Covington's Connetic Ventures succeeds by leading investments from behind

VC firm syndicates startups with a lead partner

COVINGTON -- When you have money to invest in startups, as does Covington-based venture-capital firm Connetic Ventures, you hear a lot of pitches like the one that Lindsay Fairman made last month.

Fairman founded Shelfscouter.com, a website that independent grocers can use to take orders from customers online. Its tagline is "Independent grocery e-commerce made easy."

Once a month, the leadership of Connetic Ventures gets together to hear pitches from companies like Shelfscouter.com. Shelfscouter.com was one of about 80 startups the company screened before inviting a handful to make presentations, Connetic Ventures founder Brad Zapp said.

Fairman told her audience that she was also a mother who hated to take her children to the grocery store. Producing a $20 bill, she said she'd gladly pay someone to do her grocery shopping for her.

She wants to support local groceries, she said, and that's where Shelfscouter.com comes in. "Today's customer demands convenience, and local grocers are failing to deliver it," she said.

She told the group that her company had already signed up one customer, Clifton Market, and planned to move forward with five others. The company makes money through a monthly subscription fee, she said, and also a transaction fee for each order made through the system.

She shared revenue projections that showed the company losing money for the first two years, but turning a profit in 2018.

Her presentation lasted only four minutes, which was unusual because it was only about a tenth of the time most presenters spend, said Connetic Ventures partner Kyle Schlotman. Most of them pitch for about 40 minutes, then spend another 30 answering questions.

Schlotman asked Fairman to walk him through a hypothetical transaction made at Shelfscouter.com, which she did. Once customers have chosen their items, she said, they are asked when they want to pick up their order, or if they want the groceries delivered for an extra charge.

Another investor asked Fairman what's to stop Amazon.com from doing the same thing that Selfscouter.com does.

"The connection with the grocery down the street is not going away," Fairman said.

In a conversation after the meeting, she explained that there is a perception, particularly among millennials, that larger grocery stores are not as careful in their selection of produce as smaller ones.

After about 30 minutes, the presentation and questions ended and Fairman and company left the room. It didn't take long for Connetic Ventures management to agree that although they liked the company, they didn't want to invest in Shelfscouter.com.

The concept was similar to one that Connetic Ventures had heard previously but declined to invest in, Zapp said. Shelfscouter.com had plenty to like, he said, with its strong staff and some good customers, but "we're waiting for something more exciting for us."

It pays to be selective. Since Zapp started the firm a little more than two years ago, it has invested in 31 companies, he said, and 30 of them are still in business. Its first fund started with $5.5 million -- the firm doesn't disclose how much of that it's already invested.

Connetic differs from other VC firms in that it doesn't lead deals, Zapp said. It syndicates them with a lead partner. That's attractive to other firms, he said, because Connetic doesn't compete with them on terms offered to the companies it invests in.

If this business model works, Zapp said, then the firm hopes to raise $20 million to launch a second fund in 2018. That amount would give Connetic Ventures enough capital to invest in as many companies as it wants to, he said, and hire enough staff to realize some efficiency of scale.

As it is, it's just him and Schlotman and a part-time employee, which isn't enough to comfortably do the core business of the firm of seeing deals, vetting deals, building relationships and reporting to investors.

The firm makes deals in Indiana, Kentucky and Ohio, and Schlotman regularly visits Pittsburgh, Raleigh, Charleston and Atlanta. The company recently opened an office in Chicago, where Schlotman spends about one-third of his time, meeting startup owners and other venture capitalists.

Connetic Ventures' goal is to have the lowest ratio of fees to money invested of any VC firm in the country, Zapp said. Or to use a phrase he learned in his days of working as a financial advisor, to put more "money in the ground."

"An offering that puts more money 'in the ground' is much better for investors," he added.

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