Nothing Ventured, Nothing Gained

There is no doubt that the number of venture and angel investors in an area is directly proportional to the number of successful start-up companies. Areas like Silicon Valley, Boston, San Francisco, Austin and Seattle are flush with investors willing to sink their money into the next big thing, and as a result have become popular places to launch a business. One big criticism of Northwest Florida is that it doesn’t have enough venture and angel investors to support a thriving business community.

Why Northwest Florida has lagged behind in offering investment opportunities to start-ups and what some people are doing to make the region more entrepreneur friendly. By Lilly Rockwell Originally published in the Aug/Sept 2011 issue of 850 Business Magazine Zero.

That’s how many Fortune 500 companies lay claim to Northwest Florida.

Contrast that to nearby Jacksonville, which is home to a respectable four Fortune 500 companies, such as the Winn Dixie grocery stores, and has a smaller population than the 1.3 million people that live between Tallahassee and Pensacola.

So what’s missing in Northwest Florida? Business experts say the clues to the success of many major companies are access to cash and experienced mentors early on.

Jacksonville also happens to be home to several venture firms and angel funds that specialize in making investments in businesses early in their corporate life.

Many of Florida’s most successful businesses started out as an idea that an investor believed in, supplying the necessary cash and mentoring at a crucial time to allow that burgeoning company to blossom into an economic powerhouse.

Especially in tough economic times, when banks are reluctant to loan money to companies that don’t have rock-solid balance sheets, private investment companies such as venture capital firms and wealthy “angel” investors fulfill a crucial need.

Not all businesses are able to “bootstrap,” a term for a business that relies on its own revenue and profits for growth, rather than loans or investors.

Like placing a risky bet, investors hope they will see a healthy return down the road.

Many of the most talked-about business success stories today, such as Google and Facebook, relied upon venture capitalists early on to fuel their growth.

“There is no question it is extremely important that a community recognizes that a vibrant entrepreneurial sector is an important long-term element to economic development,” said Alan Rossiter, the chairman and fund administrator of Jacksonville-based Springboard Capital, an angel fund. “Back in ’95 when I was working with business incubation … it became apparent from day one that without access to early stage equity capital the entire effort would be stillborn. The magnitude of an entrepreneur’s problem of accessing sources of equity capital cannot be overstated.”

But there is hope for Florida’s Panhandle. Quietly over the last few years, a small handful of private equity, angel funds and business incubators have emerged that want to help build a Northwest Florida that is a hive of entrepreneurial activity.

Just like real estate, it’s location, location, location

Experts in start-up financing say it’s important to have venture firms and angel investors physically located in a given region to attract the type of entrepreneurial activity and corporate growth that is common in regions such as California’s Silicon Valley.

Historically, investors have been reluctant to travel to Northwest Florida to preview the small handful of start-ups worthy of a closer look.  Increasingly, business boosters are pushing for those types of investment opportunities to be available locally, where investors have a real stake in the community and want to see companies be successful.

“One of the recognized deficiencies in the area is we don’t have a platform where investors can look at lots of opportunities at one time,” said Tim Holcomb, executive director of the Jim Moran Institute for Global Entrepreneurship at Florida State University. “Things like Innovation Park in Tallahassee are an effort to bring together lots of different start-ups and young companies in a way that might be attractive.

But we haven’t reached a critical mass in this area.”

Northwest Florida has at least one essential ingredient that has fueled so much entrepreneurial activity in areas like Silicon Valley: a research university. Business boosters are hopeful that the inventions that come from universities such as Florida A&M and Florida State will help ignite more local businesses.

“There is a natural disconnect between inventors and people with professional business experience,” said Mainline Information Systems CEO Rick Kearney, who helped found a private equity firm in Tallahassee.

“Inventors tend to live in a world of ideas and physics and mechanics of their invention, whether it is software or hardware. But they don’t have connections to big business …they don’t have money to see their dreams through.”

Though Northwest Florida has lagged behind the rest of the state in fostering a nurturing environment for start-ups, the state at large struggles to compete with the big dogs of private equity investing, states like California and Massachusetts.

Last year, Florida ranked 15th among states in the amount of venture capital invested in Florida companies, according to the St. Petersburg Times.

