Gavin Christensen is the founder and managing director of Kickstart Seed Fund, based in Salt Lake City. The firm recently raised $26 million for its second fund. Before Kickstart he worked at vSpring (now Signal Peak Partners), Google, Monitor Group and Fidelity Investments. He studied economics at BYU and received an MBA from Northwestern.
Christensen spoke with Silicon Slopes from Kickstart’s offices in Cottonwood Heights.
Silicon Slopes: How did you get into seed fund investing? Why did you choose seed funding versus VC?
Gavin Christensen: So I had the experience of kind of growing up in the industry. Like I was saying, I had joined vSpring in the early days, and I think from there I saw what an opportunity there was. vSpring was writing $1 million to kind of $3 million checks, and there was really no one before vSpring in the ecosystem who was taking the same level of due diligence, leading out on deals, structuring them appropriately in sitting/seating boards. So that’s when I really started first thinking about it. I left for Kellogg [MBA], and while I was at Kellogg I actually worked on something called the Kellogg Venture Fund project where I really looked at a bunch of different models across the country. This is back before there really was, there was maybe one or two seed funds nationally.
When you look at an ecosystem, the magic is really around universities. If you want something to happen it really is about a university. You look at Stanford, you look at Harvard and MIT, kind of that ecosystem. And so tapping into that, the affinity, the dealflow, the commercialization. Energy is the key, so that’s where the genesis of Kickstart was when I was at Kellogg. Then I teamed up with vSpring at that time, the University of Utah, the other universities and the angel groups here to create Kickstart. That’s something that I did with part of my time while I was also working for vSpring in New Mexico. And the energy just was all in Utah, so I basically lived on the road for four years and kind of made it happen. Then we got to the point where it made sense for Kickstart to not be affiliated with any venture fund, and stand on its own, have its own team. So in the last year, that’s happened. I’ve brought on a partner in Clarke Miyasaki, and a CFO in Alex Soffe, and raised our second fund. So we’re excited about where we are now. I think that’s the history, but the genesis was just seeing the opportunity at an early stage, and being close enough to know exactly how it would work, then putting together a structure that was really quite unique in that we brought in the community behind what we’re doing.
Silicon Slopes: This is your second fund, $26 million. How much was fund one?
Gavin Christensen: It was $8.1 million.
Silicon Slopes: How many of those people invested in fund two?
Gavin Christensen: We had good carryover from the first to the second fund.
Silicon Slopes: More than half of those first people?
Gavin Christensen: Yeah, I would say, yeah. There were some structural reasons why some of our LPs could invest in the second, but without getting into detail on all of those, we had great support.
Silicon Slopes: What is the makeup of your LP base? Are these institutional, family office, just well-off individuals — what’s the makeup of fund two?
Gavin Christensen: Fund two probably has more institutions than the first fund did. It has a lot a family offices, groups that really care about the ecosystem in Utah, that want to do angel investing but it’s not their focus. So, often they use Kickstart as a way to source deals, to make sure they are seeing the best dealflow, to get them structured appropriately, to have due diligence to piggyback on, and then to write checks alongside. That’s the profile of a lot of our LPs, and then we have other folks who are more passive and just want to see it happen. So we brought in a really great new group of LPs with the second fund.
Silicon Slopes: What percent of them are in Utah?
Gavin Christensen: A good percentage, let’s say 80% plus.
Silicon Slopes: And the 20%, why did they choose that then?
Gavin Christensen: Generally, they know Clarke, they know me, they like the track record of the fund to date. What’s exciting I think for LPs, is that they really believe in the strategy and its ability to impact the ecosystem here. But they also believe fundamentally in the financial opportunity of investing in something like Kickstart.
Silicon Slopes: As a seed fund, what is your typical due diligence on investing in companies that range from a little more than an idea to a little bit of revenue? What is your process of due diligence to decide that this is really something that is too risky or that fits your risk appetite?
