The VC boom reaches flyover country | $10M fund for South Asian women entrepreneurs | Performance numbers for Insight Partners

Today we’re tackling the crazy third quarter funding totals from a different angle — how the boost has reached micro markets like South Dakota, Iowa and Arizona, a new venture fund aimed at backing South Asian women, how Insight Partners and other top-tier venture firms have performed over the last decade and some notes from both the Forbes Under 30 and Female Founders Alliance summits that took place earlier this week. Let’s get going.

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“Capital is getting to basically every corner of the United States,” Kyle Stanford, a senior venture capital analyst at PitchBook tells Midas Touch. “What is most surprising is that it’s not leaving New York or the Bay Area, those areas are still growing their deal count and dollars invested too.” While one could chalk this trend up to a “rising tide lifts all boats” situation or point to the impact remote work has had on the industry, it's a bit more complex. 

The numbers: But first, the numbers. South Dakota’s venture scene is starting to blossom. The Mount Rushmore State saw $145 million invested into its market this quarter alone, according to data from PitchBook. While this doesn’t beat some of the bigger single Series A rounds we’ve seen, South Dakota’s total includes more single-quarter volume than the state has seen in the prior six years combined, $138 million. Iowa also recorded its highest quarter with $113 million invested, which is 37% higher than its previous record quarter, $71 million. The Southwest saw its own small-market success too, with more than $566 million invested in Arizona last quarter, a 28% bump above its previous record quarter, $405 million, and a 69% boost above the average investment volume per quarter of the last five years, $173 million. 

The reason: Mike Asem, a partner at Chicago-based M25, says this marks the acceleration of a few trends. M25, which focuses on pre-seed and seed deals in the Midwest, has been tracking the changing dynamics in its area, many of which he says are likely playing out in other regions, too. Even a few years ago the startups from smaller markets were plagued with “early exit syndrome,” with founders perfectly happy to sell out $100 million instead of staying private longer, Asem says. That's the kind of return profile guaranteed not to excite big-name investors. But now there have been enough “one-off” success stories in small markets like Ohio and Indiana to shift the mindset in entrepreneurs to aim bigger, Asem observes. He believes this switch is helping attract more coastal VC attention and sparking more founders to stay and grow in the region too. 

Increased competition is another likely reason these markets are seeing more interest. Firms are flush with capital, but losing out on term sheets, and are hunting for new proprietary deal flow outside the coastal bubbles. Asem, says he personally invested alongside firms like Forerunner Ventures, widely considered a top U.S. investor into early-stage consumer startups, twice this year; the firm hadn’t invested in the region prior to the pandemic. What’s more, he says, deals in places like Columbus, Ohio and Pittsburgh are also more competitive now than two years ago.

There’s a potential waterfall effect from these firm expansions, Asem says. When M25 “accidentally” became one of the most active VCs in Nebraska, startups took note. “We wrote a check in Nebraska and 99% of VCs have never looked there,” he tells Midas Touch. “When [funding rounds] happen in a lot of these markets it's still really meaningful. When you are that one of not many companies that has done that in Lincoln, Nebraska or Toledo, Ohio, [other founders] want to do the same and ask who your favorite investors are.” He says this can create a flywheel of future deals. 

Once firms start dipping their toes into smaller markets, there’s likely no going back, Stanford and Asem agree. Attractive opportunities everywhere and valuations are typically more reasonable outside the hubs. “Everything is a record, it’s higher than it’s ever been, it's $70 billion higher than it was two quarters ago,” Stanford says. “It’s going to find its way to these small ecosystems. The U.S. venture capital markets are in a great position and helping out those smaller areas should be exciting.”

 That’s why Sankaran cofounded Neythri, a non-profit focused on building a professional community for South Asian women, one which she envisioned building into a fund. This past week, Sankaran closed the first fund for Neythri Futures Fund, a $10 million vehicle consisting of South Asian women limited partners and male allies, focused on investing in women cofounded startups.

 The org: Neythri is intended to be a cross-generational organization for both senior and junior women professionals, as reflected by its cofounders. Chitra Nayak is a former Salesforce executive and board director at Intercom and Infosys. Representing the next generation is cofounder Sruthi Ramaswami, an investor at ICONIQ Growth. Launched just prior to the pandemic hitting North America, Neythri shifted online for professional and leadership development in 2020, and now counts nearly 2,000 members, one third of whom are young professionals earlier in their career.

 The fund: Initially an investor in other venture funds as an LP, Sankaran says she backed several women-led funds, but saw “untapped potential” to focus on South Asian women. Initially setting out to raise $3 million minimum, Sankaran sized the fund to $10 million, the largest allowed by regulators to still be able to have up to 249 backers. Sankaran says that 90% of those LPs are South Asian women; 70% are first-time investors. The last several million came in fast once several influential male allies in the South Asian community invested and spread the word. 

Nayak and Ramaswami are LPs but not actively involved; Roli Saxena, president of the AdRoll unit of NextRoll, serves as a partner on the fund’s investment committee. Investments so far include developer platform Alchemy, ad-free search engine Neeva, data sharing platform Vendia and ecommerce cloud platform Webscale.

