Venture Capital Firm Puts Money Where Ideas Are

Arthur Ventures continues support of fledgling software companies

BY DAVE OLSON

Arthur Ventures, a Fargo-based venture capital firm that uses financial muscle to help fledgling companies grow and prosper, is itself growing.

Formed in 2008 with an initial fund of $11 million, Arthur Ventures recently announced the establishment of its Growth Fund II, a $45 million pool of money that brings the total value of assets under management at Arthur Ventures to more than $65 million.

Dollars from the new growth fund, known as AVII, will be invested in software companies that cater to the information technology, health care, agriculture and energy markets.

Similar to what occurred with an estimated $20 million of investor money pooled earlier by Arthur Ventures, dollars that are now committed to various companies, the new growth fund will focus on firms in the Upper Midwest – with some exceptions.

“We’re going to invest where the good deals are,” said Doug Burgum, Arthur Ventures chairman and co-founder.

Burgum, whose own money makes up a portion of the capital Arthur Ventures puts at risk when it invests, said one of his motivations for starting the company was the gratitude he feels for opportunities he’s been given.

That includes his success with Great Plains Software, a company Burgum provided seed money for and led for years until ultimately guiding it through an acquisition by software giant Microsoft.

“A huge team of people built that company,” Burgum said. “I have an interest in giving back, or paying forward, however you want to think about it.”

When it comes to his investment choices, Burgum remains a strong believer in the power of software to drive economic development and job growth.

“Software is still the greatest invention to date that extends human capability,” he said. “You get very excited about being able to have an impact on humanity.”

Early Intervention

Arthur Ventures occupies a particular niche in the world of venture capital, one aimed at a specific moment in the life of a start-up company, said James Burgum, brother to Doug Burgum and co-founder of Arthur Ventures.

“The type of investing we’re doing is called early stage, which is one stage after what we call seed stage,” James Burgum said.

In the seed stage, he said, companies typically seek “angel” investors to provide them with the resources needed to get an idea off the ground.

“What we do,” Burgum said, “is come in with $500,000 up to $3 million over the life of the business to try and help take that initial seed idea and turn that into an early stage company.”

More often than not, Arthur Ventures dollars go toward helping pay a company’s staff, James Burgum said, because the value of a hightech company often rests in the minds its workers.

“If they are successful and start selling their products to customers, as the company grows and builds value we’ll have a chance to return that increase to our investors,” he said.

Risking All

It can take years before investors in start-up companies see any kind of return.

Some never do.

James Burgum said he and others who hold a financial stake in Arthur Ventures understand the risk – and take it anyway.

“Part of the role we have as managers of a venture firm is really risk management, because early stage ventures are inherently risky,” he said.

Fargo-based Arthur Ventures recently completed a successful second round fundraising effort, generating $45 million for investments in early stage technology companies in the region. Back row, from left: Patrick Meenan, director; James Burgum, co-founder and managing director; Kathy Laney, operations director. Front row, from left: Kayleigh Biloki, accounting; Megan Lind, executive assistant; Andrew Christensen, associate.

“These are companies without customers, sometimes without proven product, even sometimes without experienced management teams,” he said. “There’s a chance they (invested dollars) could turn to zero.”

The flipside of the coin is this: Potential rewards can be substantial.

“Businesses we invest in typically are businesses that at some point will get sold to another business, or have an initial public offering where the ownership we have in those underlying businesses gets returned back to our investors,” James Burgum said.

“If we do that successfully,” he said, “they should have very high returns that are far above averages you would receive in other types of investments, like public stocks or bonds.”

James Burgum said potential investors are told up front they may not have access to their funds for five to 10 years, a commitment that requires a certain type of investor.

“The Securities and Exchange Commission has pretty strict regulations around who can participate in something like this,” he said.

Because there’s a chance for total loss, he said an individual must be what is called an accredited investor to participate in venture capital arrangements.

“Basically, the SEC says: ‘If they have a certain amount of net worth, then they can afford to lose it,’ ” James Burgum said.

Profit and Patience

To date, none of the companies Arthur Ventures has invested in have returned a penny to investors, but there is every reason to believe they will, James Burgum said.

“All six of the businesses that started as early stage ideas are now growing companies. It’s been fun to see the evolution,” he said, adding the progress has been enough to inspire a new round of capital contributions from Arthur Ventures investors, also known as partners.

“Investors in the second fund saw we had done a nice job creating value in taking seed-stage ideas to the point where they’ve become real companies,” James Burgum said. “They know there are potential returns down the road.”

He said one business being helped by Arthur Ventures that has a bright future is Intelligent InSites, a local company whose software has many applications, including helping hospitals track their equipment and supplies.

The first company to receive dollars from AVII, the new growth fund, will be Infusionsoft, a large Phoenix-based business that provides sales, marketing and e-commerce software solutions for small businesses.

While Infusionsoft doesn’t qualify as a start-up, it is in keeping with Arthur Ventures’ strategy of investing in a few established companies to add a dash of stability to its otherwise speculative portfolio.

“A company that’s very stable provides us some protection against early stage risk we’ll be taking with other companies,”

James Burgum said. ‘Local Impact’

Given the high-risk nature of venture capitalism, firms willing to dabble in it are few, said James Burgum, who is “thrilled and humbled” by the number of individuals and families willing to put their trust – and money – behind Arthur Ventures.

“It’s important to know there are a lot of investors that care deeply about having an impact locally,” he said, referring to individuals and families that have strong track records of business success in a variety of sectors.

“There’s not a lot of venture capital,” James Burgum added, “So, for them to put capital at risk says a lot about the investor base.”

Doug Burgum agreed.

“It’s about investing and it’s about building successful companies. Where that happens matters to communities,” he said. PB

Dave Olson Reporter, The Fargo Forum dolson@forumcomm.com

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