5 Questions with Justin Kaufenberg at Rally Ventures


From founder to funder. Like many successful founders, Justin Kaufenberg transitioned to the venture side of the entrepreneurial ecosystem after a significant exit. Now a managing partner at Rally Ventures based in Minneapolis, we were excited to talk with Justin and hear his take on the state of innovation and venture from the dual perspectives of a founder and a VC.

Q:        Tell us a bit about Rally Ventures?

JK:       Rally Ventures was founded in 2012. I am one of three general partners along with Jeff Hinck and Charles Beeler who I originally met when they led the Series A into my prior company, SportsEngine. I started SportsEngine in 2008 and Jeff was on my board representing the Rally investment all the way through our sale to NBC Sports. Jeff and Charles became two of my closest confidantes who I really valued. When I eventually stepped down as CEO of SportsEngine, I decided that I wanted to be the same type of investor to other entrepreneurs that Jeff and Charles were to me. I was really inspired by their involvement, so I joined Rally as the third general partner in 2019.

Right now, we’re investing out of our $250 million fourth fund and we’ll be switching gears to our new fund five on January 1st.  We are a very decidedly Series A firm. We’ll do some seed investing and some Series B investing but the majority of our investing is traditional Series A. Those are anywhere from a $2 million to a $10 million first check into a company doing anywhere from $1 million to $5 million in annual revenue.

We have well-defined criteria for the sectors we invest in. We’re about 1/3 cybersecurity investing; about 1/3 what we call “future of work”, which often takes the shape of verticalized artificial intelligence. The third sector is “SaaS +” which is vertical software with embedded finance. So, the software serves a particular industry or a particular vertical and then embedded within that software is the ability to process credit cards, manage money and bank accounts, issue debit or credit cards, buy insurance – basically all of your traditional banking institution capability embedded right within your software.

One of our notable and still active investments is a company called Braze, a marketing automation company. Rally led their seed round when they were just getting started and now they have about $500 million a year in annual revenue. That’s a great example of a company where we led their first round a decade ago and then we participated in the Series A the B the C, D the E and we’re still an investor now that they’re a public company.

An example in the cybersecurity space is our investment in a company called Arctic Wolf. They’ve gone from zero to close to $500 million in revenue and they serve a niche we really like which is cybersecurity available to non-Fortune 500 companies. Historically, cybersecurity has been so expensive and difficult to implement that unless you were a very large corporation you couldn’t afford it or you couldn’t deploy it. Arctic Wolf makes that available to mid-market companies and small businesses, all of whom are under constant attack from cybercriminals these days.

Q:        What makes you and NVNG a good fit?

JK:        The majority of Rally’s team is based in our Minneapolis office (the rest of our team is in Menlo Park, CA).  Both of the co-founders and I are originally from Minnesota, so it’s a firm that’s been built in the Midwest.

We have invested more dollars in Midwest software companies than any other venture capital firm in history. We’ve generated close to $5 billion in exit value just in Midwest software companies over the last 25 years. We’ve created about 5,000 jobs just in Midwest software companies. Jeff and Charles started in venture capital in 1997 so we’ve had a significant focus on this region for a really long time, and I think that’s a big part of what makes this such a good fit. We really believe in the Midwest and think it’s an ideal place to build a company.

Additionally, I went to the University of Wisconsin-Eau Claire and co-founded SportsEngine in my dorm room there, so I feel like I have a good sense of what founders in the Midwest need.

Q:        Tell me about any trends you’re seeing in the venture space right now.

JK:       We’re a big believer in this “SaaS +” movement – the idea that software companies are not just generating revenue by selling software but also by having embedded financial services like embedded payments for example. From the outside, it often appears as though they are traditional software companies, but the reality is that 50%+ of revenue often comes from things like payments and embedded financial services. “Saas +” is a term we coined a long time ago and it’s happening in countless industries. So, that’s a major trend that we’re seeing.

Another trend we’re seeing is that venture capital valuations are down across the board. This has been a difficult market for entrepreneurs to raise money. Generally speaking, right now, we believe in what we call mature Series A, companies that already have multiple millions in recurring revenue. We believe that’s the most attractive valuation pocket right now.

Q:        What is your take on the Midwest Venture ecosystem?

JK:       The Midwest venture ecosystem is in the best shape it’s been in my 20 years in the entrepreneurial and venture space. When we started SportsEngine there was almost no seed capital available here. Really the only source for early-stage capital in the Midwest was Angel investors and they were typically poorly organized, difficult to find and weren’t writing very large checks. The advent of a number of different pre-seed and seed funds in the Midwest has been absolutely critical in the past 10 to 15 years. It’s made this market much more attractive for firms like Rally and other Series A investors. For us, having local seed and pre-seed funds as partners is a lifeblood in terms of deal flow. It means that we get to see a lot of companies that they have effectively gotten off the ground. They’ve gotten them to a size that is appropriate for us. The influx of seed capital in this market makes it viable at a scale that we’ve never seen before.

Talent mobility also continues to make the Midwest more attractive. The best engineers in the world now don’t have to be based in your backyard. For a long time, you could build a startup here but it was difficult to grow a very large company in the Midwest because there weren’t many chief product officers, chief technology officers or experienced venture backed chief financial officers here. Talent is really no longer an issue. We think the industry here is in the best shape it’s been in ever.

Q:        In your work at Rally – what are you most proud of or passionate about?

JK:       When I was running SportsEngine and now at Rally, I tend to spend most of my time on the people. I’m usually the board member who spends the most time talking about the org chart and how the company is being built from a people perspective.

At the end of the day, it’s effectively impossible to build a great company without having a great team and that’s really hard to do and it’s really nuanced. How is the org chart built? Who reports to who? What’s the right level of executive talent at the right stage of the business? Who does and does not have the stomach for a startup? Who does and does not have the playbook when it’s no longer just a startup and they have to scale?

It’s incredibly difficult, so I tend to spend most of my time thinking about the human strategy behind these startups. It was my passion at SportsEngine and now it’s my passion at Rally as well.