Darcy Howe: Capital Efficiency in How You Run Your Business and How You Raise Money Matters
Our most recent guest on Fast Frontiers was Darcy Howe, a Kansas City advocate, venture capitalist, angel investor, and lifelong asset manager who not only wears a ton of hats—she rocks them well. When you think of Kansas City, and you think of startups, you think of Darcy Howe.
Darcy sat down with us to discuss everything from capital efficiency to raising money and even broached the subject of how to effectively dismantle that sometimes precarious landmine of managing investor expectations. As a 20-year veteran angel investor and founding member of Women’s Capital Connection, a network of accredited investors who invest in women-led, early-stage businesses, Darcy has more than earned her street cred when it comes to doling out savvy advice and expert tips. So we were thrilled to dive into these topics with her.
Darcy’s passion for innovation and empowering others, both within large companies and with back-of-the-napkin ideas that germinate into great business, is just one of the reasons behind her impressive track record of success. She shared how she often is approached by young people especially, those who see her career and want to know how they can follow in her footsteps: “Times have changed … [It used to be that] if you really wanted to be at the top of the ladder, all you wanted to be in was investment banking. Today, so many of young people ask me, ‘How can I get into VC?’”
According to Darcy, there has been a shift in many ways, one which is what’s considered “hot” these days: “It used to be everyone wanted to work on the deals that were hot, and those were big companies. Today, the deals that are hot are smaller companies.”
As Darcy shared more about her origin story and how she paved her path in the VC world, she spoke of the many often-hard lessons learned along the way: “[In my earlier angel investing days, I] did everything wrong: I threw money at stuff. I had no diligence. I would love the idea but didn’t even evaluate whether [it was coming from] somebody who could actually pull off their big idea.” The list goes on.
Suffice to say, Darcy is quick to inform people of the real truth of her VC experience, which was not always smooth sailing: “I say to people I learned the hard way, on my own money, as an angel investor.” Darcy learned those lessons quickly, and then focused on doing the hard work and pushing forward.
We first wanted to talk about raising seed money, which Darcy says doesn’t have to be the Mission Impossible that so many people think it is. According to her, “There’s capital; you just have to build something that people want.” As an angel investor, Darcy explained how she approaches things: “We kind of put it back to the entrepreneurs that we’ll bring the capital… [then tell them] ‘You just have to bring the great ideas and the traction. Show us you know how to figure that out.’”
Thinking again of a lot of our listeners and entrepreneurs who are outside of Silicon Valley and are trying to raise money, we often hear stories of somebody who gets turned down by folks locally, and then somebody from out of town invests, and those who passed miss this tremendous opportunity. While owning that this can be frustrating as an entrepreneur, Darcy revealed how this very scenario highlights the extreme value and importance of both the talent and one’s network.
Times are changing, and we are now (thankfully) proving that entrepreneurs don’t have to be limited by location. Regarding Kansas City and the Midwest, in particular, we wanted to know what was unique about this region that Darcy has found to have worked particularly well, which may act as a guidepost or inspiration for other Midwest cities.
Darcy shared, “I think the ‘secret sauce’ of many of our Midwest cities, [and] what we’ve discovered the Kansas City region is really good at, is figuring out how to bring innovation to very basic businesses. [You have to ask yourself] ‘who are their customers?’” And then? Find the local logistics that can connect those dots.
In the case of Kansas City, Darcy explained how they are the NAFTA crossroads, which they use to their advantage: “We have more rail lines in Kansas City than Chicago, so rail lines go north, south, east, and west, and we’ve had a lot of logistics innovation out in our region [because of this].” Another thing entreprenuers are doing well in Kansas City, and which can also be done well in other regions in the Midwest, according to Darcy, is determining how to build with that capital efficiency so that the founders don’t have to give away the whole ship. “I’m really focused on founders keeping as much of their company as they can,” she reiterated.
While some companies give away a lot of the company with modest traction to attract some of those big players, the jury is out whether or not that is a best practice. Other entities go the exact opposite and take a different route, choosing not to bring in and grow it themselves and then keep a lot of the money inside. According to Darcy, “There’s no one way to do it, but I’d say our secret sauce is understanding what to build.” And what exactly is that? “We build innovation for very basic businesses that are in our backyard,” Darcy explained.
It’s no secret that it is a challenge for investors to put their money to work more than ever, which explains why they’re always looking for great deals. If you understand this dynamic, you can raise money and do it in a way where you don’t have to suffer a tremendous amount of dilution if you’re smart about it. According to Darcy, it’s all about capital efficiency and maintaining as much autonomy as possible as an entrepreneur. “Venture is the only place where in the press we are celebrating the dilution of founders,” she stated.
But Darcy is determined to change all of that: “I call myself the ‘Ted Lasso of venture capital’ because I’m super positive. I want to cheerlead the little guy, [and] make sure the founder is not shoved aside while this capital [is] clamoring to get in.” In Darcy’s estimation, it all comes down to balance.
The way she puts it: “We want to help surround founders with the resources they need, not just money, but all the other cohort resources to help them succeed. My concern is is that when [any founder] gets too much money—or up at the top of what you’re able to raise—your margin of error just shrinks.”
Specifically, Darcy explained how this sets you up for a pressure-cooker scenario: “You then have to perform to perfection because, in the venture world anyway, those investors are expecting at least a 2X growth of the valuation for their next dollar. That means you’ve got to double your business in probably 18 to 24 months, and a lot of things go wrong … So they end up having these sideways rounds and begging for capital and convertible note rounds and all the other things because they took so much money in the last round that they had to really execute to perfection.”
For more advice on the current trends in VC investing and much more, you can head over to our website and listen to the full podcast.