When 2-year-old Project Canary started out for a second round of funding, the startup was inundated by investors wanting to get in on the Denver company’s potential growth. CEO Chris Romer credits the $111 million funding tsunami to the convergence of four massive waves.
First, its core business helps oil and gas companies better collect and analyze methane emissions data to fix leaks, which meets regulatory requirements. Secondly, that appeals to eco-minded buyers in a budding market he calls “responsibly sourced gas.” The climate-tech company also caught the attention of investors who want to support socially minded, for-profit companies. And fourthly, potential clients themselves now are competing to see who can be greener.
“To be candid, we had offers of over $300 million to $400 million in capital. We chose to take only $100 million, which is kind of funny to say for a little startup,” said Romer, a former state senator and a son of former Gov. Roy Romer. Romer was on the founding team of his daughter’s company, Guild Education in Denver. “We chose the (investors) that we thought understood those four dynamic forces, those four waves.”
Similar reasons have driven private investors to put more money — around $6.8 billion in 2021 — into Colorado’s fastest-growing startups. There’s more wealth willing to gamble on the next big thing, and Colorado is one of the top states to find such startups.
The value of deals here was nearly triple that of the last record set in 2020. Split between 583 companies, the average deal value grew 63.6% in 2021 from the prior year, according to the “The State of VC Colorado” report by Access Venture Partners, a Westminster venture firm now in its third decade of finding new companies on the verge of massive growth.
“If you look at the data, the average round size just continued to go up and to the right,” said Kirk Holland, a managing director at Access Venture. “And in Colorado, we probably have gained share based on the great dynamics here in Colorado around company building and talent. I think we’ve gotten more than our fair share of the growth in the last few years, which is great.”
Just a few years ago, it was an eye popper when a Colorado company raised more than $40 million or $50 million. But Project Canary’s deal doesn’t rank among last year’s top 12 in Colorado. The largest, raised by Sierra Space in Louisville, a subsidiary of Sierra Nevada Corp., was a gobsmacking $1.4 billion in November.
It’s a founders market as many report getting multiple offers from investors, which in turn is helping company leaders better value their own business. Higher valuations also are attributed to rising employee wages and other costs. Raising $50 million when a competitor raises half that amount can give the company a leg up on competing for talent, Holland said.
But there is concern that the funding environment is moving too fast for entrepreneurs and investors to make sure they’re a good fit. That can happen at the large firms that do hundreds of deals a year hoping that a handful hit a giant gold mine. Local investors must be more judicious, but increased competition from out-of-state investors is pushing everyone to make decisions faster, which isn’t always better.
“As startup investors, we like things that move fast. That’s sort of what we’re attracted to,” Natty Zola, a VC at Matchstick Ventures in Boulder, said during a recent venture capital panel discussion sponsored by Access Venture Partners. “But it makes it hard sometimes for founders and investors to really matchmake in a way that moves beyond just a transactional relationship.”
Billions of reasons outside of Silicon Valley
The funding phenomena wasn’t just in Colorado. VC exploded nationwide last year. The value of all U.S. deals totaled $330 billion in 2021, or nearly double the prior year’s record, according to data from researcher PitchBook and the National Venture Capital Association.
“Larger deal sizes and valuations is what is to be expected when there’s so much interest,” said Kyle Stanford, PitchBook’s senior VC analyst. “We do see around the U.S. a lot of deals are getting multiple term sheets or multiple offers just to get in on the deal. So if founders and companies have a strong story and really strong traction, they’re really able to close the deal that they feel is best for them. It’s a very founder-friendly time in the U.S. right now.”
About half of money went to companies in California, home to many of the major venture capital firms known to require their investees to relocate nearby.
Bonusly CEO Raphael Crawford-Marks chuckles at that sentiment.
“I had some Bay Area VCs just up and tell me (pre-2017), ‘You really need to move to the Bay Area if you’re going to be successful,’” recalled Crawford-Marks when his company was based in New York. “Like, New York’s not even good enough.”
Bonusly picked Boulder, as did Crawford-Marks and his young family around 2017.
“We had an advantage in hiring,” he said. “The costs for doing business were much lower, labor costs were a bit lower, office rents were way lower. Taxes were lower.”
Bonusly, which provides a digital tool to recognize and reward employees, saw business take off in the pandemic as companies went remote and used Bonusly’s service to improve morale. It raised $9 million from venture capitalists in 2020.
The cost of doing business in Colorado has increased, and that will have to be considered in the next funding round. Bonusly now hires from all 50 states so it’s competing for talent nationwide and “having to pay market-rate salaries,” he said.
But growing a business — Bonusly tripled its staff to 120 people in two years — is also about valuing location differently than VCs once did. “Those advantages have gone away. But of course, I still love living here and I’m not going anywhere,” Crawford-Marks said. “The quality of life is great.”
Quantum Metric not only isn’t in California, it’s not even in Denver. It’s based in Colorado Springs — and it raised $200 million last year, landing among the state’s top five deals.
“I think the world’s woken up (that) it’s not just Silicon Valley that’s able to create value in tech companies,” said CEO Mario Ciabarra, who started the software company in 2015.
While it certainly helped that Quantum Metric’s customers are fans of the service and continue to renew their contracts — it has a 98% gross retention rate, he said — the billion-dollar valuation that made it the first Colorado Springs unicorn is thanks to an ongoing effort by the local business community. Staff has grown to 425 people, from 172 before the pandemic.
