Early-stage venture fund New Stack Ventures just raised $42.6 million for its second fund, which is designed to capitalize on founders who don’t have an educational background or the place we usually see entrepreneurs.
A Chicago-based firm that describes itself as “the largest single-partner U.S. mobilization ever carried out between the coasts.” fund prides itself on being unique among other venture capital firms, and that comes from its founder and CEO. Partner Nick Moran, formerly of Danaher in M&A and product management, where he developed an analytical tool for testing compounds in drinking water.
When Moran started investing in angels, he found the whole startup fundraising process confusing, so in May 2014 he launched a venture podcast called “The Full Ratchet” to interview other VCs and ensure funding transparency.
New Stack raised its first $6 million fund in 2018 and has since added 38 companies to its portfolio, including Hologram, Cybrary, Fairmarket and Tovala. It makes angel, upfront and seed investments in B2B SaaS startups in industries such as finance, healthcare, cybersecurity, supply chain, construction and real estate.
I spoke with Moran about how the company’s focus shifted between the coasts and how investments developed there. The following has been edited for clarity and length.
TK: The current portfolio is mostly corporate/B2B, with some notable investments in food technology. Why are these areas attractive to you?
NM: I come from the corporate B2B world, so about 75% of our portfolio is enterprise SaaS. When I returned to Chicago and was an angel investor, people were focused on raising unicorns and had no control over areas such as food technology or social commerce, which had breakthrough success. We didn’t start there with a dissertation, but due to the lack of capital and networks in the Midwest, we had the opportunity to support these founders.
TC: Looks like you watched between the coasts before it was popular. What were the first difficulties?
NM: To make it work, you need to bring together a lot of materials – a network of founders, a network of talent and a network of capital. The thesis of the first fundraising, outsiders and investments in the center of the country was a difficult task. We have just closed the second growth and the thesis has been approved and we have hundreds of investors and people who are motivated and enthusiastic. We think the big story has to do with the migration of Midwesterners back to the Midwest who had to settle in the Bay Area to work. It was a huge tailwind for us.
TC: How much have these ingredients improved?
NM: Capital and talent networks are strong right now, especially when working remotely. We’re still on the coast when it comes to Series A and Series B, but investors are backing the founders of the Midwest. It’s tricky at first, but once you’ve gained momentum and investors see the value, they don’t need to attend board meetings in person. We saw that there is a demand for investments in our companies. We’re starting with Series B and our first D round is coming up. When I first started, this wasn’t the case for Midwestern companies, but now, thanks to technology, you can have networks everywhere.
TC: How many companies do you want to invest with Fund 2?
NM: It will be 35 investments, the check will increase from $400,000 to $1 million.
TK: Within a company and between companies in a portfolio, the diversity of venture capital is paramount. How does your company deal with diversity?
NM: Much of our external thesis is about people who are marginalized or underrepresented. The founders of our portfolio companies help break traditional stereotypes in technology. Hosting The Full Ratchet taught me that more diverse teams work better than less efficient teams. We are excited to announce several new employees to our core team in the coming months who will help us embrace and promote gender and racial diversity in venture capital. To help reach out to “young outsiders” through venture capital, we launched the New Stack Scholarship in 2020. The program’s graduates were 58% female and 85% underrepresented, with many of them taking full-time jobs or internships in venture capitalists and technology. This group has materialized the New Stack, and we look forward to educating and serving the next generation of great investors.
TC: Why do the founders want you on their investment table?
HM: From the very beginning, the venture capital industry has been chronically lacking in innovation. They used to invest in the same industry and person, but we see a future where there is innovation. We innovate through our podcasts where founders connect with us. If you ask the founders why they chose us, in the Midwest most VCs don’t know the analysts or employees of all Series A companies. We could argue that since we interviewed them and established relationships, the founders want access to the decision makers and we provide this hot ramp to companies on the shore.