The tech startup deal flow in Arkansas is blossoming, thanks in large part to the efforts of Innovate Arkansas to match entrepreneurs with available funding sources, both public and private.
Entrepreneurs from Tontitown to Timbuktu beat the bushes for capital like Percy Fawcett in search of El Dorado (not the one in Union County).
Indeed, in small, rural states like Arkansas especially, startup funding represents a difficult quest. Whether spawned from university research, the product of an accelerator program or an idea hatched on the back of a napkin, those early-stage Arkansas ventures looking for the seed capital necessary to develop their ideas no longer have to search in vain.
For tech-based startups in Arkansas, that quest for seed capital is no longer a symbolic trek through the Amazon for lost gold. As the state’s tech startup ecosystem has evolved over the last decade, public and private resources are providing the seed capital funding necessary to help tech founders avoid the dreaded entrepreneurial “valley of death,” that tenuous time between launch and first revenue. In what used to be a deal-flow wasteland, resources now available in Arkansas are helping churn out more viable startup ventures than ever before.
Some of the more high-profile funding mechanisms include the Arkansas Development Finance Authority, the Arkansas Science & Technology Authority, the Arkansas Risk Capital Matching Fund and the Arkansas Institutional Fund, which invests in national VC firms like Noro-Moseley Partners and Fulcrum Partners, both of which invest in Arkansas startups.
Plus, private Arkansas-based groups such as New Road Ventures, Gravity Ventures, Tonic, XCelerate Capital, Torch Fund, Tech Rock, Natural State Angel Association, the Arkansas Angel Network, Union County Angels and the trailblazer itself, Fund for Arkansas’ Future, are providing the necessary seed-stage funding of $500,000 and less.
For startups not yet developed enough to attract the big money from out-of-state investors like Noro-Moseley, that’s exactly what’s needed in Arkansas.
Innovate Arkansas Director Tom Dalton remembers when Fund for Arkansas’ Future was the only seed-capital game in town, but plenty to accommodate the number of tech entrepreneurs seeking funding.
“When the Innovate Arkansas program began in 2008, I remember a public meeting of business leaders in which Jeff Stinson, the managing director of FAF, lamented the fact that his fund, having recently completed a $6 million raise, was having a great deal of problem with deal flow,” Dalton said. “Viable, promising startups were simply not coming to FAF in sufficient numbers. Where structured funds like to see six to eight deals in a month, FAF was receiving only three or four in a quarter.”
FAF was launched officially in 2005, and Stinson said it took eight years to deploy the first $6.5 million. In the last two years, FAF’s second fund has distributed $5.5 million. (All told, FAF has invested roughly $10 million in 27 Arkansas companies.)
“That’s directly attributable to the quality and quantity of deal flow now in Arkansas,” Stinson said.
FAF prefers its potential targets be Innovate Arkansas clients before they present.
“We prefer they become an Innovate Arkansas client before they get to us,” he said. “That way we know we’re gonna get better presentations, better plans and better preperation. Innovate Arkansas has been huge for the state. Really, it created early-stage investing in the state of Arkansas.”
Indeed, the local environment has changed, drastically, for the better. While no one is mistaking central or northwest Arkansas for Silicon Valley, local tech startups can find the seed capital they need to move forward. Dalton said IA’s strategy of providing startups with free services, including aggressive mentoring as well as business and financial model development, is paying off.
“Of the more than 450 startups that have contacted Innovate Arkansas, between 80 and 85 still are active and working toward various degrees of commercial viability,” he said. “Of that latter number, 29 companies can be described as possessing the key elements to reach scalability; that is, they have the business model, management team and product market fit to allow for rapid market growth.”
Dalton said the increased deal flow attracted the growth of Arkansas angels, and the existence of more angel options helped encourage more tech-based entrepreneurs to take the plunge.
“What has also developed in the last seven years, and this has been the added benefit resulting from Innovate Arkansas, has been the increase in the number of private investment options in Arkansas,” Dalton said. “It’s important here to note that Arkansas is not unique in its local investment situation. Increasingly, venture capital funds are moving upstream, providing larger amounts to fewer companies, but those with potential higher return opportunities. As that has evolved over the years, mid-market regions such as northwest Arkansas and central Arkansas become more dependent on local angel investors moving in to address the needs of the earlier startups. And this is precisely what has happened here.”
Still, Innovate Arkansas adviser Jeff Amerine of Fayetteville’s Startup Junkie Consulting and a Gravity Ventures and Tonic fund member, said more can be done to ensure adequate seed funding sources are available in Arkansas. Arkansas needs to continue to grow its angel resources to keep Arkansas tech startups at home, he said.
In addition to FAF’s second fund, Gravity Ventures is on its third Arkansas fund and has raised roughly $2.5 million in state. Three investment groups created for the ARK challenge startup accelerator raised more than $1.5 million to fund the ARK’s third and fourth installments following its first two federally funded runs.
“It is clear that local angel investors are stepping up in Arkansas,” Dalton said. “And as these private dollars become more available, the Arkansas Development Finance Authority has matching money that can be provided on a basis of $1 to every $4 of private investment raised.”
Dalton believes early-stage financing is no longer a barrier to tech startups in Arkansas. In fact, Innovate Arkansas initiatives have helped IA client companies raise $197 million in private capital investment over the past six years.
No longer can entrepreneurs simply present an idea and ask for money, he said.
“Early-stage financing from both public and private funds is available for new ventures that can present with clear business models and defined customer development strategies.”
Early-stage investors, of course, are taking on the most risk, and Dalton thinks they want to see clear visions validated by customer demand and strong management teams with solid plans for entering the market.
The Arkansas tech startup ecosystem is meeting most early- and mid-stage obligations, Dalton believes. However, a gap still exists in the earliest stage of startup development.
“There is a recurring area of concern for Arkansas in the long run, and that is for additional pre-seed stage investment funding for university research and development and concept-stage startups with good ideas, but a commercial path that has not yet been validated,” Dalton said. “It’s in this validation stage that additional funding will be needed.”
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