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LeanKit: Tech-savvy NVille VCs harder to find than Software talent
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Chris Hefley

Updated Aug. 12, 2014: CEO Hefley said earlier this month the company's total capital-in is about $9MM, with more than 100 Angel investors participating. CrunchBase says that by September 2013 its total Series A raise was $8.6MM. A January 2014 LeanKit filing with the SEC said the company was raising further capital with an undefined target. Our original story below noted that LeanKit might raise $10MM in 2014. - Ed.

FRANKLIN tech startup LeanKit has found it easier to recruit software-development talent than to raise venture capital in Tennessee, according to Chris Hefley, co-founder and CEO.

LeanKit expects to have at least 40 employees aboard by June 1, nearly the midway in a year it expects to generate more than $3 Million sales, up from 2012's $1.2MM topline, said Hefley. Sales are likely to reach $10MM or more in 2014, he said.

Its software-as-a-service (SaaS) visualization offering provides adopters of Kanban/Agile/Lean management and workflow systems greater ability to track progress, priorities and problems in their projects, portfolios or enterprise operations.

It has more than 1,100 customers and more than 23,000 seats licensed, and it estimates 150,000-plus total users, Hefley said. Its customers outside the US, mainly in Europe, account for more than 20% of its sales. Previously concentrated in information technology, its customer base is broadening to manufacturing, supply chain and other domains, he said.

The startup has raised $4.5MM to date and has roughly 50 equity holders, most of them Angel investors in Tennessee and Arkansas, he said. No Tennessee venture capital firm has yet invested. Hefley declined comment on whether its most recent capital raise has closed.

Asked about his next logical move, Hefley said that although he hopes reality proves otherwise, right now a capital raise of $10MM or more in early 2014 seems much more likely to get takers among East and West Coast VCs, rather than among Tennessee firms.

He's "keeping in touch" with at least a half-dozen out-of-state VCs, he said. He mentioned marquee-quality VC names, but asked they not be published. Inbound calls from out-of-state VCs have picked up since LeanKit's April designation by Gartner as one of its "Cool Vendors" in program and portfolio management; and, the company's subsequent May 20 presentation during Gartner's national summit for information technology and project and portfolio management professionals, according to Hefley.

Before undertaking another raise, LeanKit has work to do: It is working to raise market awareness that the LeanKit solution can constitute a visualization layer sitting atop other technologies, as well as functioning on a stand-alone basis. Broadening LeanKit's fit with other technologies is also a goal, illustrated by its recent announcement of its integration with Focused Objectives' modeling and simulation technologies, according to the companies' joint release.

Equally important, LeanKit will use recent investment to refine and demonstrate the scalability of its customer-acquisition model, and to show that potential global demand for its offerings goes far beyond project management, into other management functions, said Hefley. Doing that will complete LeanKit's positioning as bigger than "niche" status.

Hefley said he senses some local VCs bring to the table insufficient understanding of the software-as-a-service (SaaS) business model, resulting in wide disagreement on valuation and other issues.

LeanKit carries a valuation of 7X its revenue run rate, Hefley asserted. Rapid growth requires cash, and LeanKit profitability will show once again by 1Q 2015. Soon afterward, it is likely to merit valuation 4X to 8X EBITDA or more, he said. (SeekingAlpha and SterlingHoffman are among related SaaS model resources we found.-Ed.)

Some pushback on valuation is inevitable, even reassuring, Hefley readily acknowledged.

However, during fund-raising sorties the founders have confronted much less pushback on valuation in New York, Boston and the Bay Area than here at home, said Hefley, adding that institutionals in the other cities "got it." In contrast, when talk turned to valuation, Southern VCs often "acted like we were trying to rob them," said Hefley, a native of McMinnville, Tenn.

Recruiting high-grade talent has been relatively much easier, he said. Puzzled by chatter in Nashville about the apparent shortage of IT and software talent, Hefley told VNC that not long ago he asked around for an explanation.

One tech recruiter told him that many Nashville startup management teams are "just not willing to pay" adequately for talent. Strong software developers often come with near-six-figure or higher pricetags, Hefley told VC, adding with a chuckle that he had taken a paycut from somewhere north of $100K per year to become an entrepreneur. LeanKit continues "hiring as fast as we can find people," he added.

