Joel Fontenot is Managing Partner at Trailblazer Capital, the only Texas VC firm to consist solely of entrepreneurs. I met with him recently to get a better idea of what makes VC’s tick. We began the discussion talking about the Dallas investment market. Many are already aware of the difficulty getting funding in today’s world, especially in DFW. Over 75 percent of the capital coming to local companies comes from outside of Texas. It’s certainly encouraging that money is coming in, but dismaying to discover the lack of belief that sources in our own region have about investing locally. Trailblazer is a breaking this pattern and focuses its energy only on deals located in Texas and Oklahoma.

We then talked about the great Bob Metcalfe, who Fontenot paraphrased as saying, “Art” is part of the word “startup”. So true. You can’t use a formula to build a successful company. It takes many pieces falling into place. Great idea, excellent team, viable market, among others. Fontenot actually quipped to me “Do you know how hard it is to create a $100 million company?” It was obviously rhetorical. But knowing plenty of startups that have struggled to get off the ground, it’s hardly surprising. It seems that many folks Fontenot has spoken with don’t completely appreciate that difficulty.

Do you know how hard it is to create a $100 million company?

Not surprisingly, Trailblazer receives pitches and business plans all the time, over 400 deals through the end of September. So how does a startup founder get Trailblazer’s attention? Despite the apparent overload, Fontenot assured me that the management team does well to triage the transactions at the “top of the funnel”, to get to a more manageable selection worth further scrutiny. As a transaction makes it’s way down that funnel, it receives more and more attention.

For those reaching out to Trailblazer for feedback on their idea or business, Fontenot offered some words of advice. One is that not all deals/transactions can be venture-backed. You must understand that the expected rates of return must be high enough for a VC firm to be interested in investing. You may have a great business, but firms are looking for a significant rate of return along the lines of 2 to 10 times invested capital in two to three years. So called “lifestyle businesses” simply don’t offer that return multiple. Another is to not form an LLC — but rather, form a C corp. Many choose an LLC for simplicity. But for the ease of stock classification and allocation necessary during fund raising, a C corp is the way to go. Fontenot also recommends using restricted stock to incent employees because they offer the greatest after tax benefit and it avoids the new reporting and valuation regulations for stock options implemented by the U.S.

I asked Fontenot some of his pet peeves about entrepreneurs, especially ones that ask for a meeting. The first thing he said was “Be Prepared”. Know who you’re meeting with. Learn about them. What is their domain expertise? Find out about their hobbies. What do they do on their personal time? Seek to establish that rapport before heading to that initial face-to-face meeting. He then mentioned that founders shouldn’t get too emotionally attached to their own idea or strategy. While he wants to see purpose and conviction in your eyes, he also wants flexibility to adapt. Fontenot acknowledges there needs to be a “healthy tension” between the management team and whomever is writing the checks. Pushback will happen, and is expected. But seeing your reasoning behind a task or strategy will go a long way towards convincing him. He adds that even if you reached out to him via phone or email, and haven’t heard back, don’t be afraid to follow up. Sure, he’s busy. But don’t let the fact that he hasn’t returned your initial call or email discourage you. Maybe he just forgot.

Nurture the relationship. Be prepared. Don’t get emotionally attached. Follow up.

I asked Fontenot for some parting words of advice. He suggested that entrepreneurs look at the MoneyTree Report (PWC Moneytree.com) for help with analyzing their market and valuing their company and NVCA.org for further insight into the VC business regarding deal sizes and standard documentation.

I joked to Fontenot about how busy he must be, fielding questions from people like me, and pitches and ideas from dozens of entrepreneurs. He acknowledged he sometimes struggles with the email overload. He added that he tries to get to inbox zero every Friday evening, but will settle for “inbox 20″.

A panel discussion on Incubators and Accelerators will be held on Wednesday 5:30pm at Maggiano’s in NorthPark Center. The panel will be moderated by John Reed, Partner/Mentor at Tech Wildcatters, and feature 3 CEOs of local DFW startups. David Stiles, CEO of ErgoNurse, Debra Wawro, CEO of Resonant Sensors, and Chris Fagan, CEO of Mobestream Media will discuss the experiences, the challenges they have faced in starting their businesses, and advice for people looking to start their own companies. Find more info here and here.