Gavin Christensen: That’s a good question. I think some, some seed funds out there and angels believe that, hey, fundamentally due diligence doesn’t matter, because it’s early, you’re betting on a person and we believe completely the opposite. I think that the data out there, there’s a Kauffman Study that we reference a lot, which was done which they did a pretty sophisticated regression model on what factors matters to determine the delta between angels that do really well and angels that don’t do well. And the biggest factor they’ve found in terms of explaining the difference in returns was due diligence. And it really wasn’t who did it, how they did it, it was how many hours they spent doing the due diligence. So I structured Kickstart around using the sophistication of an early-stage or institutional investor at this seed stage, which I think is pretty unique. We take on that burden typically not only for our fund but the entire syndicate that we put together around a deal, where we’ll spend many, many hours doing due diligence on the team, on the opportunity, on the product, et cetera. And then we’ll actually package that information and share it with our limited partners or other folks that are part of the syndicate. And I think that has really helped us take a really leadership role in the deals that we do. So we believe very strongly in due diligence. A lot of times it’s, you’re dealing in a very ambiguous sphere but it’s worth it to do the work.
Silicon Slopes: Some people see angel investing as merely charity, that some people are thinking, “Hey, I may likely never see this money again.” Do you agree with that?
Gavin Christensen: Oh absolutely not. We’re investing typically alongside angels. We have institutions that invest alongside us as well but we’re going early enough that often it’s angels. I think the data shows clearly that angels do really well. But there are some basic principles. One is what I described which is due diligence.
The worst thing you can do as an angel is invest in one deal and be passive, which is what most angels do. Invest a small amount and don’t follow the deal. But if you’re willing to follow the deals you invest, invest in a somewhat — at least have ten-plus bets out there. And then take active involvement — then you’re odds of success are dramatically greater. And so with Kickstart, we’re allowing angels to say, hey, we’re active, so you don’t need to be active. We do the due diligence; you don’t have to do that. And we have, if you invest in the fund, you’re diversified so you don’t have to do that. So we help solve the return problem for a lot of angels and then they can follow us on the ones they want.
Silicon Slopes: What is the typical timeline for due diligence? You do five to six deals a year, is that about right?
Gavin Christensen: It’s probably a little bit higher than that. We have three types of deals and we’re going to try to explain more of the ecosystem, how we do this.
We have what we call our classic Kickstart deal, which is in our second fund our check size would be about $500K. The round size would be between a million to two million, maybe a million and a half. And we’ll syndicate the rest of the round. We’ll bring in the rest of the investors. Diligence on that can really vary. Most typically going to be a couple months and end on that. That’s kind of our classic deal. We’ll do about five of those a year, five to six of those a year. We’ve already done, we’re in May, and we’ve done two, soon three. So we’re kind of pacing maybe slightly ahead. And we have two other types of deals. We have Labs deals which is where we go really early. This is when we commercialize from the universities, maybe there’s no team. There’s just the technology. And we’ll do much smaller checks in those deals and maybe it’s $100K, $50K. And we may or may not syndicate on those. Much higher risk, bigger return potential for us. We’ll do two, three of those a year. And then we have what we call Lights. We also call that [inaudible] where we invest in companies that already have strong syndicates behind them, they have strong teams, significant traction. But we want to be part of the company. We have a relationship there, we want to be part of it. Maybe the evaluation doesn’t meet our criteria so we just take more of a passive role in those.
Silicon Slopes: How many of those do you do a year?
Gavin Christensen: Three, four a year as well. So total deals are much more than four or five, but I think the core — we’ll say eight to 10.
Silicon Slopes: And so I’ve chatted with a number of other entrepreneurs here and some complain that the angel community seems weak or passive and they can lead you along. Is something broken here locally that needs to be fixed or do you have the answer to that?
Gavin Christensen: When we started Kickstart one of the things that we really felt was lacking and where we have tried to fill the void is leadership. So the ability to kind of say “hey this is a great deal. We’re going to structure, we’re going to put down a terms sheet. We’re going to do the due diligence. We’re going to say this is the deal. Let’s pack in behind this.”
