The LeanKit Success Story: Raising $11 Million from 110 Angels and what we can learn from it

In my new role as ‘Capital Connector,’ I have been thinking a lot about how there seems to be a fairly large market gap for Nashville startups raising capital with access to angel investment dollars.

When I look at other ecosystems, I see efforts like the Florida Funders out of Tampa, Venture South in the Carolinas, and Groove Capital in Minneapolis who are all doing impressive work getting LPs and angel investors to collaborate to fund preseed and seed companies in their region. In comparison, Nashville looks a bit more like an angel investor desert.?

I’ve been speaking with key players in the Nashville ecosystem about this problem and what we can do (and what I can do in this role) to rectify it. I had the chance to sit down with Kemp Maxwell, who told me the unique story of LeanKit, a Nashville company started in 2012 that raised $11 Million from a whopping 110 angels.?

LeanKit was a project management software company, started by Chris Hefley, Stephen Franklin, Dan Norton and Jon Terry.?

Maxwell was a former financial advisor who sold his book of clients and took on the role of fundraiser for LeanKit. The first round raised was a type convertible debenture similar to a safe note of $3 million. Their second round, their Series A, was an investment of a $7 million priced-round.?

Their final raise was from the top 10 global VC, Insight Partners, who put in a whopping $16.5 million.?

In the end, Maxwell said that Insight “made a 2+2=9 type of investment by including one of their portfolio companies, Planview, in the mix of potential buyers. Ironically, Planview had made an informal offer in the early days of LeanKit almost 4 years prior on a routine call.” Planview purchased LeanKit in 2017 for an undisclosed amount.?

At the time of sale, LeanKit had about 150 employees. All investors made money.?

What I learned from this story and Maxwell:

Maxwell shared that he was able to recognize an opportune moment in the financial world, as people sought ways to rebuild their portfolios from significant losses during the 2008 recession. Seeing this demand, the company set out to create the right financial instrument to address these market needs. People were more open to private investment opportunities after public stocks had hurt them.?

• What we can learn: Thinking about what the story is to share with potential investors and what will speak to them is incredibly important especially in light of the current economic landscape.

LeanKit's fundraising journey was noteworthy for the diversity among their initial investors. Maxwell estimates that probably half of LeanKit’s investors were first time angels. Out of the first 10 investors, 7 were women. The majority of their investors had only reached accredited status recently, and most through their income as opposed to net worth. (Accreditation is either 200k annual salary for the past 2 years, 300k if married, or 1 million net worth). He estimated that the average age was only 35 years old. Maxwell tapped into a new audience of investors through relationship building.?

• What we can learn: While it might be challenging, find people who don’t have regular exposure to deal flow. Figure out how to foster a community of supporters.

While the LeanKit team met with many venture funds and institutional investors along the way, none took the opportunity to invest, so they continued to rely on smaller, individual investors. Many of the institutional investors thought that the individual investors' money was dumb money, but eventually LeanKit proved them wrong.

• What we can learn: Just because an institutional investor turned down a deal, doesn’t make the deal bad. Angel investors can be just as sharp as professional investors. LeanKit raised at the same multiple that the VC invested and that priced the exit.

Maxwell credits a crucial element to his success with capital raising on creating a feeling of FOMO (fear of missing out) backed by reaching objectives and growing revenue. It felt like you could either join them and invest, or read about LeanKit in the papers later.?

• What we can learn: Above all else, figure out how to create that feeling of urgency otherwise you will receive a lot of ‘Nashville no’s’

In an unconventional move, LeanKit maintained only the founders on their board. This unique choice emphasized the founders' desire to retain control over the company's direction during the fundraising process.

• What we can learn: You can do things differently from the rest and still win.

Many thought that institutional investors would be turned off by the sheer number of investors on the cap table, but that wasn’t further from the truth. Insight didn’t care how many people LeanKit had raised from when doing their deal.

• What we can learn: No need to fear taking capital from lots of names. It’s an overblown fear that it will scare off funds.

There are advantages and disadvantages to raising exclusively from angels.

Advantages:

• Receive a faster, more predictable flow of dollars coming in.
• Maintain better control of the cap table.
• No large investor getting deeply involved in the business. Can ‘drive own bus.’

Disadvantages:

• Always have to be raising, which gets time consuming and cumbersome.
• No VC benefits like connections + advice.
• No outside validation of deal terms from the lead investor.

LeanKit’s fundraising journey is certainly a testament to entrepreneurial perseverance and innovative thinking. By embracing unconventional strategies and fostering relationships with new investors, they were not only able to raise millions of dollars, but eventually provided substantial returns to all 110 angels too! I can't even fathom how much work that was to build a network that large.

In the 6+ years since LeanKit’s sale, a lot has improved for startups in Nashville, but I’m not sure if Nashville’s angel investor market has shifted much.?

Some things to ponder:

• What else can we learn from the LeanKit exit?
• What do you think about the angel investor network that exists in Nashville 2012 vs now? How has Nashville changed vs stayed the same?