By Mary Elizabeth Fratini | Special to the Vermont Guardian
Posted November 24, 2006
Conventional wisdom likes to moan about Vermont being bad for business, but according to both investors and companies looking for outside capital, there is more money and interest than there are business deals to be made in this state.
“Universally there is way more money in Vermont than good deals,” said Ed Sawyer, president of SBE, Inc., a film capacitor manufacturing company in Barre that is currently engaged in seeking another round of investment capital. “The irony is that, yes it is difficult to raise money anywhere, but if someone says ‘it would easier if I was only in Boston, they are giving themselves a crutch.”
Investing in new or growing businesses, other than traditional bank lending, generally falls into one of three categories: the 3Fs — friends, fools, and family; angel investments; and venture capital. Angel investments are traditionally made by individuals in amounts less than $1 million, as opposed to a minimum of $3-5 million sought by most venture capitalists.
Although a few companies move quickly from concept to landing a multi-million dollar investment — as with Sun Microsystem founder Andy Bechtolshein’s infamous offer to Google before the company was even a legal entity — the vast majority need all three types of funding.
“There’s a three-stage pecking order — founder investment, individual investors [angels] who provide a lot of strategic advice and access to new angels as a piece of the puzzle; then the next stage of that capital-raising growth process is venture funds, who will come in usually with $1 million or more,” explained Charlie Kireker, cofounder and managing director of FreshTracks Capital, a Middlebury-based venture capital fund managing $11 million in investments.
Venture capital funds reached their peak courtesy of Silicon Valley in the 1980s, and then later with the dot-com craze in the 1990s, with everyone looking to get in early on the next Microsoft or Google. While many people are familiar with the concept, if not personally acquainted with the cash, of venture capital investing, angels actual play an integral and often overlooked role in developing small local companies.
“An angel investing his/her own money may have more modest risk preferences or a personal interest,” said Mark Blanchard, technology development and commercialization advisor for the Vermont Small Business Development Center in White River Junction. “Maybe this company doesn’t have the potential for sales of $300-500 million, at least at this point, but the investor may think that it is a good business to have in Vermont. From both the interest and level of investment standpoints, it is appropriate and important to pursue angel money.”
Many angel investors are retired business owners or managers looking to stay involved in their industries and offer more active participation in the form of strategic advice or even serving in the CEO or other positions for newer companies.
Bruce McGeoch is a member of the North Country Angels and the chief executive officer for Draker SolarDesign. He joined the Burlington-based renewable energy firm six months ago and has been instrumental in spurring company pitches to outside investors like the annual Vermont Investors Forum (VIF) in November, according to company founder and chief technology officer A.J. Rossman.
“He really believes in this and is putting in 60 to 70 hours a week helping us to structure the company as we grow,” Rossman said.
Draker’s previous projects range from a passive solar office building in Burlington, to installing solar electric power systems for monitoring rice dryers at Lundberg Family Farms in Northern California and providing design assistance and turnkey systems for remote monitoring of photovoltaic systems in Africa, but the company needed assistance to finance and develop a sales and marketing plan for an upcoming product launch.
“It is difficult to cash flow a business if you are focused on getting the product out the door and have no sales on it for six months to a year,” Rossman said. “You may have an excellent product, but you need to bring in somebody top notch and be able to give them a budget for advertising and creating booths for shows and the proper literature.”
Like most of the 17 companies selected to make a 12-minute presentation at VIF this year, Draker did not walk away with cash or even promises in hand, but used the event as an opportunity to increase visibility, access the informal network of angels throughout Northern New England, and use the feedback to hone their pitch. That aspect, along with the Innovators Corner that invites even newer companies to make a two-minute presentation and table during the day, makes VIF a unique resource in the world of business investing, according to Blanchard.
“The number one value from VIF is the opportunity to get training in how to do a pitch. The networking piece and the informality, the chance to speak to people offline outside of the pitch is very valuable,” he said. “Unlike an organized angel group, the VIF is a premiere event giving people exposure to a wide range of potential investors and discussions between consenting adults; it’s a unique format that way.”
