David Kerr: Sure. Peter, thank you for having me on today. My name is David Kerr. I’m the managing director at Allos Ventures. Allos is a venture capital fund based in Indianapolis, Indiana. We are a fund that is focused on business- to-business (B2B) software-as-a-service (SAAS) companies. Allos invests at a very early stage; at the seed stage, the seed plus stage, and the Series A stage. We focus on companies that are headquartered in the U. S. Midwest. So, we feel like that’s been undercapitalized, underserved area for many years, and so that’s where we target our companies and our founders. We have a few things that are outside of that geography, but for the most part, that’s where we are focused.
And prior to that, I’ve spent the last 25 years as an operator. I’ve been a CEO, a COO and a general manager at all sorts of companies, tech companies and tech-enabled service companies. Everything from a three-person startup to Groupon and kind of everything in between as I’ve been in that operating phase of my career before I moved into venture capital.
David Kerr: Sure. Venture capital really focuses around, or at least where we invest, the stage we invest, around four different specific areas. One is fundraising. We have to go convince limited partners to be part of our fund. And those are institutions, those are high net worth individuals, those are family offices. And we have to convince them that we are good stewards of their money and that our thesis and our approach is one that will give them returns that they’re looking for. So fundraising is one of those pillars.
The second one is sourcing deals. So, we are always on the lookout. We participate in all kinds of events. Marketing and outbound marketing initiatives are important. We go to accelerators and incubators and folks like that. And what we’re doing is we’re looking for entrepreneurs that are starting businesses that fit within our thesis. So, sourcing deals is the second part of it.
And then, the fourth area is really what would be considered the harvest phase. Once you’ve gotten it to a certain level, we are typically in these deals for 7 to 10 years, then it’s finding what is the appropriate exit path and exit ramp for the company. So that we are able to return capital to our limited partners. So those are the four, maybe five, with a sub-bullet in there, areas that we that we focus on, that I spend my days on.
We have fully invested in three funds. Right now, I’ve been a part of one fund, Allos 3. We have assets under management of about 150 million. And in those first three funds, we have approximately 40 companies. In our Series A, we have a higher concentration. So, in Allos 3, we have 15 companies that are Series A where we’ve invested a higher number of dollars. And then we also have an Alpha Program where we do some investments into companies that we hope will mature into a Series A that we can be in a position to lead that. But overall, over those first three funds, it’s roughly 40 companies.
David Kerr: Well, so I think there is two areas I’d like to talk about here. One is the business. The challenges we face as a venture capital firm. And two would be the challenges our portfolio companies face. From a venture capital firm, the challenges we face in the US right now, there are more than 1,000 venture funds that are under $100 million. There’s a lot of competition, both for limited partners in those funds, and then for allocation of capital.
And then, you know, over $100 million – I don’t know what the numbers are, but my guess is there’s another 1,000 plus. Some are the very well-known, marquis brand kind of funds that you are competing with. So, part of it is competition for deals and part of it is competition for limited partner dollars. I would say what Covid has done is it’s really opened [the market]. Used to be the concentration of capital is in Silicon Valley, New York, Boston, and then you kind of move to some other areas, like Austin, Texas, and areas like that.
But 70-80% of all venture capital has historically gone into Silicon Valley area and the Northeast part of the U. S. Now, after Covid, people are doing deals over Zoom. So it has broadened the competition, I would say. Because people can come into Indianapolis or Madison, Wisconsin, or wherever and still be very competitive there. So that’s a challenge that we face.
And then, just as the general nature of that stage of company, you are trying to convince typically, since we do business to business, these larger enterprises, that you are credible and valid and can deliver a solution that is going to meet a need. Maybe you are a 10-person company or a 20- or 30-person company, and you are trying to serve a big company that is publicly traded and has 30,000 employees.
David Kerr: I still think we’re really in the nascent stages of the digital transformation. You know, we think about iPhones and iPads and all the automation that we’ve seen. I think there are just tremendous opportunities still, in many companies in the early stages to automate processes, systems, workflows. All these things that that software has not addressed yet. So, I think it is a golden age for an entrepreneur. There is so much capital out there, and there are so many problems that can be solved, can be addressed. So, I think those are massive opportunities that are out there.
The other thing is because there is so much capital out there, depending on the target exit size that you are looking at. You don’t have to go public to have a venture-backed exit. There are plenty of other companies that they are kind of, you know, the bigger fish eating the smaller fish and so on. That gives an entrepreneur an opportunity or a venture fund to exit along the way. So, I think there is still tremendous opportunity, not only here in the US, but then as I look more broadly across the globe. Lots of opportunity for continued digital transformation.
David Kerr: So I think, in the venture world, you typically see two paths to venture capital. One is a finance path, and that is typically the most common. And there is almost an apprenticeship type of approach that’s been there. But that’s really being broken up quite a bit, I would say. Younger people entering just are not willing to wait the way that our generation did, and I think it’s a good thing that they are breaking down barriers and so forth. But there’s this finance path into venture.
And then there’s the operating path that I took, which I’m certainly biased towards. Because I feel like I have empathy, understanding, a connection with entrepreneurs that maybe others on the finance side can’t quite have. I know the roller coaster that everybody rides every day of winning a big customer, losing the big customer, getting a new employee, somebody quitting, all those kinds of things. That gives me some appreciation for that. So, I think there’s a couple of paths there to go in.
