The fund stems from recent efforts to clarify startup funding needs, says managing partner
Two local investors are launching a new statewide venture capital fund designed to bolster Iowa’s early-stage startup funding continuum.
Managing Partner Tej Dhawan and General Partner JD Geneser told the Business Record they plan to raise $6 million from Iowa investors for the new fund, which stems from several years of back and forth conversations in the community about gaps in early-stage capital for startups.
In preparing to put conversation into action over the last few weeks, Dhawan gauged that there is an “appetite” from investors and startups for a new fund. But he said it wouldn’t have been possible without the groundwork laid by recent efforts to determine priorities for Iowa’s entrepreneurial ecosystem.
From 2021 to 2023, he and 11 other Central Iowa stakeholders participated in MIT’s Regional Entrepreneurship Acceleration Program (REAP), during which they whittled a list of 16 growth strategies for the region down to three.
One was risk capital.
“Had those early series of meetings not happened I don’t think we would be meeting today because the clarity of thought that came through that team’s work on the research park campus, at the MIT campus and beyond is what has ultimately led us to this,” Dhawan said.
Iowa’s angel investor community has also helped set the stage, he said.
“The work that the angels have done over the last at least 13 years that I’ve known has all built up the credibility for this to happen here,” he said.
Dhawan, other members of the MIT REAP cohort and some new additions are continuing the work started three years ago through the Central Iowa Entrepreneurship Coalition, a volunteer advisory group operating under the Greater Des Moines Partnership’s umbrella. In addition to risk capital, the group is working on initiatives that address engagement between corporate stakeholders and entrepreneurs and the cultural perception of entrepreneurship.
The fund explained
Once capital is raised, the fund will consider deals with companies from anywhere in Iowa and in any industry.
Dhawan and Geneser plan to divide the $6 million into three pools that are designated for startups at different levels of early-stage growth.
The first pool is $1.2 million reserved for investments of up to $50,000 in “promising” pre-revenue companies. Dhawan said startups at this stage are likely participating in accelerators and programs like Startup Weekends or presenting at 1 Million Cups events.
It is also the point when these businesses may be applying for a Proof of Commercial Relevance (POCR) loan from the Iowa Economic Development Authority. An investment from the new fund could serve as the private match funding companies need to receive a POCR loan.
“Our goal isn’t just to fund the company but to make sure that companies that are growable, coachable, mentorable, receive support from the private and public sector concurrently,” Dhawan said.
Dhawan and Geneser would like to see startups apply to their fund and for a POCR loan at the same time.
The next allocation is $1.8 million set aside for early-revenue companies.
Markers of companies at this stage include filing provisional patents, expanding the founding team and bringing a minimum viable product to market, he said. The fund will invest up to $100,000 in startups at this stage.
The fund’s remaining $3 million will be invested in companies that fall in the gray area, where they don’t yet meet qualifications of larger venture capital firms but have put funding from IEDA and angel investors toward building out their business.
“It’s the lonely time for the founding team. We want to be there,” Dhawan said.
These companies would be starting to have monthly recurring revenue and would have a complete founding team that is pursuing the venture full time. Investment amounts will vary depending on the company’s performance and other factors.
Dhawan and Geneser intend for the fund to be a lead investor in companies at any of the three levels, filling a gap they have seen in Iowa’s early-stage funding landscape. A lead investor sets the terms of the investment, and having one in place helps position startups to seek follow-on investments from other investors.
Depending on investors’ interest in capitalizing the fund, Dhawan said there is a possibility of adding a fourth pool of money for investments in companies that are bringing in between $250,000 and $1 million in annual recurring revenue.
Increasing the size would also benefit investors in the fund. If Dhawan and Geneser can raise $15 million, the fund would be eligible for IEDA’s Innovation Fund Tax Credit, which provides individual investors tax credits equal to 25% of an equity investment in funds investing in Iowa companies. The Iowa Legislature has approved $8 million to go toward the Innovation Fund Tax Credit.
Dhawan said with a smaller number of funds in Iowa, he and Geneser think there is “both a need and an opportunity to avail of what the legislature has approved.”
“We really want to try to move that way with regards for the limited partners that would come in to be able to have the Iowa tax credit,” Geneser said.
For startups, Geneser said structuring the fund as three separate pools provides investments as companies grow large enough to qualify for larger venture funds.
“[This fund is] creating that pipeline through to that next level of venture funds. They could come in, if you will, kind of planting those seeds while they have the opportunity to observe the growth of these companies,” he said.
Much of Geneser’s career has involved working for or alongside early-stage companies.
After starting his career in accounting, he joined a startup and exited it first to a publicly traded company and then to a private equity firm. He came to UHY Advisors in 2006 where he continued working with early-stage companies on mergers and acquisitions. He is currently partner and managing director.
In the startup ecosystem, he co-founded angel investing group Plains Angels alongside Dhawan and five others and is a partner in Mango Capital.
As general partner of the new fund, Geneser will ultimately decide what companies the fund will invest in. He said his criteria for a good investment includes a demonstrated understanding of the specific industry and market entry as well as leadership skills and financial competency.
“When we invest, it can be one or two people,” he said. “They don’t have to necessarily have all those skills, but they have to be aware that they need to go acquire those skills and … understand how they’re going to fill out their team.”
Dhawan and Geneser are calling the fund the Plains Angels Early Stage Venture Fund. While the fund will fall under the Plains Angels umbrella, Dhawan said, he and Geneser will be responsible for the organization.
An investment committee will support the pair with input on different industries and areas like patents, exit strategy and late-stage investment.
“We could do virtually all the due diligence ourselves, but that would be due diligence with blinders on,” Dhawan said.
Eship Co. set to launch angel investor education efforts
Dhawan said this new venture fund marks the early stages of Eship Co.’s work in risk capital. The fund was one of five priorities established by the group’s risk capital subcommittee, and they are set to address another one this fall.
Ahead of the third annual Iowa Angel Investor Summit on Nov. 19, two workshops are scheduled to help emerging angel investors better understand what angel investing entails and “gently come into this world,” Dhawan said.
Eship Co. is pursuing angel investor education in order to keep building Iowa’s angel investing community.
“We know that through education, we will grow the foundation [of angels,]” he said.
The first workshop on Oct. 8 will cover the fundamentals of angel investing. The second event on Oct. 15 will go deeper with a panel of active angel investors sharing their approaches to investing and insight from their experiences.
The other risk capital priorities for Eship Co. are:
- Attracting a new general purpose accelerator to Central Iowa.
- Inviting new angel investors to join existing angel groups or form new ones.
- Establishing a new corporate venture capital fund to replace the expired Wellmark Venture Capital Fund.
Dhawan said the work of Eship Co. and others to fill in “missing pieces” in the foundation of Iowa’s risk capital and startup ecosystem is essential not just to existing companies but future ones too.
“If we were to look at the horizon as a 20-year horizon, we need not only funds that support the system today, but to make sure that we keep making room for larger and greater investments so that the longer term can be achieved.”