 The strategy: Neythri’s first fund is sized like an early-stage one, but it’s not focused on early-stage checks. That’s in large part due to the high proportion of first-time investors backing the fund, whom Sankaran wants to gain confidence through a slightly less risky first portfolio. “Hopefully this is not the first fund they invest in, but the beginning of their investing journey,” she says. So Neythri will write $50,000 to $500,000 checks into companies all the way to pre-IPO, co-investing alongside other VC firms who lead rounds. NFF will back any startup with a woman in a decision-making role, either as a cofounder, member of the leadership or board of directors. Supporting South Asian women entrepreneurs is a bonus, Sankaran says, and the firm has already backed several, but not a requirement.

 The mission: Even in Silicon Valley, Sankaran says it is common for South Asian families to segregate by gender at gatherings, the men in the living room “talking shop,” the women in the kitchen focused on the cooking and family updates and concerns. Sankaran has always felt more comfortable in the living room, she says. “Many of these women are equally accomplished and capable,’” she says. “I wanted to break those stereotypes, and I realized there was a huge appetite for it. Women really wanted to come together.”

When Sankaran came to the U.S. from India in 1987, women engineers were more scarce than the 12% currently working in Silicon Valley. More recently, a combination of women entrepreneurs arriving from India, increased representation in engineering programs and in the tech ranks has coincided with an increased awareness of the power of representation.

 “The biggest takeaway is that community is very powerful; never underestimate the power of community,” she says. “When I started out, I talked about community and everybody would say, ‘Oh, that’s a very nonprofit thing to do.’ But it actually makes economic sense, and the fund is a direct testament to that.” Sankaran is confident that NFF can deliver returns just like any other successful fund. A year from now, she hopes to be wrapping up investments from the first fund; she hopes more women investors will join over time, too. “I don’t have to be the managing partner of every fund, because I want to grow that pipeline,” she says. “Hopefully this will be a great training ground.”

But looking at other vintage years tells a different story — not a bad one for Insight — but rather a great one for top-tier venture funds in general over the last decade. When looking at Insight’s vintages from other years, the return metrics pretty much fall right in line with other brand-name funds from the same year. Insight Fund VIII (vintage 2013) has a 22.5% net return which is a solid and is also about equal to DFJ’s Growth fund from the same year which is at 24.4%. Looking at 2015, Insight Fund IX has a net return of 33%, which is great, while NEA Fund 15 is at 22% and Summit Venture Partners Fund IV is currently at 33.7% — all good. Insight declined to comment. 

While any of these numbers would most likely make an investor happy, it will be interesting to compare how these vintages perform against the ones actively deploying now into the best exit conditions the asset class has ever seen.

The biggest advice from both Boyce II and Johnson is that those who are considering spinning out or launching their own fund should just dive in. “Especially to my Black, Latinx and indigenous founders out there, a lot of time we might deal with imposter syndrome and say ‘I need to wait.’ No. Just do it,” Johnson says. Boyce II adds that the potential rewards from trying  easily outweigh the risks. “Worst case scenario, you end up going and joining another firm,” he says. “There isn’t a tremendous amount of downside if you think long term.”

The pair also encouraged potential emerging managers against being apprehensive about only being able to write small checks to start because value can be provided in other ways. “You can provide sweat equity,” Johnson says. “Fortunately we have all this expertise and experience that we are able to really provide that value add, you don’t need to lose sleep at night over this part, here is the best practice etc.” Working alongside founders in that fashion can also create better alignment, Boyce II says, as founders may feel more on a level-playing field with a VC that has recently gone through what they are doing for the first time like fundraising and building a business. 

FFA: Midas Touch also popped into  the Female Founders Alliance Summit this week just in time to chat with the organization about its breaking news. The group announced that it has raised a $9 million fund to back women and non-binary founders; it’s also rebranding to Graham and Walker. The name is a nod to Katharine Graham, the first woman to serve as CEO for a Fortune 500 company, and Madam C.J. Walker, the first woman to become a self-made millionaire, entity founder Leslie Feinzaig says. 

This marks a big step for the organization which started as a Facebook group in 2017. Feinzaig was having trouble raising money for her startup, Venture Kits, and discovered that she wasn’t alone in the struggle. The Female Founders Alliance quickly grew and members started to introduce each other to investors and the group began running its own accelerator. Eventually it was obvious the Facebook group  could be something bigger.  “One step at a time, we grew and grew and we kept doing the things that were working,” Feinzaig says. “Through that first accelerator that was for the moment where I was like there is real deal flow here.” 

Knowing personally how hard it is for women to raise money for their startups, she went out to raise her fund in 2020 hoping for at least $3 million and getting more than $9 million from a diverse group of 110 investors. Midas Touch also caught up with Julie Sandler, a managing director at Pioneer Square Labs and one of the limited partners in the fund. Sandler says she has worked with the organization for the past few years and the opportunity to invest was a no-brainer. “Leslie, she is just undeniably a community leader and advoate for woman and non-binary founders,” Sandler says. “She’s also an investor with great instinct.” The fund will start investing in January.

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