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Second Stage Investing: Supporting The “Unsexy” Entrepreneur

In a recent article in Entrepreneur, CEO and Founder of Venture for America, Andrew Yang, wrote candidly about his views on what kinds of startups he looks to invest in. Labeling these companies as “unsexy” by the standards often used to describe most fledgling businesses who garner buzz from various media outlets, Mr. Yang elaborated on what “Unsexy Entrepreneurship” means to him:

It’s the unglamorous, obscure, brick-and-mortar business with an unclear ceiling. It’s a company you start not with a desire to be huge, but because there’s a problem you’re driven to solve. You work with normal people, like the folks in upstate New York. If you create jobs, they tend to get filled by other normal people.

Breaking this down even further, Mr. Yang details what is commonly accepted as sexy in entrepreneurship, and conversely, what may not look quite as attractive on a venture capitalist’s list of investments, but is an intelligent choice nonetheless.

A guide to sexy versus unsexy entrepreneurship

Source: LinkedIn

What Makes Second Stage Sexy

At Evolution Capital Partners, we found Mr. Yang’s description of “unsexy” companies to be markedly similar to the profile of leaders whose small businesses we look to partner with. While there are sometimes opportunities to make a great deal of money investing in a young startup, it is the second stage company that brings with it proof of true investment potential.

These second stage businesses aren’t struggling – they’ve already proven themselves in the marketplace. Through their own creative funding efforts and wise decision-making, they’ve built a solid reputation in their region, and an equally strong rapport with their customers.

And as you can see by viewing our list of companies we’ve invested in, neither the industries nor the cities they operate in can be categorized as “sexy”. Yet, every one of them was thoroughly evaluated and discovered to not only be scalable as an investment, but also filled with quality team members and leaders who wanted to take their established organization to the next level – a level that’s positively impacted both their communities and their bottom line.

For Every San Francisco There are 10 Cities like Cincinnati

Looking at Entrepreneur’s list of The 100 U.S. Cities Where Businesses Received the Most VC Funding from earlier this year, we discovered some interesting trends in where money is being invested across the United States. While the San Francisco area still holds the lion’s share of venture capital investments, dozens of “unsexy” cities collected respectable funds from firms who believed in their organizations, including Fort Lauderdale, FL, Denver, CO, and Provo, UT.  A nice trend to see.

In a free, capitalist society there are plenty of opportunities to take an idea on paper and turn it into a company. But as shown in our infographic The Science of Small Business, 7 out of 10 of startups fail within their first two years of business, 5 of the next 10 last five years, and only 3 of every 10 of those who make it this far get to celebrate their 10-year anniversary. This is why only about 1 of every 100 businesses scrutinized by venture capital firms eventually receives funding.

The secret then is knowing where to invest, who to invest in – and when.

Bringing “Unsexy” Back

So, to answer Mr. Yang’s request to bring “unsexy” back, Evolution’s in!  And for those “unsexy” entrepreneurs that are solving problems, have proven business models (pushing cash to the bottom line), are reinvesting in their businesses, and see an opportunity to scale into something with an even bigger impact than they are already having, first off, congratulations!  Secondly, if you are looking for a partner to help you reach your vision faster, or perhaps you have hit a road block as you take that next step, we would be honored to hear from you.

 

Posted by: Jeffrey Kadlic A co-founder and managing partner at Evolution, Jeffrey has spent the past 15 years as an investor and private equity professional with a true passion for working with dynamic small businesses. @kadlic

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