Then it’s how do you begin to build around there? So, when I think about your network, you know, I think we all think this is all 28-year-olds that are getting this venture capital and changing the world. I forget the exact statistic, but I believe most venture backed companies in the most successful ones I want to say the age bracket is somewhere in the mid-forties, mid- to late forties. It’s because experience matters.
And so, I think, not only from a founder perspective, but then building that team around them, whether that be a finance leader, which, typically, founders are like, I can do that, I can outsource that. But it’s somebody that they need early on if they’re going to take venture capital, or a sales or a growth leader, or even a COO. Maybe it’s an over-titled term at a 10- or 15-person company, but somebody that can really think about the operational aspect of those companies and how you scale that to get to $5-, $10-, $20 million.
David Kerr: I’m going to say yes and no. So, I would agree with your comment around the need for not just data scientists but people that are going to operate based on data. Every company that is tech-enabled now or a software company has lots of data and should be data driven and metrics driven, from that perspective. So, I tried and somewhat failed to convince my kids to take statistics in college or in high school or whatever, and really think about kind of the data portion of their future career.
Because I believe firmly that no matter what they do, whether you are a product leader, a sales leader or whatever it may be, that this understanding of data and being able to not only interpret it, and sometimes use a tool like tableau to cut and slice it, and so that you’ve got a better understanding of it. So, I think those are some skill sets.
Just saying culture building, when I’ve worked back in my twenties, culture was not really a thing. I guess there was a culture there, but it wasn’t a thing. You kind of went in, you did your work that your boss told you to do and showed up on time. And you worked hard. Maybe someday they give you a raise or they gave you a promotion. I do think now really embracing culture, that the generation that is coming to work today, if you are a leader and a manager, helping to foster culture. You can’t create it from the top down but helping to foster that and recognize the benefits of it, it is probably a different skill set that people need to adapt to.
David Kerr: I would absolutely agree. And it’s fascinating to me, especially in this competitive world where there’s big pay packages and option packages and things like that. Especially here in the Midwest. I don’t know if it’s a Midwest values kind of thing, but if you can create a culture that people want to be there. They don’t have to believe as much in the product that you’re selling, but the people that are working with the problems we’re solving for customers that back in that can offset some of the compensation. If somebody just comes and says, here’s a big check, but it’s a toxic culture or there is no culture, I’m finding you can retain people or attract people to a company with those kinds of cultures.
David Kerr: I would say it’s more than allegedly. We’ve seen it firsthand that that has worked.
David Kerr: So, I would characterize it by function. Typically, we are investing in a founder. And the company has got real problems if you’re churning the founder/CEO. So, let’s set that one aside. The biggest churn that occurs would be in the go to market team, in the sales and the marketing lead. And I think that’s not just small companies. I think that’s with large companies as well.
Some of that is due to a sales leader is measured based on quarterly performance and things like that. Usually there is a ramp period and people give them a period of time. But sometimes there is either a fit or there is not a fit. And so, you see that, and it could be either way – it could be from the company’s perspective of the individual’s perspective. I wouldn’t say we see a higher amount of turnover in those specifically in the in the sales leadership or the marketing leadership. It’s more stable in a product or engineering and in a finance leadership role. Not that there’s not some turnover or attrition there, but it’s pretty stable.
And then the next stages of companies. So, let’s say the company, we’re kind of $0 to $10 million, and then a bigger check comes in or much, much bigger check comes in. We’re investing in rounds that are $5 million, maybe $10 million, and then then these rounds are like $20, $30, $40 million. Those next rounds there may require a different level of experience in that finance leader, or in that go to market leader, or those kinds of things. So that’s the other area where you’ll see change based on chapter or stage of the company.
David Kerr: So, like I said, about 25 years ago, I moved from non tech roles. I own some companies in the non tech world, little companies that I bought and grown. Then I would be getting into the tech world. And so, I started, as you know, it was an over titled position as president of, like, a three-person startup. When we sold that company, I had an opportunity and ended up taking a role in the acquiring company, which was a much larger one. And then through a whole series of events, I ended up buying our intellectual property back and restarting the company.
And one day, just in our conversation, he said that our president of Europe just resigned, turned in their termination notice, and we’re going to hire somebody in Europe to do that. But I need somebody to go over there and tend the store for 30 to 60 days. So, I think I can do it and I’m in. You know, that was like on a Wednesday and on the next Monday I was on a plane, and four years later I moved back to the U. S.
My family eventually came with me, but it was, I think, being opportunistic, being patient, but always kind of raising my hand and saying, hey, I’m willing to take on a task that may not seem like it’s really in my wheelhouse. I had no international experience, I had entrepreneurial experience, but I had a willingness and that was a that was genuinely one of the most rewarding, personally, and professionally times of my career that I’ve ever had.
David Kerr: You know, I would say it kind of goes just building off what we were just talking about. I think being opportunistic, and I mean that in the most positive sense. Not taking advantage of a situation but being opportunistic and being willing. I think sometimes people pigeonholed themselves. They think, well, I’ve done this, have been in finance for 20 years. That’s all I could do. Or, I’ve only been an engineering lead for 20 years. That’s all I can do. You have a lot more skill sets than you may think you have. And I would say, be opportunistic, think a little bit outside of the box.
And then also I would say, assess your risk profile. I don’t think there’s any right or wrong on a risk profile. I work in a world of what would be typically perceived as very high risk with these small companies. But they can be extraordinarily exhilarating, inspiring. You know if they work out, they can be financially rewarding as well. And it’s not always big companies that is the safe bet. And the company that satisfies your passion.
David Kerr: I appreciate you having me on, and I’ve enjoyed the conversation.