In the first quarter of 2011, Florida rose to No. 10 in venture investments, with $114 million pumped into Florida companies. But in that same time period, there were only six deals completed by Florida-based venture capital firms. Meanwhile, just the Silicon Valley area alone raked in $2.5 billion in venture capital investments.

Some of the more popular areas for venture capital firms and angel investors in Florida are South Florida and the Tampa Bay area. Collectively, they are home to a large majority of the state’s venture capital firms. These urban areas are popular locations for venture firms or other investment groups, because they have the right mix of wealthy individuals and large companies that often spawn retired executives with money to burn.

“This investment market has been underserved for a very long time,” Kearney said, referring to Northwest Florida. “Banks are not in the business of taking risks. Yet there are so many good ideas coming out of the universities and local entrepreneurs that went to Florida State and Florida A&M that have been toughing it out for years and need someone to get them across the goal line.”

It takes a special kind of investor to want to get involved in funding start-ups. There is no way of knowing whether the company you invest in will go bankrupt in a few years, or be wildly successful and double or triple the money you put into it.

It’s a high-stake lottery that some wealthy individuals thrive on.

“Participating in angel investment is an extremely risky proposition,” Rossiter said. “It’s almost like walking up to the plate where the only thing that counts is a home run.”

The draw for a lot of investors is a mixture of a purely financial incentive and a genuine interest in helping start-ups, with many investors being successful businessmen or women themselves who want to impart their knowledge to the next generation.

Rossiter said some investors are drawn to the potential for a “very large return.” But that is “balanced by a very, very large risk,” he added.

“There is a question of suitability for investors to participate in angel investment and therefore angel investment is typically done only by accredited investors and people with sufficient net worth that they can afford to allocate some small portion to a high risk investment,” Rossiter said. “It’s certainly not for everyone.”

Even Rossiter’s Springboard Capital has taken its lumps. It was founded in 2001 in Jacksonville and in its first fund “we had significantly more losers than winners,” he said. But lessons were learned and applied to the second fund, which Rossiter reports is doing well. He said there have been no exits yet, a term for when a company is either sold or goes public, yielding a return for investors.

“These companies are growing, there is cash flowing, we would expect within the next 12 to 24 months to have one or two exits,” he said.

Investors say a typical rule of thumb for most venture or angel investors is that 20 percent of the investments will fail, 60 percent will break even and 20 percent will do very well.

In Pensacola, white sand means more than beaches

In Pensacola, Rus Howard has found success running a three-year-old angel fund called Whitesand Investments. Howard could have run his fund anywhere, but chose Pensacola because of its climate and proximity to one of the companies he wanted to invest in.

Howard said he was familiar with Northwest Florida through an early investment in New York-based Pyhton Inc., which was involved in the wildly successful anti-cancer drug Taxol, an invention that came out of Florida State University.

“Taxol is the best anti-cancer drug in the last 30 years,” he said. After that early success, Howard started to consult with other start-ups.

“I started helping people, I saw an opportunity to invest,” he said. “When I first started doing it, I didn’t have money to invest. Then I did.” Suddenly, Howard was an angel.

One company he was investing in, Silver Bullet Technology, moved to Pensacola because his “wife wanted to lay out on the beach,” Howard said. Silver Bullet makes software for the payment processing industry, with several large banks as clients.

“He moved his business down here and kept trying to get me to move down here, and I said ‘No, no, no,’ ” Howard said. “One day, I learned if lived in Florida, I’d save enough on taxes to buy a new house.”

Howard relocated to Pensacola in 2003.

He continued investing on his own and started an angel fund three years ago. That means he raised money from several wealthy individuals to go into one fund together.

Howard soon discovered why there weren’t any venture or angel funds there before he came around. Finding investors is “never easy,” Howard said, adding that discovering good local start-ups to invest in is just as much of a challenge.

“This area definitely needs improvement,” he said. “If we restrict our investments to just this area it’s going to be very, very difficult. We’ve looked at a lot of local (businesses) and rejected almost all of them, though we have a few.”

One drawback, Howard said, is that the University of West Florida is “a great teaching university, but it doesn’t do a lot of research.”

