New Minnesota $15M investment fund to help 'bridge' financial gap for startups

Many emerging businesses have good ideas, products or services and demonstrate revenue growth but lack the money and mentorship to take the next steps in a company's life cycle.

Local venture capitalist Shane Erickson is hoping to help those companies bridge that "capital gap" to become a mature business through a new investment fund run by his business, Traction Capital.

Erickson raised $5 million as of March 5 for Focus Fund I and is hoping that it will end up with $15 million through successive financing rounds. He plans to invest primarily in Minnesota companies and make the fund's first investment sometime in August, with more by the end of the year.

So far, Erickson has 21 investors in the fund, many of whom are experienced business owners and entrepreneurs who have agreed to mentor prospective companies within the fund.

To differentiate his fund from others, Erickson, an entrepreneur himself, is basing the fund's investment thesis on a business concept known as the Entrepreneurial Operating System (EOS), popularized in the business book "Traction" by Gino Wickman.

Erickson doesn't have a formal connection with Wickman or his book but has successfully used the concept in his own businesses.

He started his first company in grade school. That trading-card business eventually grew into a vending company and later retail stores for the cards.

In 1999, the company moved into the promotional-products business and became Innovative Marketing Consultants, or IMC. The EOS process is still used to run that business.

Erickson founded Traction Capital in 2010, a hybrid private-equity/venture-capital firm that works with early to midstage business from an investment and acquisitions standpoint.

Matt Meents, who met Erickson through the local chapter of the Entrepreneurs' Organization, also used EOS for marketing-technology firm Magnet 360, which he co-founded and led until Mindtree bought it in 2016.

Meents said he had "fantastic results" with EOS, which is a management philosophy that includes strategies to make sure company employees are all on the same page and working toward a well-defined vision and business plan.

"It's great for any company in early stage startup, but also any company that is hitting a ceiling and really wants to break through," Meents said. "It's a process or methodology to get everyone rolling in the same direction."

Meents, now CEO of another startup called Yardstik and an investor in Erickson's fund, said he will use the EOS with his new company as well.

Erickson hopes to invest in as many as 20 companies with Focus Fund I and believes, if the companies are successful, it will be a catalyst for developing successive funds.

Mike Paton is a certified EOS implementer who has been doing EOS consulting for more than 13 years. Erickson was one of his first clients and they remain friends, but Paton is not an investor in the new fund.

The system is designed for privately held entrepreneurial companies with 10 to 250 people, Paton said. The "simple practical tools" allow companies to "execute well and operate as a more cohesive functional collaborative team."

A benefit of the system is that while it's applicable for startups and young companies, it works for companies in just about any industry. That's something that appeals to both Erickson and Paton.

There is a $250,000 minimum to invest in the Focus Fund I. The fund is structured as a hybrid of a venture-capital and a private-equity fund. On the venture side, it is looking at companies with $500,000 to $5 million in revenue, where the owner is active.

"We would invest and become minority owners and help the owner grow the business and exit it within five to seven years, " Erickson said.

On the private-equity side, the fund would look at companies with $500,000 to $1.5 million in earnings or revenue of $5 million to $20 million.

Erickson envisions half the proceeds of the fund be spent on the acquisition side and the other half invested in the smaller companies.

To Erickson, long-term success of this fund would mean making a difference in acquisition or investment in 20 or so companies, helping those companies grow, expand employees and eventually earn good exits for the owners and the fund.

If successful, once Erickson and his partners invest 70% of the money in the first fund, he can begin raising money for a second fund.

That is his longer-term vision.

"Eventually I want to create something that continues on and helps the entrepreneurial community here forever," he said.

Patrick Kennedy • 612-673-7926