“What we’re seeing is this blossoming, laying a few seeds and watching them grow here,” Ciabarra said. “In fact, Vance Brown, I think he had the largest investment record here in Colorado Springs. I’ve spoken with Vance. He’s been a mentor and adviser for me and I’m really excited here at Quantum to mentor the folks that work here as we continue to grow. Some people will depart and create their own startups and (I can) help them create their successes.”
Brown founded Cherwell Software in Colorado Springs in 2004 as an IT service management software company. While at Cherwell, he raised $222 million largely led by Insight Venture Partners. Insight also led the $200 million round into Quantum Metric. Cherwell was acquired last year by Ivanti Inc. in Salt Lake City.
Of course, a startup that delivers will also be in demand. Spekit, which helps companies build modern training programs for employees, announced it raised $12.2 million in March 2021. Nine months later, it added another round, this time at $45 million.
The Denver company attracted a ton of new customers in the pandemic as clients realized that hiring and training had to be done remotely. That’s Spekit’s expertise. Revenues grew more than 300% and a decision to invest in more research and development led to another VC round a few months later, said Melanie Fellay, Spekit’s CEO and cofounder.
“I think part of it is natural, just growing. People knew who we were more so we had a lot more interest,” she said. “And then what was interesting is actually, two of the investors that invested in us, Craft Ventures and Felicis, had passed on our first round (but) they led this round very competitively. And so I think it just goes to show that for certain funds, it’s a level of comfortability with where you’re at in your journey as a technology company.”
Fellay said the company didn’t need to raise $45 million, but with the looming global unrest, she wanted to prepare for the uncertain geopolitical future.
“You want to raise when you don’t need to fundraise,” she said. “In the future, I don’t want to be in the position where we have to raise and we’re not necessarily getting the best potential investor on the market.”
Colorado’s entrepreneur ecosystem is ripe
Attention on Colorado has a lot to do with the earlier entrepreneurs who stuck around, grew their companies, exited and started again, said Scott Miller, managing director of Endeavor Colorado, an organization that was started by entrepreneurs to help other entrepreneurs.
“These huge deals that you’re seeing, in many of the cases, it’s experienced founders who have a track record of success with past exits,” Miller said. “The first four that just jumped to my mind are Sondermind, Quantum Metric, JumpCloud and BillGO. All four of those founder CEOs have had exits in the past and are on their second, third and sometimes eighth companies. That track record makes it easier for those VCs to come in and write nine-figure checks.”
More than a decade ago, it seemed like a lot of the local deals were coming out of Boulder, from The Foundry Group. Nowadays, rounds are being led by out-of-state VCs. The most active one last year was General Catalyst, which invested in several Denver startups. And often, it wasn’t the first time.
General Catalyst was part of the $150 million round by behavioral health care company SonderMind in July, after being part of its $27 million round in 2019. It also supported Guild Education’s $150 million round in June, after leading a $157 million raise in 2019. And after providing seed funding in 2020 for Plume, a health-tech company focused on the transgender community, General Catalyst joined Craft Ventures in a $14 million round last year.
“General Catalyst was the most active, out-of-state, tier-one fund,” Miller said. “They had a really big exit with Eric Roza at Datalogix, Then they had another exit with Ping Identity. And Eric is actively angel investing in the community. He’s sending them deals.”
There’s also the coastal VCs and private-equity firms Bessemer Venture Partners, Insight Partners and the legendary Sequoia Capital, which backed Apple and Atari way back when. The list goes on, according to PitchBook, which counted up 341 unique investors in Colorado companies last year, a figure that has tripled in the past decade. California, meanwhile, is somewhere around 5,000 unique investors.
“These are tier-one VCs that are really active in getting to know the local community, getting to know the local founders and in some cases are actually hiring people here locally,” Miller said. “I would say I have two to three calls a month with a new VC who wants to better understand the Colorado ecosystem and see more deal flow.”
Long-time entrepreneur, Dan Caruso, has been waiting for this to happen. As part of the founding team of Level 3 Communications in the late 1990s and then Zayo Group in 2007, Caruso has scaled startups into publicly-traded companies. He and others spent years building the beginnings of a tech ecosystem, encouraging founders and investors to grow here. He feels this was sped up by the pandemic.
“All of the elements that used to say you really should be in Silicon Valley, all those have gone away in a very rapid time,” Caruso said. “The fact that Colorado already had all of the building blocks for tech companies and to scale companies made us one of the biggest beneficiaries. It’s accelerated because people want to live here.”
And, of course, there are more local VCs, like him. After overseeing Zayo’s move back to a private company, he left in October 2020 and now runs Caruso Ventures in Boulder with his family. They plan to invest $25 million to $30 million a year in companies making a positive impact on their local communities with job creation, innovation or other social-good endeavors.
At a recent gathering in Denver of founders and investors, Holland, the Access Venture director, glanced around the room and noticed that young founders with multimillion-dollar rounds completed were mingling with old-timers. Many of the startups were less than five or 10 years old.
“It was kind of cool to look across the room because I called out a lot of the, what I call the OGs, because they are people like John Spiers who founded LeftHand Networks 22 years ago, there was Don Hazell from Rally (Software) that started 20 years ago. Josh (Scott) and John (Levisay) from Craftsy, Mike Beaudoin and Craig Smith from HomeAdvisor,” Holland said.
“This isn’t a short-term pop. This great year that we had last year was amazing, almost $7 billion in capital raised. But it never would have gotten here if we didn’t have all these folks 20-plus years ago start to lay the groundwork and start the companies to have success and spin off other founders to create success.”