made fairly smooth by the company’s relationship with heavyweight venture firm Battery Ventures.

The Indianapolis company sells contextual marketing software, which helps retailers tailor and automate customer interactions. It received $7 million from Battery in 2013, the latest Indianapolis bet for the Massachusetts firm, which also invested in Angie’s List and ExactTarget.

Osborne Osborne

As SmarterHQ was gearing up for the new round early last year, Battery partner Neeraj Agrawal arranged a connection with New York-based Simon Venture Group, the venture arm of Simon Property Group Inc. that targets retail investments. SmarterHQ CEO Michael Osborne said that, after the introduction, he and Simon Venture Group head J. Skyler Fernandes had a few phone conversations and a face-to-face meeting.

“These guys all hang out at the same conferences and they see each other at various events,” Osborne said of Simon Venture Group and Battery Ventures. “I believe there was a conversation about SHQ at an event like that and then an intro was made to me to further the conversation.”

focus-vc-table.gifSimon Property Group declined to make Fernandes available for this story.

The other major investor in SmarterHQ’s $8 million round was Scott Booth, founder of New York-based Eastern Advisors and its private-equity arm, Lead Edge Capital. Booth had known Osborne from when he was an executive at Bazaarvoice Inc., which went public in 2012. The two touched base every so often, but a nudge from Battery last year got Osborne and Booth talking about investing in SmarterHQ.

“Both of them entered the process relatively late,” Osborne said of Booth and Simon Venture Group. “We were engaged in a number of conversations and, probably a month before closing, both of them got involved.”

Booth said SmarterHQ wasn’t a fit for an investment from Lead Edge Capital, but it was a fit for him as an individual investor. He made the investment based on the merits of the company, but it helped to know Agrawal and Osborne.

“There’s a tremendous difference in terms of getting comfortable with an investment opportunity when you know that people who are very smart and very talented are already involved,” Booth said.

MOBI

MOBI had operated mostly under the radar in the Indianapolis tech community until last spring, when New York-based Bregal Sagemount sniffed it out and plowed $35 million into it.

MOBI sells software that helps companies manage their mobile devices, including cell phones and tablets. Executives launched the company in 2009, initially funding it themselves using proceeds from a previous business venture, as well as debt and cash from friends and family.

In 2014, as the company began contemplating venture capital, Adam Fuller and his partners at Bregal discovered MOBI through market research.

“We identified that there was a really strong need to solve some of the complexity around the mobility environment for large enterprises,” Fuller said. “And when we did our analysis, there didn’t seem to be another company in the market that had the software capabilities that MOBI had.”

kraege-scott-mug.jpg Kraege

MOBI had less than $5 million in annual revenue in 2011 and increased that 466 percent by 2014, CEO Scott Kraege said. The growth spurred company officials to take a step back and assess how fast they could grow over the next three years by bootstrapping versus obtaining outside growth capital.

“We knew that we could probably double our business organically,” Kraege said, “but with outside capital, we knew we could quadruple it easily.”

Kraege said that, once company officials decided to pursue venture capital, they talked with about 60 potential investors over six months and met in person with about 40, including Bregal. The get-together with Bregal at a Pacific Crest investor conference in San Francisco last spring was not a deep dive, but it allowed Bregal partners to familiarize themselves with MOBI executives, and vice versa.

In the weeks that followed, the Bregal team flew to Indianapolis three times for deeper talks. Fuller wouldn’t disclose the size of the stake Bregal acquired, but said it was less than 50 percent and “significant enough” to warrant a board seat.

He said the cultures of MOBI and Bregal matched, and the venture firm’s capabilities aligned with MOBI’s interests in such areas as international expansion.

“We’re a pretty young firm from an age perspective,” said Fuller, who helped found Bregal in 2012. “So we get along well with companies like MOBI where you have young entrepreneurs who have a lot of energy and are looking for investors who can bring that level of energy to the table, too.” 

Fuller said that, since its founding, Bregal has reviewed 3,000 investment opportunities, taken a close look at 120, and invested in 16.•

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