I think that’s what’s hard for angels to do, because most angels are successful entrepreneurs who still have some kind of day job right, so it’s hard for them to devote the time to kind of put all that together. What’s a lot easier for them is that once everything’s structured to say “Hey, I’m alongside for $20,000, $25,000, $50,000, $100,000.”
I think that’s something entrepreneurs maybe worried about everywhere, not just here. We’re trying to do our part by being proactive leading out and giving opportunities for angels to invest alongside. I think there’s definitely opportunity for other folks to try to lead out as well.
Silicon Slopes: What are your typical terms on investment. What are you looking for? Are you the lead investor on it?
Gavin Christensen: Yeah.
Silicon Slopes: And what kind of percentage stake do you typically take?
Gavin Christensen: Ah, it varies by deal. In our classic type deals, which is what I make sense to talk about, our ownership stakes are typically at least 10 percent and closer between 10 percent and 20 percent.
Silicon Slopes: And what is your timeline horizon? You’ve raised this $26. How long are you going to take to spend that?
Gavin Christensen: Typical deployment for a firm like ours is three or four years, and so I think we’ll be in that.
Silicon Slopes: And then what is your typical lifespan of the companies that you’re investing in. Are you traditional a seven-year type thing?
Gavin Christensen: Yeah you look at the averages, it’s seven to nine plus years. And we’re investing earlier than many of those funds that report those numbers. So you could see seed funds having deals for 10-plus years. We definitely will have companies that push that. On the flip side with Kickstart 1 — we’ve seen the average holding period on a Kickstart 1 deal is now about three years. And we’ve seen exits already on that portfolio.
So I think we’re trying to have a nice mix for our investors of companies that get traction quickly and have the opportunity to sell, certainly sooner than nine to 10 years. And then some that really ramp up and get big. So, I would guess that on average we would be holding them slightly less than that, kind of nine years, but I could see it being fairly long.
Silicon Slopes: Are you willing to go in on a follow Series A round? Or are you saying ‘We’re only doing the seed and we’re stopping there and either we cash out when the VC comes in or we just stay in there until there’s a further exit down the road?’
Gavin Christensen: So, it’s an interesting question — I think right now there isn’t a ton of local Series A in Utah.
Silicon Slopes: There aren’t enough people doing it or enough money available to do it?
Gavin Christensen: I would say it’s both. I think there’s just not a local Series A money, and so sometimes we’re having to seed fund a deal and then try to put together enough capital behind that company to get through the Series A kind of milestones. There’s also a dynamic that’s happening, nationally where the definition of what a Series A is just shifted to the right.
Silicon Slopes: A Series A crunch?
Gavin Christensen: Yes, I think that’s right. The expectation of what a Series A company has accomplished is quite a bit more than it was certainly like five years ago, even a couple years ago. So it used to be like — Hey product finished, early revenue. Now it’s definitely significant revenue.
I would say we definitely are doing seed deals, but often we end up funding through a Series A type what used to be Series A milestones. Honestly we took it on a software as a service company. For us to kind of go out to the Coasts to raise that big Series A we wanted to have significant revenue. $1 million plus. That’s a different profile than it was a few years ago.
Silicon Slopes: So you want the companies you’re investing in to get to that million revenue before Series A?
Gavin Christensen: Yes, I think it’s expectation. So, I think just to answer your question more directly I think the definition has shifted out. So I think, you know, we’re definitely a seed investor, but we’re also recognizing hey we have to get our companies further along. And, and on the flip side, many companies that are reasonably far along are still raising seed money from folks like us because the definition of A has shifted out.
Silicon Slopes: You just expanded your team. Why did you do that?
Gavin Christensen: Just pure bandwidth. Kickstart 1 has 19 companies and it was just kind of me for the last several years. It was pretty crazy. I’m grateful to have a talented team on board with Clarke and Alex. For us the constraints are board seats and having senior guys who can sit on boards
Silicon Slopes: Are you on every board of every company?
Gavin Christensen: Not every company but at least 60 to 70 percent of the companies have board seats. Certainly the core deals and the lab deals we described have the board seats on. That’s the big reason — It’s the capacity to do diligence, capacity to fill board seats, capacity to administer the funds. We are good on bandwidth now, which is great.
