The fishing is getting better for local companies looking for venture capital.
By Bob Andelman
Maddux Business Report
If you ever cross paths with Field Forensics president and CEO Craig Johnson in the security line at Tampa International Airport, don’t sweat it. Those aren’t live explosives in his bag.
“I carry inert explosives with me all the time,” says the St. Petersburg-based security specialist and entrepreneur. “I take them on airplanes. Recently we were doing a demonstration of our explosives detection kit at an airport in the U.S. We were inside the security area with the TSA (Transportation Safety Administration) people. The regional director of the TSA happened to be there. He said, ‘We could use that kit. But tell us, how did you get those two canisters of explosives through the line?’ Then they asked, ‘Would you mind going back through the checkpoint so we can do a test?’ We said sure.”
Researchers at Lawrence Livermore National Laboratory, Calif., and Field Forensics developed a new, compact way to screen for explosives. The E.L.I.T.E. (short for Easy Livermore Inspection Test for Explosives) is a shirt-pocket-sized trace explosives test that is sold as being simple enough to be used by security forces everywhere. It is self-contained, requiring only a small auxiliary heating system such as a butane lighter or battery-powered heater.
Timing is everything in business – especially for a start-up. And even more important for a start-up in search of venture capital, as Field Forensics is.
“That incident was what started things rolling with the TSA for us,” Johnson says. “It’s not to say their instruments are bad; they’re very good. But they can give false positives with perfumes and other things. We get the same sensitivity no matter what the environmental conditions might be.”
So, if you had it, would you gamble $2 million on Field Forensics technology?
That’s how much Johnson is looking for to finance rollout of its explosives detection kit. He was one of about two dozen entrepreneurs presenting at the most recent Florida Venture Capital Conference held at the Renaissance Vinoy Resort in St. Petersburg, organized by Florida Venture Forum Inc.
Would the risk seem a little less high if you knew that in 2006, Field Forensics’ kit was named one of the year’s 100 best technologies by R&D Magazine?
How about if you knew that the company was already producing revenue? It already sells the E.L.I.T.E. kit to the FBI and six cruise ship lines, for example.
“To some VCs,” Johnson says, “we’re under their radar because we’re not looking for much money. The way some VCs look at it, it costs as much to invest $2 million as it does $20 million. If they want to do so many deals, $2 million is not enough. So some big VCs won’t even look at us. The smaller companies are interested because we’re not saying we have a lot of R&D to do. We already have sales; we’re making money. We just need money to speed things to market. We have a big distribution in exports; 75 percent of our business is in exports.”
This might not seem like a great year to get venture financing. But this is an industry that looks ahead, not back. Its proponents gamble on the future, not the past.
In fact, says Robin Kovaleski, executive director of the Florida Venture Forum, there were more venture capitalists at the 2008 conference than the one she organized a year earlier.
“People thought our conference would be adversely affected by economic factors,” she says. “But as money comes out of the real estate markets, it’s flowing into private equity for higher returns. So for some purposes, venture funding is almost counter-cyclical. And Florida is on the map. That has to do with Moffitt, Scripps, and SRI. These VCs realize there is a lot of opportunity in Florida. They have to get here and invest or it will be too little, too late.”
These VCs weren’t just enjoying a pleasant getaway in St. Petersburg while sitting on their wallets, either. Two companies that presented to the forum were funded within a week, including Tampa-based Persystent Technologies, which develops enterprise software.
“That’s the first time that’s ever happened,” according to Kovaleski, referring to the speed with which these deals closed. “Persystent presented three-and-a-half years ago and got $7 million, and presented again this year and got another $6 million.”
Kovaleski says that of the 200 or so VCs at the St. Petersburg conference, most were either in fundraising mode or they just raised a fund that they must invest.
“Sometimes it takes longer and things are still brewing. Other times it takes a little longer,” she says. “Of the 2007 presenters, 18 of 24 got funded to the tune of more than $160 million, an all-time record for the Florida Venture Forum and the State of Florida. This was the fifth conference for me; I’ve seen a great deal of growth. A lot of heavy lifting has been done; Florida has really come of age. It’s an exciting time to be an entrepreneur in Florida.”
Alan Taetle is an Atlanta-based VC and general partner with Noro-Moseley Partners. But, geography aside, he – like Kovaleski – is a big booster of Florida entrepreneurship. He is also the past-chairman of the Florida Venture Forum.
“There were some excellent, diverse companies in IT and health care at this year’s Florida Venture Capital Conference – very interesting stories,” according to Taetle. “It’s a terrific conference, probably one of the best VC conferences in the country.”
Taetle is on the committee that chooses the companies presenting at the conference. And while that gives him a heads-up on what’s coming, it hasn’t necessarily given his firm an edge.
“We’ve seen a lot of companies in the Tampa Bay area,” he says. “We have offered term sheets to a couple but we’ve never consummated a deal in the bay area. We’ve been outbid a couple times, which is great for the entrepreneur. A couple others have unraveled relative to terms, over management or strategic direction. When you enter into a relationship with a VC, it’s long term. You have to be of a same mind with the business direction.”
