Take one look at the 2004 "MoneyTree Survey" by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, and you'll see that most venture capital goes to companies that develop cutting-edge technologies. The siren call of high tech, nanotech, and biotech seems impossible for VCs to resist.
But there is good news for low-tech companies. Behind the headlines, many VCs are investing in low-tech (or no-tech) companies that offer prospects of rapid growth, job creation and excellent economic return. In fact, well-managed companies in any industry can score VC dollars if they know where to look. Following are lessons from three low-tech entrepreneurs who found financing gold.
Right on Target
At first glance, Summit Partners, a private equity and VC firm with offices in Boston, London and Palo Alto, California, looks like any other high-tech venture fund. Since 1984, the firm has invested more than $5.5 billion in more than 250 companies, including Silicon Valley icons McAfee and WebEx. But as managing partner Joseph F. Trustey says, the firm is not blind to nontechnology opportunities: "Tech investments represent only 40 percent to 60 percent of our portfolio. Our real growth areas over the last couple of years have been low-tech-consumer products, healthcare, business services and financial services, for example."
One of Summit's most surprising investments is in family-owned Tippmann Pneumatics Inc. TPI, founded in 1986, supplies air-powered guns called "markers" for the sport of paintball. The company met Summit's initial criteria--revenue, profit, strong management and an industry-leading product but Summit was skeptical about the market size.
"We had no idea how big an industry paintball was," says Trustey. "We initially thought there wasn't much for us here. But what jumped out at us was the size of the market and very attractive industry dynamics."
Paintball is now the fastest-growing extreme sport in the U.S., according to SGMA International, a sporting goods manufacturers association. Dennis Tippmann Jr., 33, who was president of the company when he found out about Summit Partners, says his company was riding that wave. "By 2004, we were growing over 20 percent a year for five years," Tippmann says.
In 2004, the Fort Wayne, Indiana, company's growth became overwhelming, and the Tippmanns knew they needed new management. "That was one big reason [to look for VC]. The other reason was to do a recapitalization," says Tippmann.
Although Summit Partners normally leaves existing management in charge when they make an investment, they agreed to help the Tippmanns search for a CEO. "They were very upfront with us--they said it was a situation where we'd need to bring new management in," says Trustey. "That's representative of them being great entrepreneurs."
Within three months, Summit Partners had written a check. Some of the capital purchased shares from the Tippmann family, while the rest went into the business to fund further growth. The company was renamed Tippmann Sports in July 2004, and Dennis Tippmann Jr. happily stepped out of the role of president to head up product development, an area that he loves.
With the help of Summit's extensive contacts, Tippmann Sports hired a new CEO, allowing the whole family more time to enjoy their success. "I think it was a win for both sides," says Tippmann.
Trustey agrees: "We are always looking for market leadership, companies growing faster than their underlying sectors, and opportunities for liquidity with exceptional returns. Tippmann Sports continues to exemplify that."