For David Krag, founder and CEO of Plomics, VIF provided a welcoming introduction to the world of investment capital. “I live in the academic world, so this was a way to walk into their space for a bit,” he said. Plomics is a working prototype to organize and deliver information from the more than 500,000 medical articles published annually and was introduced as part of the Innovators Corner.
Krag, who is the S.D. Ireland Professor of Surgical Oncology at the University of Vermont, previously founded Calypso Medical in 1999 with seed funding from Frazier Health Care Ventures based on his invention of a wireless tracking system of internal body tissues. With Plomics, he noted the difference between pitching a physical product, however experimental, and trying to sell a method for organizing and accessing data. “I was intrigued by their questions, which were very practical; it can be hard to frame shift like that. Matching the product to investors’ interests and skills sets can be a long process,” he said.
According to Blanchard, the Innovators Corner (previously called the Inventors Corner) is good exposure for companies in the earliest stages. “They’re not really ready to raise money yet, but have something interesting and might be in the market in a year or two,” he said. The longer presentations are a select group of companies that are “marginally ready” to raise funds from a third party. “They understand their markets, have some sector expertise, and know where their revenue will come from.”
The evolution of mophie is a case in point. The company, conceived by 19-year-old Champlain College student Ben Kaufman and described as “a developer of innovative, value-added solutions for the digital lifestyle market,” attended VIF as an innovator in 2005 with help from FreshTracks Capital. A small amount of early investment sent Kaufman to MacWorld in January where he won the Best of Show Award for his RELO system, an external hard case for the iPod that protects it at all times while allowing the use of all functionality and inter-operability. That publicity led to a new set of interested investors and at that point, mophie had grown enough to meet FreshTracks’ four-prong test for their own investments: quality and experience of management, size and growth rate of market, a “defensible competitive advantage,” and a sustainable business model.
“We had helped this young entrepreneur find experienced senior managers to work with him and help capitalize on this phenomenon of exploding sales,” Kireker said. “It is a bit unusual for us in that it was a very young company, but in the world of iPods time is compressed; you can’t build a business slowly over years, you have to go for it.”
For the most part, Kireker looks at VIF as a proving ground in which members can watch companies evolve over time. “Think of it as a life cycle of companies, taking four to six years to grow, and we are watching and helping out wherever we can. If they hit it off six months or a year [after VIF] we check back in. We are constantly trying to stir the pot,” he said.
Indeed, the list of presenters from VIF’s 14-year history includes successes ranging from specialty foods like South Burlington microbrewery Magic Hat (1994), to women’s sportswear company Isis (1998), and the evolving products manufactured by SBE, Inc. (2003).
Sawyer’s presentation to VIF came at an expansion stage for his 57-year-old manufacturing company as it moved into a new market of high energy capacitors, originally for use in the pulse-related Taser International stun guns. He raised about $500,000 for that first round of investment, with only about 10-20 percent of that raised directly from introductions at the forum.
“The forum is a great part of the angel community in Northern New England and if you aren’t there, it isn’t a good thing, but you have to be in the circuit,” Sawyer said. “We were voted most successful investment of 2003, but most of my investors also saw me at other pitches and meetings, or had heard of us from other angels.”
Although SBE continues to use traditional bank financing for part of the business, Sawyer said their newer ventures would have been impossible without the angel investors. “It is cash burn that you are looking to fund and we have one more round to go,” he said. The total angel investment in the high-energy capacitors will likely reach $1.2 million over three years. SBE anticipates that it will begin to turn a profit on the product in about a year, although the original market in Tasers has lessened and alternate uses in fuel cell and hybrid vehicles have increased.
“Some of these guys will give the benefit of the doubt to a local company knowing it won’t be their highest paying return because they want a particular type of business to exist in Vermont in 10 years,” Sawyer noted. “I have people who said that is why they funded us — it’s a decent investment and it feels good. It just doesn’t feel the same to put it into a biotech company in Boston.”