Jeff Standridge doesn’t want a repeat of what happened to Menguin Inc., so he’s working to direct more Arkansas money into Arkansas companies.
Menguin promptly moved its headquarters from Fayetteville to Louisville, Kentucky, after it was acquired in September for $25 million by competitor Generation Tux of Louisville.
The Arkansas online tuxedo rental company “couldn’t raise that money inside the state, so they had to go outside the state,” said Standridge, a venture capitalist.
So this year, Standridge partnered with Jeff Amerine and his son, Brett Amerine, to form the venture capital company Cadron Capital Partners of Conway. Cadron, which also has an office in Fayetteville, hopes to raise at least $20 million for Arkansas companies that need between $250,000 and $2 million. Standridge said that range of funding for startups is lacking in the state.
He fears that startups that can’t raise the money will follow Menguin’s example and leave.
While the United States as a whole saw an increase in venture capital funding last year, Arkansas didn’t. In 2017, Arkansas had $110.5 million in venture capital assets under management, down 3.3 percent from 2016, according to National Venture Capital Association yearbooks.
California had the most venture capital assets under management with $198.9 billion.
Arkansas was one of nine states in the country that didn’t have any disclosed venture capital activity for the first quarter of 2018, according to the MoneyTree Report from PwC, also known as PricewaterhouseCoopers, and CB Insights. Texas had 55 deals worth $747 million, and California was again the leader with 513 deals valued at $11.6 billion, the report said.
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Joe Ehrhardt, the CEO of 3E Software of Springdale, agreed with Standridge that finding venture capitalists in Arkansas is difficult if a company wants to raise between $100,000 and $5 million.
Raising $1 million for 3E Software, which provides lending portfolio management software to banks, took several months, Ehrhardt said. It reached that total in October. Had 3E Software been in another state, it might have raised the money more quickly, he said.
“If I wasn’t born and raised here, it may have been an easier decision to move, but I personally would have never moved,” Ehrhardt said.
Justin Delaney, the founder of Menguin, told Arkansas Business last week that “there’s certainly a problem with getting larger firms funded” in Arkansas.
Delaney said he wanted Menguin to stay in Arkansas, but the only company that could have bought it and allowed it to stay in Arkansas was Walmart Inc. of Bentonville.
“You kind of have this bias outside Arkansas where people believe being in Arkansas is not an enabler,” he said. “It’s more of like an anchor, which I really don’t think is the case.”
Being in Arkansas “made his career,” and about 80 percent of Menguin’s investors were from Arkansas, Delaney said.
Most entrepreneurs think they need money when what they really need is customers, customers from whom they can learn ways to improve their products, Delaney said. “Sometimes that requires money, but I feel like people get ahead of themselves,” he said.
After a company has learned how to attract customers and grow the business, then it should raise money. “That’s kind of how we did it.”
Scaling Up the Fund
For the last eight years or so, both Standridge and Jeff Amerine have been involved in early seed-stage funds for companies. Amerine led Tonic NWA Fund LLC of Fayetteville, which in 2014 raised $1.5 million. And Standridge was the CEO of Cadron Creek Capital LLC of Conway, which raised money to invest in early stage companies.
Together, their companies have invested in more than 100 companies, Amerine said. “We realized that these small $500,000 to $1.5 million-size funds can only do so much with a $50,000 to $100,000 investment,” Amerine said.
So they decided to form Cadron Capital Partners — no Creek in the name of the new company — to raise at least $20 million to invest in companies that need from $250,000 to about $2 million.
Jeff Amerine said he wanted to get involved in Cadron Capital because he feels that Arkansas has an unmet need for the investment range that Cadron will provide. And he enjoys the work.
“I’ve raised a lot of money over a long career in both Fortune 500s and nine startups,” he said. “And it’s also completely consistent with what we’re trying to do in building a vibrant startup venture ecosystem here.”
The companies that Cadron Capital Partners will invest in are cash-flowing companies that “are not quite ready for either bank finance or for a bigger growth equity fund,” Amerine said.
In addition to the standard venture capital, Cadron Capital will offer loans to companies and may charge a higher interest rate to those startups that don’t want to give up a lot of their shares in exchange for an investment.
To raise the money for the $20 million fund, Amerine said Cadron will ask for investments from high-net-worth people, the private wealth management firms that have clients with high net worths and institutional investors. He will look to investors inside and outside Arkansas.
The investors know investing in startups is risky, he said. But Amerine said he hopes Cadron will provide investors a 10-12 percent annual return. “This is still very early stage financing, and you put your best efforts in, but … we can’t guarantee anything,” he said.
Attorney Jamie Fugitt of PPGMR Law of Little Rock is handling the securities filings for Cadron.
So far, Cadron has raised between $1 million and $1.5 million and has a goal of $3 million by the end of the summer. The rest of the money is expected to be raised in the next year to 18 months.
“It’s a time-consuming process,” Amerine said. “We’re out trying to convince people that we’ve got a good value proposition.”
Once Cadron is funded, Amerine and Standridge will use their contacts to find companies that need investments. “Our goal is that 50 percent of all the deals we do will be Arkansas-based,” Amerine said. “It doesn’t make a lot of sense to raise a $20 million fund that’s intended to fill a gap and then have all the deals be from elsewhere.”
The problems Cadron will face are the same that startup companies have: raising money.
Amerine said the larger institutions, like pension funds and private wealth management firms, allocate only between 2 and 5 percent of their portfolios to investments that are high risk. “So that means there’s a lot of competition” for the investments, he said.
But once the money is raised and some success comes, then it gets easier, Amerine said. “It’s a grind for sure,” he said. “You’ve got to talk to a lot of people and get used to hearing ‘no’ a lot.”
It will be worth it, Standridge said, if companies can receive funding they need and stay in Arkansas. “That’s part of the issue that we’re trying to solve.”