The beauty of the model is, they’re not the ones doing any diligence, they’re just partnering with good VCs.
This is not a black-and-white world. Sure, things would be much easier if everything slid neatly into clearly-defined categories — good/bad, happy/sad, fair/unjust, but anybody who pays attention to the evening news knows this is not the case. Our world is too complicated to be categorized in rigid, unforgiving terms. An experience can be simultaneously happy and sad, just as a “bad” person can show kindness while a “good” person can show cruelty. On Game of Thrones, the ultimate study in gray characters, your rooting interests switch scene by scene — there are no good or bad people, just a world filled with people capable of doing absolutely anything at any given time. In that respect, Game of Thrones’ world echoes ours and trying to pigeonhole people or experiences or emotions into one specific area is impossible.
Now that I just spent an entire paragraph explaining how this world can’t be divided into black-and-white categories, I’d like to tell you about Service Provider Capital. They’re a relatively new venture fund and their investment strategy is clearly defined in the strictest of terms.
“It’s pretty black and white,” Jody Shepherd, SVP for Square 1 Bank and co-founder of Service Provider Capital, said in regards to their investment goals. “The first institutional equity round of a million dollars or more that is credibly led by a VC. The reason we have such a hard line on that, we want to make sure that somebody is doing some diligence. If it’s just a bunch of family and friends, they might just be investing because they like them. But if it’s an equity firm committing a significant amount of money, then they are doing diligence.”
Shepherd, along with Noah Pittard, co-founded Service Provider under these guidelines. They will contribute a small amount of money ($50,000) into every Series A round over a million dollars led by a VC firm. They will provide companies with connections to a wide variety of service providers in the industry. They will concentrate in areas they are familiar with (basically the Rocky Mountains with a high concentration in Utah and Colorado). And they won’t do any of the legwork normally required for an investment, instead trusting in other VC firms to do the work for them.
“We’ve got LPs that are sending us deals and we’re getting into those deals,” Shepherd said. “It’s very passive, we’re not taking a board seat, we’re not negotiating, we’re not doing any sort of diligence. Our diligence is piggybacking on the VCs that are leading the round.”
Sounds pretty great, right? Imagine if your job was letting other people do work and then using that work to your advantage. If you think that sounds cutthroat, stop right there.
“What we’ve heard from venture capital firms is $50,000 is small enough that we’re not ruining anybody’s economics,” Shepherd said. “Nine times out of ten they can find room for another $50,000 in a Series A. Between Noah and I and our LPs, we try to add as much value as we can. Making introductions to VCs, making introductions to potential customers….we try to harness the power of our network for the good of the companies.”
Service Provider prides itself on being able to connect companies with a wide array of service providers — amongst them Utah-based Diversified Insurance Group, Advanced CFO Solutions, and Kunzler Law Group — that drastically enhance the resources and connections for each investment company. The $50,000 is great, but the LP network is just as valuable.
“The beauty of the model is, they’re not the ones doing any diligence, they’re just partnering with good VCs,” said Spencer Hoole, CEO of Diversified Insurance Group. “It’s one of those things that works all the way around. They’re not crowding anybody out, just a tag-along investment for a relatively small amount at $50,000. If you’re a VC and your sweet-spot is doing Series A rounds, what a great partner to have.”
Despite being in existence for less than a year, Service Provider has already invested in 11 different companies, including TaskEasy, SpinGo, Simplus, and Moki. Because they want to take an index fund approach, Shepherd envisions getting 50 or 60 deals into this fund with concentration on one specific area.
“This is the Rocky Mountain fund,” Shepherd said. “We’re looking at Colorado, Utah, we have one deal down in Arizona. But by and large, it’s going to be Provo, Salt Lake City, Denver, Boulder, that’s where 90 percent of our deals are going to come from. When you look at our LP base, the majority of our LPs are service providers in this area and they want to invest in companies in their backyard.”
We don’t live in a black-and-white world, but in Service Provider’’s neck of the woods, they’re looking to make it so. In a venture capital world where terms and money shift in the most mercurial of ways, Service Provider is taking a different, simpler, and clearly-defined approach.
So if you’re somewhere in the Rockies and raising a Series A round that is led by a VC, know one thing: Service Provider Capital wants in.