Denver firm acquires startups unable to raise a Series B

By   –  Reporter/Colorado Inno associate editor

There’s an expectation in the startup sphere that successful companies raise through the alphabet from Series A to B and on with little friction, hitting funding milestones with each passing year.

The reality is that despite an exorbitant amount of money flowing into Series A investments, the next steps are becoming increasingly hard to reach.

Krista Morgan is extremely familiar with that struggle, having experienced it with her past company, online lender P2BI. Nearly two years ago, the company was involved in a fraud case perpetrated by New York’s MyPayrollHR that caused a massive financial impact.

“When we had this issue in the portfolio, this fraud hit, basically we lost an equity round and all of a sudden we didn’t have the money to continue,” Morgan told Denver Business Journal. “You’re really left kind of alone.”

To protect its customers, clients and employees, the company went through a successful restructure and Morgan exited the business in early 2020.

Leaning on that experience, Morgan is now one of three general partners at Denver-based Stage, a private equity firm that seeks to acquire and guide early-stage, venture-backed startups that are unable to raise Series B rounds.

“Having gone through it myself, I love what we’re doing here. We’re taking these companies that really have been given a lot of capital and built something of value, but it’s not enough to get that next round of capital,” she said. “Instead of telling them they’re a failure, we say let’s take a whole different approach and do something different.”

Stage has been around for a decade, started in 2008 by Daniel Frydenlund with a similar interest in acquiring companies that have been passed over by traditional capital. Now, the group has closed its first committed capital fund aimed at supporting this class of startups.

“Getting acquired doesn’t have to be a death sentence for the founder or their teams,” she said.

Together, the trio are looking to provide an alternative path to growth and, ultimately, an exit.

Stage is looking for Series A companies that have received between $5 and $20 million in venture capital and have over $2 million in revenue. Their goal is to acquire and recapitalize those startups, offer a new management philosophy that doesn’t prioritize venture investment, and hold them for two to three years. From there, Morgan said Stage will look to sell them either to a strategic investor or another private equity firm.

“We’ve got into this mindset that if you’re not getting venture backed, you’re not a good company,” Morgan said. “I think that mentality is what we’re really trying to change.”

Due in large part to early success of its five portfolio companies, including corporate learning startup Zeal and Haystack Mountain Creamery, Stage closed its first fund in October and has shifted its gaze to raising a second fund. With the traction of its first group, the partners envision raising a fund in the neighborhood of $100 million next time around.

“I can see us raising a $100 million fund next year and then we would buy roughly 20 companies at that point, all with the same exact makeup and situation, just companies that are a little larger,” Frydenlund said.

SOURCE: Denver Business Journal

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November 2021 Newsletter

Dan, Krista, and Ingrid got together in early 2020 to build upon what Dan started in 2009 and expand it into a fund model. With venture dollars increasing, many good companies are being orphaned by their equity and need an alternative path. Krista, having faced relatable obstacles in her founder path, recently published a blog on the experiences that led her to joining Stage as a General Partner.