The typical mantra of startup community promoters is that capital is a region’s greatest need. Companies just can’t grow without it. And in the Triangle, the lack of Series A funding is the specific problem.
I can’t tell you how many people have lamented to me in recent months about the lack of growth-stage funding, and “since Intersouth stopped doing deals.”
The common theme here is that startups are perplexed—they have needs that aren’t being met.
But what about the wealthy individuals with money to spend? Part of the reason venture capital firms exist is because of them.
Yesterday’s annual meeting of the Raleigh investment firm Lookout Capital hit home for me the less-obvious reason why we need more venture capital firms here.
Because most potential investors won’t spend their money without them.
Lookout invited four members of its advisory board to sit on a panel and share their investment strategies. Three of these men admitted they either don’t have the time or the skills to fully vet deals themselves or to keep tabs on an investment after its made.
And these are not inexperienced people. They’ve started and sold businesses, and two were C-level executives at public companies.
The panelists were Tom Darden, CEO of Cherokee Funds and former chairman of brick producer, the Cherokee Sanford Group; Chip Andrews, senior chairman of FMI Corporation; Peter Scott, former CFO of Progress Energy; and Michael O’Donnell, former CFO of Electromotive, Inc. and Xerium Technologies, Inc.
They rely on the people spending 100 percent of their time each day scanning the market, getting to know the entrepreneurs, asking the tough questions and understanding the competitive landscape. These men want to know that hundreds of potential opportunities are being considered and someone is out there picking the best. And then that same someone is working hand-in-hand with the company to make sure the strategies on paper are pursued in real life.
“At least half of my mistakes I wouldn’t have made if I had good due diligence,” said Darden. “I’m not wired that way. I’m thinking about the opportunity, the growth, the idea but all these other things that are really much more important after the fact, you’ve got to be good at.”
Added Scott: “I only want to invest through partners who spend 100 percent of their time focused on deal flow, due diligence and driving home results to create ultimate liquidity.”
Lookout Capital is attempting to solve this problem. Just three years old, the firm has three arms—a private equity division for $2 million to $10 million revenue companies, Advisory Services to assist companies raising larger rounds and Lookout Ventures for seed stage deals of $250,000 to $1 million. The company has made six investments so far, and later this month will announce its seventh in InfaCare Pharmaceutical Corp. of Pennsylvania, a new drug to replace phototherapy in treating infants with jaundice.
In December 2013, The News & Observer reported that Lookout had 60 investors, up from 30 when the firm was created. It’s obviously filling a need in the community.
We’re constantly reminded of the wealth and growth in the Triangle region—we seem to make every list that ranks those things. And there’s clearly an opportunity to engage more people in the alternative asset class of startup investing. But most of those people don’t want to become an angel investor—they don’t have the time or the skill set.
But they will invest with people who do.
So perhaps the region should be pitching prospective VC firms on the people in this region who would invest, along with the impressive companies they could invest in.