How to Get a Piece of BCVP’s $26M Fund

And it’s proof that this region—and other second and third-tier cities across the Mid-Atlantic and Southeast—have businesses worthy of investors’ time and dollars.

“One of the greatest return potentials in the venture marketplace is the small end of the market. We think we can generate outsized returns for our investors by investing in these smaller U.S. venture funds,” BCVP investor Roland Reynolds told me last week. He’s a managing director at Industry Ventures, a Silicon Valley firm with $1.75 billion under management and a fund of funds now invested in the most recent two of the men’s funds.

What you need to know about BCVP

So, the BCVP guys convinced me there was more to the story. And after checking out the other published reports on the news, I definitely had some questions. Like, for example, what does a corporate investment from Cisco or Red Hat even mean? How accessible will executives at those companies be for a potential portfolio company?

Some of the investors are repeat from the first two Southern Capitol funds. What do they like about this group?

What makes a perfect investment candidate for BCVP? What makes this fund different from Southern Capitol’s? And importantly, what’s the plan for future Triangle investments?

So if you haven’t already blown up the email boxes of the two men, then take a few minutes to read this and understand their strategy.

Notable in the new fund are a pair of big name corporate investors, Cisco and Red Hat, both of which have huge presences in the Triangle region. Research Triangle Park is home to Cisco’s second largest facility and employee base in the U.S., second only to San Jose. According to Bill McCarthy, the company’s vice president of U.S. Sales and the RTP site’s committee leader, an investment in a local fund shows its priority of supporting local technology innovation and talent development.

It certainly has money to invest—Cisco tells me it has an active portfolio of 80 direct investments around the world and serves as a limited partner in 35 funds. The value of its investments totals $2 billion.

According to McCarthy, “We view investing as an integral part of our build, buy, partner and integrate strategy.”

And Red Hat, though it doesn’t have a formal investment arm, is clearly on the look out for technology that complements its suite of open source products. In May, it acquired a cloud storage company for $175 million and in June, bought an OpenStack deployment and training company from France at a $95 million clip.

Seems to me it’d be a whole lot easier to integrate a Triangle company into a local giant like Red Hat than a French one.

In the BCVP news release, Red Hat executive vice president and chief people officer DeLisa Alexander says her company feels responsible for helping bring new products and technologies to market.

So how does that play out for a potential BCVP portfolio company? The men say they recently ran a company by the chief technology officer of Cisco to get feedback on the business potential.

“We have access to different parts of Cisco and Red Hat that we didn’t have previously,” Caplain says.

The BCVP difference.

If there’s any criticism of Southern Capitol Ventures, it’s that some of its investments were made too late (diluting the value of the shares). Like Silicon Valley’s Art.com and the Maryland-based wedding planning site WeddingWire. Caplain and Jones explain that WeddingWire is a good example of an opportunistic deal tied to a specific growth strategy—the company needed funds to make an acquisition. They’ll continue to make those if it’s the right opportunity.

On the other end of the Southern Capitol spectrum were seed investments in companies like ChannelAdvisor, which returned what Reynolds calls “great” returns after its 2013 IPO; Arlington, Virginia’s BrightContext, a platform for integrating real time data streams into websites and apps; and Durham’s own ReverbNation, to which Southern Capitol committed funds before the company even had a name and helped attract other investors (In 2012, it earned nearly $14 million in revenue, making the Inc. 500).

“I think given the size of our fund and our interest and what we’re good at, we usually line up with early stage guys but we’re always opportunistic in funding growth companies,” Caplain says. “We don’t say no because of the stage.”

But early stage will be a clear focus of the new fund. The men describe their ideal investment target as a marketing software or software-as-a-service company bringing in $20K to $50K in revenue per month, an entrepreneur and team with experience (and typically some skin in the game) and already enthusiastic clients.

Their best example from Southern Capitol’s portfolio is Durham-based Zift Solutions, an investment made in 2010 after Red Hat’s marketing team raved about the software and the company. Southern Capitol provided the startup’s first institutional dollars.

“What really excited us was talking to Red Hat about it. (The marketing director) raved about the product and the team. We started digging in and that was the catalyst—all their customers were raving about Zift,” Caplain says. “That’s what we like.”

And what do fund investors like about the two men?

According to Reynolds, it’s their tireless work on behalf of the companies they invest in.

“They are incredibly hard-working in sourcing companies they want to invest in. These guys are relentless once they find something they want to invest in,” he says. “And they are relentless post-investment in their advocacy on behalf of their companies, helping their companies raise subsequent rounds, taking them out west and taking companies to visit corporate business development partners.”

As for the quality of the deals, Reynolds admits to missing out on the opportunity to invest additional dollars in those with the most potential.

“We’ve looked at a couple of their companies, and shame on us, there are one or two we should have invested with,” he says. “That’s part of why we like working with them—there are opportunities to work with them in multiple ways.”

So, when’s the next Triangle investment?

Caplain and Jones say they’ll average two to four investments annually over the next five years. They’ve already got one portfolio company in StepLeader Digital (a spin out of Capitol Broadcasting, ExitEvent’s parent company), a deal made with the earliest commitments to the fund in 2013.

And they expect to announce a second local investment later this year. The pipeline is rich with companies in this region, Atlanta and Washington D.C. After 14 months of fundraising, they’ll now turn 100 percent of their attention to vetting and making deals.

But the men emphasize that the average length of a relationship with an entrepreneur before they invest is at least a year. To plant the seeds of those relationships, they’ll continue to host Entrepreneurs Series events, to engage with entrepreneurs on social media and to provide their email addresses on their website.

“We’re always around. We’re trying to do everything we can to eliminate any perceived barrier with the entrepreneurs,” Caplain says.

To wrap up my time with Caplain and Jones, I asked for the top three things a company can do to get their attention. Here’s their feedback. Now shoot off those emails and hold them to it.

1. Customers, customers, customers. That’s the biggest milestone for a company. Continue to add more customers.

3. Some of our favorite companies are the ones that haven’t raised any money. Everyone talks about raising money but so many great businesses don’t. We think about this business really long term, so we’re not only looking at entrepreneurs raising money today. We want to know all the smart people.

*An earlier version of this story quoted a BCVP investor saying the ChannelAdvisor investment happened too late. In fact, Southern Capitol Ventures was the first institutional investor to put money in the company in 2003.