If it involves entrepreneurship and it’s located in Spokane, chances are good that Tom Simpson has something to do with it.
The 55-year-old Spokane native is president of the Spokane Angel Alliance investment fund, chairman and co-founder of Spokane ecommerce conglomerate etailz, co-founder of the Toolbox business incubator, and co-owner of the Plechner Building downtown, where Share Space Spokane is opening. Oh, and funds he’s managed have invested in some of the Spokane area’s most successful startups.
The Journal sat down with Simpson recently to talk about startups, venture capital, and his evolving career.
Journal: It seems like you are involved in a lot of different ventures. I wanted to get a sense of how you divide your time.
Simpson: You know, it’s all blended together, quite honestly. My passion is stimulating economic growth through entrepreneurship here in Spokane, whether it’s at etailz, or Toolbox, or the Spokane Angel Alliance, or Share Space downtown. It all kind of weaves together. Primarily, it’s helping first-time entrepreneurs with the guidance and contacts and capital to get to the next level. On a day-to-day basis, my office is back in etailz. But how I divide it changes every single day.
J: Would it be accurate to say you spend the biggest share of your time with etailz?
Simpson: I’m at etailz on a daily basis and I sit right next to Josh (Neblett), my co-founder, so yeah, the majority of the time is spent on etailz-related activities.
J: How did you get to where you are now? How did you become sort a go-to guy for entrepreneurship in Spokane?
Simpson: It was a circuitous route, nothing ever planned. I started out as a CPA, working in Spokane back in 1982. Then I went to graduate school on the East Coast at Wharton (the business school at University of Pennsylvania).
Where I really got the exposure to emerging growth and working with entrepreneurs and working with venture capitalists was when I worked as an investment banker in Seattle, for a regional investment banking firm called Dain Bosworth. And that was from the late ’80s through the mid ’90s. That’s when Seattle was just burgeoning with growth, and all sorts of cool companies were starting up. I was in Seattle around all these entrepreneurs and raising capital and working on IPOs (initial public offerings), and that’s when I got exposed to it.
J: At that time, it seems to me that IPOs were more of an exit strategy than they are now.
Simpson: IPOs aren’t really exit strategies. They’re transitional strategies. People often think about them as exit strategies, but if you talk to someone who has been through an IPO, they’ll tell you it’s definitely not an exit strategy. It’s maybe a rite of passage or another step in growth. You aren’t exiting. Especially with Sarbanes-Oxley (the federal act passed in 2002 to regulate more tightly publicly-traded companies), you are under the gun to perform on a quarterly basis.
J: When specifically did you come back to Spokane?
Simpson: That was the summer of 1995.
J: And what was the catalyst for that?
Simpson: I was recruited back to Spokane by, primarily, Dave Clack. Dave Clack and few other individuals had put together a venture fund called Spokane Capital Management. It had raised $3 million to invest in local companies. The fund was fully invested and had performed reasonably well. The individual who was leading the fund had gone on to do other things. The board of Spokane Capital Management said, ‘We can either shut this down or find somebody to take it to the next level.’
I had known Dave growing up, and we connected. He encouraged me to apply for the job, and I did. He hired me, and I came back to Spokane to do version 2.0 of Spokane Capital Management.
J: How much were you managing at that time?
Simpson: When I came back, my goal was to raise a $5 million venture capital fund. My premise was that the Northwest was under-venture-capitaled, that there were lots and lots of opportunities coming out of the Northwest but only a few venture capital funds. My premise was right. At the time, there were only four venture capital funds in the Northwest, of course all in Seattle.
So my goal was to raise $5 million to invest in those opportunities, and I exceeded my goal by 20 percent and raised $6 million. The timing was great. This was 1996. We had some early successes right off the bat, and a year after that, I put together a $33 million fund, and in 2000, I put together a $133 million fund.
J: When you were putting together those larger funds, were you still tied to that initial group?
Simpson: The initial group was partners of mine in those endeavors. I did change the name from Spokane Capital Management to Northwest Venture Associates, opened up an office in Seattle.
J: You said you applied for the job initially. Did you go from being an employee to …
Simpson: A principal. Yes, yes.
J: From that point on, what did you do?
Simpson: I was off and running. My most successful investment in Spokane was Packet Engines. I invested in Packet Engines and was on the board of that company.
J: Packet Engines had to have been one of the most successful venture capital investments to come out of Spokane. Period.
Simpson: Recently, yes. And World Wide Packets as well, which was the next company that Bernard Daines founded. I was an investor in that company as well.
J: Could you give me an idea of scale when you talk about venture capital funds at that point in time?
Simpson: A $6 million fund was a very small fund. A $33 million fund was a small fund. A $133 million fund was maybe an average-sized fund. By Northwest standards, a $133 million fund domiciled in Washington—not an outpost of a Silicon Valley fund—was a good-sized fund. The other funds in Seattle at that time, Madrona and Voyager, they were roughly the same size.
One thing about that, though. My initial premise was that the state of Washington was under-venture-capitaled when I started in 1995-96. By the end of 2000, I think I counted 43 venture capital funds. During that timeframe, the industry swelled—a huge increase in the number of venture capital funds, a huge increase in the dollars under management. It became somewhat of a bubble.
J: Who was it that was putting money into those funds at that time?
