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."
It's in the Bag
Decidedly low-tech bag-maker Timbuk2 Inc.has enjoyed venture investment not just once but twice during its 15 years. In 2000, an early investment from Pacific Community Ventures helped the company prepare for growth anticipated from launching its Build Your Own Bag website. Just two years later, though, the San Francisco company was operating at a loss, until a change in management helped it get a follow-on investment from PCV.
What made Timbuk2 a good investment? In a word: jobs. PCV, also based in San Francisco, invests only in businesses that have the potential to bring entry-level or blue-collar job opportunities to low and middleincome communities in California. "We don't measure jobs per dollar invested, but we have to feel comfortable that the business model will incorporate job creation elements," says PCV's managing partner and COO, Eduardo Rallo. Since Timbuk2 was already providing 20 sewing jobs at its factory in the Mission District of San Francisco, the fund was eager to see the company's operations grow.
"Of course, the company must also demonstrate a solid financial business model," says Rallo. Although Timbuk2 was not profitable at the time, Rallo says that the company had a solid record of increasing sales and the potential to grow into something much bigger. "We always look for a company that can bring the right financial return, but we also invest for social return. Timbuk2 had significant employment in the area, so they fit both our social and financial criteria."
Timbuk2 president and CEO Mark Dwight, now 45, quickly began to implement an aggressive growth plan that included expanding the product line and, ironically, moving some of the production to lower-cost factories offshore. Now, some of the company's new products--including a successful computer case for Apple Computer laptops--are manufactured in China. And yet, Dwight and PCV have also managed to increase the number of sewing jobs, now employing over 50 people at the Mission District location.
Despite the higher labor cost, Dwight says the Mission District sewing facility still makes good business sense. "There is value in the made-in-USA products," he says. "And locally produced bags can be customized to customer requests on a very short lead time. That quick response is a unique advantage."
Rallo says Timbuk2 is a star member of PCV's portfolio. And Timbuk2, now profitable with $10 million in revenue for 2004, likewise counts PCV as a valued advisor.
In fact, Rallo and Dwight seem to be cut from the same cloth. Timbuk2 donates hundreds of messenger bags each year to At the Crossroads, a homeless youth foundation, and sponsors various local arts and education initiatives. That's typical, says Rallo: "Many of our entrepreneurs are very involved with things that have social impacts. It's not something we ask them to do, but it's the way they run their lives and their businesses."
All Made Up
Elaine Linker, 57, didn't launch her cosmetics company, Doctor's Dermatologic Formula, with the vision of bringing on venture investors. But the company's rapid growth left her little choice. She has now had four rounds of venture funding from four different funds--and each invested in her company for very different reasons.
In 1999, when Linker first went looking for capital, few VCs were interested. Based in New York City at the time, Doctor's Dermatologic Formula wasn't as attractive to VCs as the many dotcom companies dominating the headlines in those days.
But one fund, the New York Community Investment Company, liked the fact that DDF was a small, woman-owned business and wrote Linker a check for $500,000.
A few years later, DDF again needed capital to increase manufacturing capacity in its new Yonkers location. This time, two other East Coast venture firms--Easton Capital Investment Group in New York City and SJF Ventures in Philadelphia put a total of $1.6 million into the company in two rounds.
The two funds made their investments for different reasons. The prospect of creating quality jobs while reaping a good financial return motivated SJF Ventures, says managing director Dan Hoversten. "We were excited to see the business grow after they moved to Yonkers. They were doing so well that they added a second shift at that manufacturing facility." Like PCV, part of SJF Ventures' mission is to create economic opportunities in financially disadvantaged communities.
Easton Capital Investment Group, on the other hand, was attracted by the growing skin-care segment, says Linker. Easton primarily invests in health-care companies, and skin care is a growing piece of that market.
Of course, both funds liked the financial opportunity. "The trend in the doctor-endorsed, high-end skin-care market was key. The market itself was relatively small, but growing rapidly," says Hoversten. The products also sell at premium prices, he adds. "There are very high margins in this prestige market. From a financial standpoint, that attracted us."
Linker's fourth and most recent round of capital is perhaps the most revealing of her success. With revenue nearing $20 million, the company had outgrown both the New York Community Investment Company and SJF Ventures. To maintain her record of 40 percent annual growth, Linker needed a new, larger VC team. She set her sights on North Castle Partners, a private equity firm investing in the healthy-living and aging segments of the health-care market.
Linker knew her market and was quick to point out the opportunities for profit. "Our niche, the clinical skin-care market, is a very small piece of the overall skin-care market," Linker explains. "But the opportunity to grow is enormous."
That was exactly what North Castle needed to hear. North Castle and Easton Capital Investment Group made a large (but undisclosed) investment in DDF, even purchasing the shares previously held by the New York Community Investment Company and SJF Ventures.
"That's when I knew we'd hit the big time," says Linker, who is not planning on looking for any additional venture capital. "It's all about continued growth now, so we can eventually sell the company."
Where to Turn
You don't need to be high-tech to raise big bucks from venture funds. To find the right VC for you, start by identifying all the things that make your company a unique investment. Are you a woman or a minority? Does your business create entry-level or low-skilled jobs? Are you pioneering new socially or environmentally responsible business practices? If you can answer yes to any of these questions, reach out to the nontraditional venture firms in your area.
Funds that support women, minorities and job growth are often called community development funds. Nearly 80 such firms are listed on the Community Development Venture Capital Alliance website at www.cdvca.org. And be sure to contact your state's community development office for other funds in your area.
If your business has a strong environmental ethic, be sure to also check out Investors' Circle, where member firms give priority to companies that measure success based on the "triple bottom line" of environmental, social and financial benefit.
David Worrell is an investment banker and author of the e-book Finding Funding.