Noro-Moseley looks for early stage or early growth investments. “We try to be the first institutional round of financing, between $3 million and $5 million,” Taetle says. “Southeast Florida is one of our favorite markets. We do technology, software, healthcare services, healthcare IT, and medical device companies. The companies we’ve lost on price in the Tampa Bay area have been healthcare service companies.”
A number of factors will affect the availability of VC cash for Florida in the first half of 2008, including the contraction of VC firms based in the Southeast. But that is countered by larger scale Boston and California firms willing to invest in the Southeast, because when you’re looking at IT in India, for example, Florida doesn’t seem as far away.
The presidential election could also figure into the availability of cash if it means different regulations for VCs – or their favorite industries – or if the capital gains tax changes one way or the other. The availability of debt markets is another potential factor.
But none of that matters when a VC falls in love.
“We look for high-quality, well-managed, rapidly growing companies,” explains Dick Brandewie, managing partner of St. Petersburg-based Ballast Point Ventures. “We provide equity that allows them to grow.”
Ballast Point provides growth capital to emerging companies in the southeastern US and Texas. “The only thing we won’t do is real estate, oil and gas,” Brandewie says. “Our first fund was $56 million in 2003. We’re doing another fund right now; it’s greater than that. Fund one is 80 percent invested. We’ll do a couple more out of that, then start on the second fund.”
In the bay area, Ballast Point has helped finance Lifestyle Family Fitness Centers; elsewhere, it is behind PDS Heart cardiology services in Palm Beach and Blue Medical, a healthcare distribution company in Jacksonville.
“For us to even be interested in a company, it has to be growing 25 to 30 percent a year, and adding to its employee base,” says Brandewie.
Habib Skaff, CEO of Tampa-based Intezyne Technologies, Inc., was one of the featured presenters at the Vinoy. It was his first round facing VCs and private equity funding sources; up until now, his drug delivery company – it focuses on delivering chemotherapy to a specific disease site – raised its first $3 million in startup money from angels and high net worth individuals.
Intezyne came to the Vinoy in search of bigger fish: $15 million.
“We think it went really well,” Skaff says. “There were some solid leads we’re following up with now. It was a great experience, a nice indoctrination to raising institutional money.”
Skaff says that while what his company does is quite easy – “We make drugs safe” – explaining how it accomplishes that is tougher. “At that point, you have to be comfortable with healthcare or biotech. There is a learning curve in the Tampa Bay area, whereas you don’t encounter that in San Diego or San Francisco. They’re more comfortable with this sector.”
That begs the question: Why are you doing business here instead of there?
“There is a big push from the State of Florida to attract biotech companies here,” Skaff says. “I’m originally from the Tampa Bay area; it was easy to get going here. The incubator where we’re located at the University of South Florida has been a big help. It’s also nice to be right next to a world-class cancer research organization at Moffitt. And it makes more economic sense to be here in terms of burn rates and lab space.”
Intezyne, which was founded in June 2004, has nine full-time and two part-time employees. It moved into a new 3,000-square-foot facility at the incubator in November 2006. There is no revenue stream yet; the company is entirely R&D. On the other hand, Skaff says he hasn’t nearly burned through the original $3 million investment.
“The next $15 million will allow us to take our four major projects all the way to the FDA filing state where we can start our phase I clinical trials,” he says. “We’re super-excited. It’s actually working like its supposed to do.”
Venture capitalists, operators are standing by to take your calls.
Entrepreneurial executives don’t grow on trees. You can’t just add money to men and women with a good business premise and expect them to suddenly be brilliant about execution.
That’s what keeps Tim Norstrem, the principal of Tampa-based Executive Recruiters, in business.
Roughly 15 years ago, Norstrem, a former CPA, was attracted by an opportunity created by a flood of venture and private equity capital coming into Florida. He supposed – correctly – that all that money needed to be protected by professional managers at less than immediately professional start-ups.
“Let’s use the example of a CFO,” he says. “ABC Company wants to raise $5 million from private equity. The private equity firm likes ABC’s idea, likes the CEO. But many times in the finance department is somebody’s brother-in-law, somebody not trained right in finance. The private equity guys say, ‘We’re going to give you $5 million – who’s going to be watching over it? Your brother-in-law? I don’t think so.’”
Sometimes the situation isn’t quite so obviously out of a TV sitcom. Sometimes the VC or private equity firm is in New York or Chicago and they don’t know a local Florida market. “That’s where I come in,” Norstrem says. “I find someone with the development skills they need. Many times the VC likes management but the company needs to make a key hire before losing a round of funding. The executives needed at these companies have skills that are a lot different than those of executives being contracted to work at a billion-dollar company.
“Most of the companies I work with have a need for more sophisticated reporting, metrics and business management as a result of a VC or private equity investment. An upgrade is often necessary to prepare the company to get to the next level,” he says.
All stories and interviews (c) 2008 by Bob Andelman. All rights reserved. Some stories may appear in unedited versions that are different from their print counterparts.
Copyright 2008 by Bob Andelman