By Sharon Fisher
Considering how many venture capitalists invest in technology companies, the process is awfully gut-driven. Connetic Ventures wants to change that.
The Covington, Kentucky-based company uses an artificial intelligence system it developed itself, Wendal, to gauge the quality of a startup and its team. Partner Chris Hjelm is coming to Boise for Boise Entrepreneur Week (BEW).
Using artificial intelligence
Connetic started out in 2015 as a typical VC firm, making local investments in Kentucky, Ohio, and Indiana. “There’s not a huge talent pool in entrepreneurs in a small tech hub like that,” Hjelm acknowledged, so the company opened a Chicago office, and continued to open a new territory or region every year or so. “We didn’t have the money or resources to open all these offices, but we can build software to help us find and fund companies,” he said.
In a previous job, Hjelm worked for Kroeger, using predictive analytics and algorithms to figure out what products the grocery store chain should carry. So about three years ago, he started to apply that to private market companies over four areas: the team, terms, technology, and time.
“There’s not a lot of good datasets, especially early-stage ones,” Hjelm said. “Once a company becomes a unicorn” – worth $1 billion – “it’s not helpful at that point. It’s when a company doesn’t have investors. How do you predict that?”
According to Hjelm, 70% of startups fail to make money. Connetic’s goal is to use data to lower that to 50%.
What Wendal includes
The team portion, called TeamPrint, is sort of a Myers-Briggs Type Indicator for startups, dividing people into 21 categories. “I’ve started a few companies, none of which have been tremendously successful,” Hjelm said. “I’m not the CEO type.” Instead, by using his software, he determined he was a “problem solver,” and TeamPrint helps him learn the other profiles that work well with problem solvers. “I’m a product and data strategy person,” he said. “I’m really bad with sales and fundraising, that other people are really great at.”
(For the record, I’m a “strategist.”)
The second portion collects 15 data points to tell Connetic how much it should pay for a company. “We’re just about to launch it,” Hjelm said. For example, it might say that the market rate for a company would be $4 million but that $3 million to $5 million would be acceptable, based on factors such as what industry the company is in.
Now, the company is building the technology module. “That’ll be the most software focused,” using drag and drop to build tech stacks, Hjelm said. “It’s a hard problem to solve.” The final component, to determine when to invest, is still in the whiteboard stage, he said.
In addition to using it themselves, so far, the software is in private beta with about 20 companies, Hjelm said. “We didn’t have plans to productize or license it, but we couldn’t keep self-funding, so now we have to make money,” he said.
Reducing implicit bias
A funny thing happened along the way: Connetic realized it was funding more women- and minority-owned startups. A lot more. In fact, the company estimates it funds eight times more women- and minority-owned startups than the VC average.
“That was not in our minds at all,” Hjelm said. The system was simply intended to help the principals be smarter about how they funded startups. But the company started hearing from women entrepreneurs that the Connetic experience was a new one for them, and suggesting that it look into the demographic results. “It was the first time we’d looked at the stats of our portfolio,” he said. “It was never an intention, but a really cool byproduct.”
Notably, before Connetic started using Wendal, its first four deals were all 30-year-old white men, Hjelm said. “We didn’t even think about it,” he said. “Without it, I’d probably fund more white men than not. It was completely eye-opening for all of us.” Moreover, the women-owned businesses perform 40% to 50% better, he added.
Thus far, the company has just one investment in Idaho, Killer Creamery. “I know [COO] Matt Price really well,” Hjelm said. “He’s been trying to get me to meet people in the ecosystem.” Boise fits into the category of cities Connetic is interested in, tier 2 and 3 cities that don’t already have a lot of VC money, where they can win deals without having to pay prices as high as in San Francisco or New York.
That’s what Hjelm is going to be looking for during BEW. “I’d love to meet a lot more Matts – good connectors,” he said. “I’d love to meet great companies, but that’s hard on a one-time thing. So how do I meet all the top connectors who know the right people? Matt’s been invaluable in building our brand and sending us companies.”
Boise in particular has a lot of advantages, Hjelm said. “We’d love to do six deals in Boise if we could,” he said. “Inherently, there’s better talent there. A lot of people are leaving San Francisco and going to Salt Lake City, Boise, Denver. Boise specifically is getting a lot of Bay Area technical talent. It’s cheaper, just as pretty, and a better place.”
A Boise office is even a possibility, Hjelm said. “If we were to get a large investment from someone in Idaho, we would definitely open an office somewhere,” he said. The company has been talking to high net worth individuals and family offices in a number of states, beyond Kentucky, as it thinks about its next fund, which is targeted for $75 to $100 million in the next one or two years, he said. “We’d love to help build something somewhere else,” he said. “It could be Boise, Provo, or really anywhere that we believe has good talent and good companies to invest in.”
Sharon Fisher is a digital nomad who writes about entrepreneurship.