Anyone who gets my reporting preferences, knows that I love two things: covering startups based outside of the Bay Area and companies out to disrupt and shake up industries that sorely need innovation, but have been slow to adopt it.
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So when I got wind of the investment thesis of a San Francisco-based firm, Builders VC, my ears perked up. Here was a firm that not only saw the value of companies in “nonsexy” industries, it actively seeks to back them. And if they’re outside of Silicon Valley? Even better.
Jim Kim co-founded Builders VC two years ago with the mission of funding entrepreneurs largely operating outside of Silicon Valley. But particularly those that are attempting to modernize what the firm describes as “antiquated industries” (think agriculture, manufacturing, logistics, trucking and oil and gas) via artificial intelligence (AI), machine learning and data analytics. To Kim and the firm’s other five partners (who are spread across the country in places like Minneapolis and Dallas), farmtech may not be as sexy as say fintech, or say connected fitness machines, but it’s no less important.
Before co-founding Builders VC, Kim had a long career in venture investing. He started at GE, helping form the company’s VC group (known as GE Ventures today). He then went on to serve as a general partner at Khosla Ventures before forming Formation 8, another VC firm.
By the end of 2017, Kim helped launch Builders VC as a continuation of the investment strategy he’d been working on at other firms. By June 2018, it had closed on a $175 million fund focused on Series A investment opportunities. Typical check sizes range anywhere from $3 million to $10 million.
“I realized that every firm needs to have some differentiation,” he told me. “You’ve got to have a special sauce, a reason why entrepreneurs want to work with you.”
For Kim, that special sauce was aiming to help entrepreneurs with their pain points with a sharp focus on companies in “nonsexy industries.”
“We analyzed how much IT spend happens in every vertical,” he said. “On one end, there were sectors like fintech where 6 to 7 percent of revenue was spent on IT. On the opposite end, there were sectors like agriculture, livestock, real estate, construction and industrial tech. Those were the spaces we found interesting.”
Because these startups often are not as attractive to many mainstream investors, Builders often found itself being “the only VC interfacing with these companies.” Since so many of them have headquarters outside Silicon Valley, the firm’s partners spend a lot of time on the road in states such as Iowa and in the midwest in general, for example, Kim said. Other locales for portfolio companies include New York, Canada and Philadelphia, Penn.
“That’s almost always required from entrepreneurs from certain industries,” he told me.
Currently, Builders VC has about 30 companies in its portfolio, many of which it started backing at the seed stage. Looking ahead, it’s more focused on Series A rounds.
“There are seed funders everywhere. When a company has some early customer traction, it’s the perfect time for us to come in,” Kim said.
Portfolio companies include SomaDetect, a three year-old Canadian startup that develops sensors and software to analyze the milk output of individual cows, and Ames, Iowa-based Performance Livestock Analytics, which aims to bring the advanced data analytics used in finance and technology to the cattle industry.
Builders has not yet seen exits, although Kim says there has been “some M&A interest.”
To be clear, Builders VC is not the only venture firm focused on investing outside of the valley (which Kim, by the way, insists is not something his firm is opposed to). We’ve also reported on the Rise of The Rest Seed Fund and Accel’s thesis of looking outside of the Bay Area for its deals. Austin-based Next Coast Ventures too is focused on backing companies based outside, you guessed it, both coasts. Then there’s Chicago’s M25 and Edison Partners, a Princeton, N.J.-based growth equity firm, which also actively look for deals away from traditional tech hubs.
As a reporter who is not based in Silicon Valley, but who used to be, I see the advantage in such a strategy. If you’re only digging for gold in your own backyard, then you’re bound to miss out on some hidden treasures.
Illustration: Li-Anne Dias