Simpson: Everybody. If you think back to 1999, there were IPOs almost daily. The market was rising, and everybody wanted to be on that train. Individuals. Corporations. Large institutions. That’s what turned it into a bubble.
J: Where did your activity go from there? In 2000, we had the dot-com … is it too strong to call it a crash?
Simpson: I don’t think so. It was a crash. It was a severe correction. You had a lot of things going on. The market crashed. The tech sector crashed. You had Sarbanes-Oxley, which made it very difficult to go public, so everything kind of changed then.
J: So what happened with you at that time?
Simpson: In the first five years of that decade, I was still investing my 2000 fund, which was my $133 million fund. I chose not to go out and raise another fund, because it had become a bubble. My premise that the Northwest was under-venture-capitaled wasn’t really correct anymore.
Every time you raise a venture capital fund, it’s sort of a 10-year obligation. In the first five years, you’re investing the fund, and in the next five years, you’re working with those companies and harvesting them. I decided I didn’t want to sign up for another 10-year commitment.
I also, frankly, decided that I really wanted to spend more time in Spokane. When I had my venture funds, I was in Seattle a couple of days a week. I had an office there. I really was primarily focused on companies in Seattle and Portland. I wanted to devote more time to Spokane-area companies.
J: With the $133 million fund, what percentage of that was going to Spokane-area companies?
Simpson: I couldn’t tell you specifically, but it was a small percentage.
When you have a $133 million fund, you can’t be seeding companies to the tune of a quarter million or a half million. The economics don’t work. But that’s the bite size that a lot of companies in the Spokane area need to get started.
J: At that fund size, what’s your sweet spot?
Simpson: You think of an average venture fund, it doesn’t have more than 20 investments, so you’re looking at $6 million or $7 million. You don’t invest that right off the bat. You’ll maybe invest $2 million to $5 million and save some in reserve.
J: Take me through what a success venture capital transaction looks like.
Simpson: The schoolbook way of looking at it is, a company has an idea or a team has an idea. They probably don’t have revenue. They might have a prototype. They do an angel round or a seed round. They raise maybe a couple hundred thousand up to a million or million and a half. I read recently that the average seed round for this year was around a million and a half dollars, up from $300,000 at the beginning of 2014, so we’re in a bit of a bubble right now.
But anyway, you would start with that amount of money and you would go out and prove yourself. You’d launch a product. You’d gain some additional revenues, then you’d go out and do a venture round. Then you might go raise $3 million to $5 million in a Series A round. With that, you fully develop the product. You expand your sales force. You grow your revenues. Then maybe you do a Series B. Maybe you raise $5 million or $10 million or $15 million. And maybe you become cash-flow breakeven.
And then the venture people who have invested in you, after three to five years, will start tapping you on the shoulder and saying, ‘Time for a liquidity event, or an exit.’ And they’ll point you toward selling the company to, ideally, a large strategic investor or a large company in that industry. Sort of like we saw Purcell being sold last year to EnerSys. A few years ago, TriGeo sold to Solar Winds. World Wide Packets sold to Ciena. Packet Engines sold to Alcatel.
Or you go public. But it’s more difficult to go public these days, and going public, like I said earlier, really isn’t an exit. You don’t necessarily get your money back in an IPO. It’s a path toward liquidity, but you have an asset. You have a stock. But in a sale, you typically get cash up front or mix of stock and cash.
That’s the typical model. I will tell you, I’m someone who has challenged the venture capital model. I wrote an article once titled “Is The Venture Capital Model Broken?” that was the cover story for the Venture Capital Journal.
I’m a little off-topic now, but when I started etailz with Josh and Sarah, I specifically laid out how we were going to start and lay out that company, really violating many of the premises of the venture capital model.
J: Because you were more hands on?
Simpson: Not more hands on. One of the pieces of the model I talked about earlier is that you raise the seed financing, then after that a Series A and a Series B. People always applaud that. They’ll read the newspaper and say, ‘Wow, XYZ company just did a Series A, then they raised a Series B. They raised $15 million. That’s really cool. You raised all that money.’
I oftentimes sit back and say, ‘What if that company never had to raise all that money?’ With that seed financing, they figured out a business model that was highly profitable, and they never needed to raise more money.
That’s an indication of how I advised Josh early on. We went after seed money early on, but we never went after a Series A or a Series B, because I advised Josh early on, let’s try to be profitable as early as we can so we don’t have to raise that capital.
J: Because if you do that, you’re giving up less ownership in the company.
Simpson: Correct. Correct.
J: How has the venture capital model changed over the course of your career?
Simpson: I don’t think it has changed. It hasn’t changed. The venture capital model has stayed intact. A lot of the tenets and structure have persevered.
J: But your approach has changed.
Simpson: My personal views on the model are different. The real difference is, the venture capital model is one of high risk, high return. You are going to swing for the fences. They want to look at a company and say, ‘This can be a billion-dollar business in five to seven years, and we’re going to go all in to make that happen.’
There can be a lot of roadkill along the way. Founders get diluted. Founders get fired.
A lot of venture capital companies are good at finding companies that go from zero to 60.
But that’s not really for everybody. A lot of entrepreneurs get stars in their eyes thinking they can do that, but again, there’s a lot of roadkill, and unnatural decisions are made.
We all look at the Googles and the Facebooks, but there are a lot of successful businesses that can be successful businesses in their own right without going through some of the hoops that are required by the venture capital model. Etailz is a good example of that.
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