Formally established in June 2002, North Texas Enterprise Center for Medical Technology, Inc. (NTEC) is a Frisco based Incubator/Accelerator focusing on medical devices.  NTEC provides everything early stage Start-ups need to operate as effectively and efficiently as possible—saving these new start-ups hundreds of thousands of dollars and countless staff hours.  Their 11.000-square-foot Enterprise Center includes 3,000 feet of administrative offices and shared space with meeting rooms and a lab, where Start-ups will have room for things like prototypes, bench testing, light manufacturing, as well as completely furnished offices and cubes space. Most notably working with companies such as Emfinders, Ergonurse, Oxysure and La Jolla Digital.

Executive Director Larry Carlton tells us NTEC is “portfolio company program, which includes infrastructure (space at NTEC facility) and management services support, is focused on medical devices, healthcare related IT and software, and cleantech.  Our infrastructure only program (space at NTEC) is open to early stage technology companies in most any industry as long as their facility use is compatible.” , is open to companies from Texas and around the U.S..

Carlton gives us some insight to the NTEC process for filtering start up applications saying the process is a “Rigorous formal vetting process that includes members of our 100+ member advisory board.  We have about 4 levels of screening with each screen getting more granular.  We look at the team, the market, the intellectual property, time to product, ability to manufacture and scale, customer need (pain) and willingness to buy, capital requirements, competition, and our ability to assist and add value to the company and their development.  Many other things in-between”  also noting that NTEC has a “deep network and most of the companies we see are referred to us by our network, which includes hospital systems, universities, bankers, accountants, VC’s, angel investors, etc.”

When asked about trends in VC Carlton offered this, saying “VC investment is down substantially from historical levels and investment is in much later stage companies.  Early stage companies are not receiving much investment as they are competing with a sea of much more developed businesses seeking funding that are already in the market with product and revenues.  This trend is expected to continue until the backlog of IPO’s and Acquisitions are burned off over the next several years.  VC’s themselves are having a tough time raising new funds due to poor historical fund performance (post bubble 2001) and the shrinking pool of limited partner investors due to over allocation in venture.”

According to a Dallas Morning News Article, VC funding decreased by approximately $230 million in North Texas, while venture capital investments rose both nationwide and in Texas during 2010.

Based on comments by John Jaggers of Dallas-based Sevin Rosen Funds, this drop is due to a lack of attractive growth companies of similar scope and potential as Groupon, a Chicago-based company which just raised almost $1 billion and is rumored to be preparing for an IPO sometime later this year or early next year.

Even with this significant decline, North Texas still represented almost 25% of all VC funding in Texas last year.

It seems that DFW firms just aren’t looking to invest in early stage companies, which goes against a national trend that saw increases in Seed and Series A rounds last year. The industries that received the most funding  in DFW were biotech, telecom and health services.

Mobestream Media, the company behind the highly successful mobile app Key Ring, has raised $1.75 million according to an SEC Form D filing uncovered by launchDFW and confirmed by founder Chris Fagan in an interview this morning.

Key Ring is an application that allows you to keep all of your loyalty and rewards cards, that usually take up space in your wallet or keychain, digitally on your mobile device. The app runs on both the iPhone and Android devices currently.

Mobestream was a member of Tech Wildcatters’ first class, where they received $25,000 in seed money and 12 weeks of mentorship before presenting their company in front of a number of angel investors and venture capitalists. Fagan, however, attributes their ability to raise the cash to a pre-existing relationship with the folks at Austin Ventures, the only investor in the round.

“We had initially spoken with Austin Ventures before entering the [Tech Wildcatters] program. We had built up a pretty large user base and they were really interested,” said Fagan.

The company actually ended up raising more money than they had initially anticipated, but will use the extra cash to accelerate hiring and continue their explosive growth. They’ve already made a few key hires, including Bobby Billman who is a former VP of Marketing at Samsung Mobile.

In addition to the hiring spree (check their open positions here) Key Ring will be using the money to quickly expand to other platforms including Windows Phone 7 and Blackberry.

The company has seen phenomenal growth, with well over a million users and corporate partners coming on board in droves. They’ve also introduced coupons and offers within the app and have delivered an astonishing 5 million of those over the past 6 weeks.

For us here at launchDFW, it’s exciting to see more companies being funded in the area. Congratulations to the Key Ring crew!