Ultimately, LeanKit's owners are likely to exit by selling to a strategic bidder within three to five years, though all options remain on the table, said Hefley, adding that an IPO is only a remote possibility.

There are probably five strategic players that are logical bidders for LeanKit, he said, without naming them.

VNC prior reporting and recent research suggest that relevant strategics include Microsoft, Compuware, HP and Instantis Oracle. A superficial scan of the web suggests current or potential competing niche or broader products include Netsuite, ProWorkFlow, CA Technologies, Workamajig, EPM Life, CIP Planner, Rally Software, Atlassian and VersionOne, among other possibles.

While the majority of current LeanKit staff work from its Franklin offices, some continue to work where they were found, in Seattle, Austin, Cincinnati, Atlanta, Fargo or elsewhere in Tennessee, Hefley added. Remote workers are regularly brought Nashville for three to five days at a stretch, mainly to ensure they build personal relationships and absorb the company's culture, he noted.

Two years ago, when it joined the 2011 Nashville Entrepreneur Center (EC) incubator class, LeanKit was already cranking more than $10K in sales per month.

Though it had already achieved the early customers that startups dream about, the company found tremendous value in access to EC mentors and to EC CEO Michael Burcham, whom Hefley credits with, among other things, insisting that his team focus on "where we wanted to take this thing," including consideration of an eventual exit.

Partly because of that experience, Hefley said he'd love to see one or more local incubators or accelerators add programs and services for more mature startups. In addition, he's discussed with a few like-minded local software business owners the need to do more to educate techies and investors, alike, about how the sector works.

COO Jon Terry

The founders still have controlling interest in LeanKit, said Hefley. Co-founders are Stephen Franklin, chief technology officer; VP-Product Development Daniel Norton; and COO Jon Terry. For more information on them, see VNC's 2011 story for more details on both product and team. Following an exit, the founding team is likely to undertake another tech startup, he added.

In January, LeanKit announced appointment of its CFO, Len Safford, whose earlier career background includes work with Deustche Bank, Lehman Brothers and Universal Safety Response, a formerly Franklin-based perimeter-fencing manufacturer. In December, it appointed tech-oriented Denise Grey, formerly with competitor Version One, to serve as LeanKit's chief marketing officer. She is in the process of relocating from Atlanta, said Hefley.

LeanKit's outside advisors include Dodson Parker Behm & Caparella, as VNC previously reported. It now uses two accounting firms, LBMC and McKerley & Noonan, said Hefley.

In VNC's September 2011 introductory story on LeanKit, Hefley projected 2012 revenue at about twice what actually materialized. Asked about that miss, Hefley said he feels it was mainly attributable to its then-immature process for making financial projections. Update 1:02pm: In a followup email, Hefley noted that its 2012 revenue was up more than 300 percent over its 2011 revenue.-Ed.

Its hiring priorities are software developers and sales/marketing folks. On the sales side, it's not looking for "consultants," per se; rather, it seeks people who can not only sell, but also answer questions from customers about how the LeanKit solution interrelates with their internal processes. Candidates with the Project Management Institute's Project Management Professional (PMP) certification are often the answer, he said.

LeanKit Inc., a Delaware C-corp, is successor to Bandit Software LLC, which was formed in 2009, originally with LeanKit as its dba. Its corporate structure and name shifted in January.

Hefley, his wife and their 4-year-old daughter reside in Williamson County. VNC

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Tags: agile, Angels, Chris Hefley, Compuware, Daniel Norton, Dodson Parker Beam & Caparella, entrepreneurs, Focused Objectives, Gartner, HP, information technology, Instantis, investment, IT, Jon Terry, kanban, LBMC, lean, LeanKit, McKerley & Noonan, Michael Burcham, Microsoft, Nashville Entrepreneur Center, Oracle, project management, recruitment, SaaS, SeekingAlpha, software, software development, Stephen Franklin, Sterling Hoffman, talent, technology, valuation, venture capital

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