Whitesand doesn’t have a particular industry specialty and generally sees more interest from Florida-based companies than out-of-state start-ups. Howard said Whitesand does not get deeply involved in the management of a company it invests in, trying instead to be “passive investors.”

One example of a company Whitesand thought was worth investing in is Houston-based Deep Gulf, which makes an underwater pipeline that is larger and can go deeper than existing pipes. But his investors will have to be patient before seeing many returns, it usually takes 10 years to see a return on investment.

A push to diversify Tallahassee’s government-driven economy

One of the reasons Northwest Florida has historically lagged behind in investor activity is it didn’t need it. Its business base was largely tourism and the small businesses, such as retailers and restaurateurs, associated with that. In cities like Tallahassee and in rural communities, the economy relied upon farms and government and university workers.

But increasingly the business community in cities like Tallahassee want to see more of the Fortune 500-type companies that bring hundreds of jobs so they can wean themselves off the perceived over-reliance on government and university jobs.

In Tallahassee, Adam Kaye has founded Silicon Tally, a hybrid business incubator and software lab formed to throw together smart, creative people in one physical space, using them collectively to work on ideas that could blossom into a company.

Kaye said the idea stemmed from a desire to see Tallahassee be more welcoming to a generation of tech-savvy 20-somethings who often leave the city for jobs elsewhere. He believes in the “if you build it, they will come” philosophy — if the right encouragement is given to start-ups, investors will flock to the area.

The idea behind Silicon Tally is to put people of different strengths together, from programmers to designers to business minds, and have them work on individual freelance projects near one another. But if one programmer, for instance, has an idea for new software, all could work on it and share in the work and rewards.

“A common criticism (of Tallahassee) is the lack of venture capital and angel investment,” Kaye said. “I don’t think it’s necessarily the lack of high net worth individuals. As I go around my network and explore the different pockets of potential resources, I am surprised at the amount of high net worth individuals in North Florida.”

Kearney is one of those “high net worth” individuals that Kaye is talking about.

He started his own private equity firm in 2006 with the intention of investing in companies within a 150-mile radius of Tallahassee.

His firm, Vision 2020, was started with the county’s help in footing the bill. In an ironic  twist, it seems even the investors themselves sometimes need help with start-up costs.

“The Leon County Commission gave us an administrative jump start with $750,000 to help us overcome some of the hurdles, which is the cost of a start-up,” Kearney said. “It will take that kind of money before the investor feels comfortable.”

Only about two years ago did Vision 2020’s first $5 million private equity fund start investing. It was completely seeded with money from local investors, Kearney said.

“Our investments range from small, like $10,000, up to $200,000. If more money is needed, we partner with other private equity firms,” Kearney said.

Unlike a venture capital firm, Kearney said Vision 2020’s approach is hands-off. “All of our investments are pretty much run by the entrepreneurs. We provide oversight and guidance and auditing.” He said they look for companies that are early in their business life cycle but still have a lot of room for growth.

One investment Kearney is hopeful about is Tallahassee-based Verdicorp, which is working on a new way of developing power, based on converting heat into energy.

Though Kearney “boot-strapped” his own information technology company, Mainline, he sees the value in offering a helping hand early in a company’s life. And he is largely running Vision 2020 as a hobby, along with his day job as CEO of Mainline.

“We are thankful for our success and would love to see other local Tallahassee business people and entrepreneurs be successful as well, so there is a certain amount of community spirit behind our motivation,” Kearney said.

 

What do venture firms and angels look for?

Tips on how to pitch your business to an investor

• Experience. First and foremost, most investors look at the experience and leadership of the company. How knowledgeable is the founder or CEO? Have they founded a successful company before? Have they brought on experienced people? Even if an entrepreneur has started a company before and failed, investors say that is better than one that has never started a company.
• A good elevator pitch and business plan. Learn how to perfect a short “elevator pitch,” either in writing or in person. Sometimes you only have a few minutes to impress an investor. Learn how to explain in short, concise terms why your company is worth investing in and whether there is a good exit strategy down the road.
• Do your research and prepare for full disclosure. Know your market and have statistics ready. If you already have a product, explain in detail how much money you are spending and earning and what those projected earnings are. If you don’t have your product or service on the market, have projections. One question a lot of investors ask is, “Who are your competitors and what is to stop them from copying you?” Don’t say you have no competitors and be truthful about your strengths and weaknesses. Disclose why you need money, what you will use it for and how far it will get you.