Silicon Slopes: What did you see in Clarke Miyasaki?
Gavin Christensen: Clarke and I worked together in vSpring as analysts, so we had a common experience about the passion for this eco system and the potential it had as well as a common way of seeing and investing. He had invested in several of the deals we had done at Kickstart and he has done incredibly well as an entrepreneur. He’s an individual that is really well liked by everyone who knows him, which is a great attribute for a VC.
Silicon Slopes: Is it a rare attribute or a good attribute?
Gavin Christensen: I think it’s a helpful attribute for VC’s and they can joke about people not liking VC’s but I think he has a great touch with people. He really fit the profile, more than anything I felt like Clark saw the world the way I did and really wanted to take a long term view in building a fund that would be a franchise that would be around for a very long time. I think he had a passion for that, and it has gone really well.
Silicon Slopes: In other interviews you talk about fair terms for entrepreneurs and investors. What are those?
Gavin Christensen: I don’t know if I would get into exactly the terms are, but I think the principle is that we have a responsibility to our LP’s, to our investors, and we need to watch out for that. We also have the same responsibility to this eco system. We want to be around for decades doing deals with the same entrepreneurs, and we are already seeing this from Fund 1 to Fund 2.
Many of our best companies that we are investing in now are referrals or new companies from entrepreneurs backed from the first fund. The way you do as a VC — you’re the total experience from end to end from first negotiation to exit. It’s like Kickstart treated me fair, Kickstart was there for me when it was hard.
Then from our side, we made money and we felt like our contribution was valued as well. It’s an exchange of value that both people need to feel that the first negotiation is uncomfortable. There should be some level of discomfort for both people and that’s probably a pretty good deal. We stretch a little bit and we tell entrepreneurs that to be thinking about your long-term fundraises. If you overplay your hand and maybe raise an evaluation that is too aggressive it’s harder. Most entrepreneurial ventures have moments where it’s harder to attract money and if you overplayed your hand early you often don’t have the goodwill from the investors to step up when it’s hard. You have to think about that it’s a multi-turn game and you want to leave some on the table at every turn. I have the same approach of how we negotiate our terms. That’s my general philosophy is we approach our entrepreneurs that way. We want a great deal for our investors but we also want the entrepreneur to say that working with Kickstart was a no brainer; we want to do it again.
Silicon Slopes: With the availability of most funding documents available online, are you finding that seed stage entrepreneurs are knowledgeable about the practice here or that’s there still a learning curve for people to really understand the right terms to get?
Gavin Christensen: I think that entrepreneurs are reasonably educated about this. I actually think that entrepreneurs over stress about negotiation. Our deals fall into certain ranges and one of the things we do is we have standard docs just like there are standard docs which are derivative of those and every entrepreneur gets the same deal in terms of actual deal terms, we change a couple of numbers and this is kind of a deal and I think a lot of entrepreneurs get really hung up on something like registration rights what happens in case of an IPO. It can burn a lot of cycles and spend a lot of legal fees on that type of stuff. Let’s go create a company that’s worth anything before without spending a lot of cycles on stuff like that.
That’s the message we try to help entrepreneurs. Let’s focus on creating something of value, getting a deal done quickly, getting momentum behind what you’re doing rather than focusing on small issues. So what we do is try to start right down the middle from a terms perspective and limit legal fees. One of the things that we’ve done is we’ve innovated legal work. We have we cap on both sides, have flat fees with attorneys and we just find that it makes the docs negotiations so much smoother and less cantankerous. We are trying to create a seed investment strategy that’s scalable at some level where we can get deals done quickly, we can have it as positive experience for the entrepreneur and be responsible for the marketplace.
Silicon Slopes: Of that $26 million, how much is going to be spent in Utah?
Gavin Christensen: 90 percent plus.
Silicon Slopes: Where you going with the other 10 percent?
Gavin Christensen: We have deal flow that comes from Arizona, from the Bay Area, and elsewhere, we will do some of that but our core is Utah. I think our last fund was on the order of 90 percent was from Utah and will be about the same.