Last year, venture capitalists poured nearly $27 billion into start-up companies based in California, mostly going into the great technology cluster in Northern California known simply as Silicon Valley.
In the Twin Cities, the total investment in venture capital amounted to a little over 1 percent of what went into California companies.
Of that relative pittance, none went to a growing Minneapolis technology company called Kipsu Inc.
That’s fine with its co-founder and CEO, Chris Smith, who wouldn’t have wanted any venture capital last year anyway.
Smith said he’s leading Kipsu down a path to success that makes a lot of sense for a Minnesota company, and it does not lead through the offices of a big Silicon Valley venture capital firm.
Smith is among the sensible Twin Cities-area entrepreneurs this year who have mentioned, sometimes in passing, just how weary they’ve become of hearing Twin Cities founders complain that what this region really needs is to “be more like Silicon Valley.”
A little irritation is understandable, as it’s roughly akin to being told by a sober Twin Cities chef that our restaurant scene really needs to become a lot more like that of Paris.
A more fundamental problem is that having Silicon Valley out there, perhaps more as an idea than as a real place, distorts the thinking of budding entrepreneurs. Smith has heard from founders who have watched Silicon Valley from afar and then reached the conclusion they need a billion-dollar product idea to have a business and that the real mark of success is getting venture capital financing.
Kipsu got its start in 2010 and is starting to develop into a significant business. It didn’t have either one.
Smith has plenty of firsthand experience in Northern California, too. He was a co-founder of Kipsu but only joined the company full time as CEO last year from the Minneapolis venture firm Coral Group.
In his years as a venture capitalist he looked for deals in and around Silicon Valley. From that experience, he said, “I feel like I could write a book on all the ways you could spend money if I gave it to you.”
Venture capital investing is inherently risky, of course, but quickly burning up the investors’ money seemed to be a common theme in the short postmortems of 135 recent failures put together by the research firm CB Insights.
Venture capitalists are also just as capable as any other investors of following the herd and jumping into fads. One failure of common sense that jumps off the CB Insights list of recent flops is a company called Secret, which developed a messaging application that allowed for totally anonymous social media chatter.
It was shut down this past spring. As it turned out, encouraging anonymity in social media only made it a lot easier for the bullies and other bad actors of the Internet to behave even worse.
Silicon Valley heavyweights put in some of Secret’s $35 million in venture money and greeted news of its closing with a yawn. Had this company been in the Twin Cities, it’s difficult to picture any investor putting a dime into it.
Smith isn’t suggesting that deep technical expertise and ready access to capital wouldn’t be great to have in our region, but they aren’t the keys to a successful start-up.
What is required is doing the extensive work it takes to understand exactly what is causing pain for a prospective customer, so much pain that the customer would happily spend money to relieve it.
Kipsu sells a service that fits under the heading of activities now called “real-time engagement.” The idea is that consumers will happily share how they feel about their experience at a hotel or shopping mall even while they are still having it.
Even the best hotel operators make mistakes, Smith said. Sometimes they don’t even make a mistake and yet still end up with a cranky consumer who will take to a keyboard to blast the hotel’s service on websites such as TripAdvisor.
That’s genuinely painful. It could be worth a lot to the hotel manager to hear from the cranky guest first and turn him or her into a happy guest by the end of his or her stay.
The Mall of America was Kipsu’s first customer. But even with some success, Smith said, he and his colleagues did not consider going to Silicon Valley for venture capital.
He is certain that being thinly capitalized kept everybody focused on the simplest solutions that gave the customers what they needed, such as the decision to get guest feedback to the hotel and restaurant managers through a simple text message.
Had Kipsu achieved the unlikely and received funding from investors, he said, it would almost certainly have used the money to develop a smartphone application that consumers would need to download and install. That would’ve been a strategic blunder. Consumers are getting wary of adding more applications to their phones, particularly for a day of shopping or short stay at a hotel.
“We wrote checks, but it wasn’t much,” he said, of the money put into the business by the founders. “And we actually never dipped into it. If you look back at our cash position, we’ve been cash flow neutral since we started the company.”
Now with about 300 hotel operators and other customers, Kipsu and its 11 employees moved last weekend into a new headquarters in Minneapolis.
It just closed on its first financing, too, raising $565,000 in the form of convertible notes placed with a handful of investors. That money should make it easier to recruit for the 20 or so positions it expects to add in the next year.
The potential that’s opened up has proved surprising, Smith said. When Kipsu started, he would’ve said he didn’t see enough potential to have venture capital financing. Now, he said, “absolutely this could be a big company.”
If that happens, word of it may even reach the ears of a Silicon Valley venture capitalist.