 

Florida lags behind in venture investments Every quarter PricewaterhouseCoopers releases data on venture capital activity in each region of the country. Florida lags behind other less populous states.

First quarter of 2011:

1. California 299 companies, $3.2 billion in investments

2. Massachusetts 79 companies, $605 million in investments

3. New York 49 companies, $416 million in investments

4. Texas 35 companies, $263 million in investments

5. Illinois 29 companies, $173 million in investments

6. New Jersey 15 companies, $165 million in investments

7. Georgia 13 companies, $154 million in investments

8. Pennsylvania 30 companies, $153 million in investments

9. Washington 28 companies, $131 million in investments

10. Florida 14 companies, $114 million in investments

Source: NVCA/PricewaterhouseCoopers MoneyTree Report with data from Thomson Reuters.

 

Ventures, angels, private equity. What does it all mean?

In the popular ABC reality show called Shark Tank, entrepreneurs pitch ideas to rich investors called “sharks,” such as the colorful Dallas Mavericks basketball owner and billionaire Mark Cuban. The ideas tend to be consumer-friendly, from magnetic button-down collars to premium wine by the glass and a dance company for children.

If the sharks don’t like the idea, it is flat-out rejected. But if at least one of the investors wants to sink his or her money into it, a negotiation round begins and the investors compete for who can bring the most generous offer.

The show is not too far off from how entrepreneurs secure investments in the “real world.” There are hundreds of investment firms in the United States that specialize in providing funding for unproven start-ups and well over a dozen in Florida alone.

Venture Capital Firms

Venture capital firms are partnerships that raise money to invest in companies. These investors can be wealthy individuals, investment banks and other financial institutions — or even pensions and endowments.

Typically these firms raise money that is put into a fund, with up to several hundreds of millions of dollars in it. That fund is used to invest in companies.

The partners of the venture capital firm select what companies to invest in and are highly selective because they are looking for a good rate of return.

Typically, venture capital firms invest in start-ups, which can just be an idea, early-stage companies and even established businesses that need help with expansion. Many tend to focus on a specific geographical area.

When accepting an investment from a venture firm, a company is usually agreeing to sell a certain percentage ownership of the company in the form of shares.

Venture firms usually take an active role in the company by putting some of the firm’s partners on the board, for instance. They also act as business mentors. The firm itself makes money from management fees and sometimes a portion of the profits of the company.

Like all investors, venture firms seek companies to invest in that will bring back more money than was put in. This is usually done through a “liquidity event,” such as the sale of the company, a merger, or initial public offering in which shares are sold to the public.

Angel Funds

An angel fund is similar to a venture capital firm in that each raises money for a fund that is used to invest in companies. The main difference is that the angel fund functions more like a cooperative, with all the members making decisions on what to invest in.

The individual angels don’t get to pick and choose what companies to invest in, but rather reach an agreement as to what the fund should invest in as a whole. All of the angels, through investments made by the fund, have a stake in a company.

What type of companies angel funds want to invest in varies widely. Angel funds, like venture capital firms, tend to focus on a certain geographical area. They also are similar to venture firms in that they act as business mentors and dispense advice.

Angel Groups

An angel group has the least formal arrangement. These tend to be loose coalitions of angels in a given geographic area that hear pitches from start-ups looking for cash.

These angels are wealthy individuals who may choose to invest in a company on their own, or with a handful of people in the angel group. Unlike an angel fund, however, there is no requirement that everyone in the group invest.

Private Equity Firms

Technically, any firm that invests in private companies is considered a private equity, with venture capital and angel funds falling under the umbrella of the “private equity” label. But there are private equity firms that are not venture or angel funds that help fund early-stage companies and nurture product development or expansion.

The main difference between a private equity firm and a venture firm is the private equity firm often takes a smaller ownership stake and is less involved in the operation of the company. But they share much in common with venture firms in that they diligently screen potential companies to invest in and are selective in their investments.

Source: Rick Kearney, Alan Rossiter, Rus Howard