VCs Rise Again

VCs Rise Again

By Francis X. Gilpin

Associate Editor

Can a venture capitalist be a people person? Richard J. Brandewie and Drew Graham swear it's possible.

"What has attracted us to the venture industry is just the opportunity to work with very dynamic entrepreneurs that sort of have a focus on what they want to accomplish," says Brandewie, a managing partner at Ballast Point Venture Partners LP.

"If you're a public market investor and you're buying stocks, you can do a lot of analysis on a company," adds Graham, the other managing partner at the St. Petersburg venture fund. "But you rarely get much direct interaction."

The two men expect they may be interacting with a few more Florida entrepreneurs in 2006, as they look for good, temporary homes for between $12 million and $16 million from their $56 million Ballast Point Ventures Fund I.

Venture capital is making a comeback. As an alternative to traditional Wall Street investments, VC had fallen into disrepute with endowment and pension managers who lost small fortunes in big tech busts.

"I think 2005 was the first year where the market felt like it had fully recovered from the excesses of the bubble years, but in a rational way," says Graham, 39, a Harvard MBA who was a merchant banker at Morgan Stanley & Co. Inc. before coming to Florida 11 years ago.

"You're back to more of a mid-'90s-type timeframe, which is healthy," says Brandewie, 51, who was chief financial officer at a publicly traded Tampa trucking company prior to his current job.

Bootstraps welcome

Ballast Point, which is affiliated with Raymond James Financial Inc., prefers young but solid businesses with between $2 million and $50 million in annual revenue. Recipients typically wish to grow at the 30%-to-50% yearly clip favored by Ballast Point, instead of perhaps 10% or 20%, which is all they could manage with their own, usually limited capital resources.

"What we're trying to avoid is the early-stage risk of whether a business model works or not," says Brandewie. "When we invest, we want to be confident the business model works and the question for us is: Can the management team scale it to be a much larger business?"

But Brandewie is partial to companies at the low end of his fund's revenue target range. "We're most attracted to a company that has bootstrapped itself to a $5 million-to-$10 million revenue level," Brandewie says. "They've learned how to use capital effectively. They've had to scrimp by. They know that each dollar of equity is both expensive and needs to generate a return."

Without California's tech focus or the life sciences orientation of the Northeast, Florida's entrepreneurial climate relies on diversity. "Look at the successes that have sprung out of different areas in Florida," says Brandewie. "Look at something like a Chico's in Fort Myers, an Outback or a Tech Data."

Since 40% of its venture capital stays in Florida, Ballast Point spreads it around among a variety of businesses, including those in communications and health care.

The fund limits investments to roughly the southeastern quadrant of the continental United States. Besides the Sunshine State commitment, Ballast Point sends 10% or 15% to Texas. The rest tends to get clustered around Atlanta and the Research Triangle of North Carolina.

I-75 corridor next?

Yet all four of Ballast Point's 2005 investments were outside of Florida.

In October, for example, the fund chipped in $2.8 million to an $8.2 million round of financing for QOL Medical LLC. The North Carolina specialty drug maker, which excels at marketing gastrointestinal treatments that have been poorly promoted by other pharmaceutical companies, needed assistance with the rollout of three medications it recently acquired the rights to sell.

Last April, Ballast Point provided $3 million to Wave7 Optics Inc., a 5-year-old company in suburban Atlanta that uses the latest fiber optical technology to furnish broadband Internet access to businesses, local governments, public utilities and residential developments.

Both QOL Medical and Wave7 Optics are headed by experienced executives in their respective sectors. "We can't really afford to have folks that are learning on the job," says Brandewie.

Ballast Point steers clear of companies that won't be profitable for 12 to 18 months. Ideally, the fund's money is tied up for no more than five years and the minimum return is threefold.

Initial public offerings are how Ballast Point cashes out of a quarter of its investments. But an IPO isn't an exit strategy that has bounced back as fast as the renewed interest in VC funds. The Sarbanes-Oxley Act of 2002 makes going public prohibitively expensive for some startups, according to Graham.

That won't stop Brandewie and Graham from trolling southwest Florida as they try to make new friends and money in the VC game.

"We're always amazed by companies that are growing up right under our nose," says Brandewie. "And we didn't even know they were here."

Brandewie predicts that Ballast Point will make its first investment along the Interstate 75 corridor between Sarasota and Naples in the near future. "That area has just boomed," he says.

Friendly Advice

As amiable venture capitalists, Ballast Point managing partners Richard J. Brandewie and Drew Graham like to stay on good financial and personal terms with the owners of their portfolio companies. In that spirit, here are a few suggestions for entrepreneurs hoping to tap a VC fund.

Tip one: Do as much homework on your funding source as a VC fund does on you.

"Assuming they find good, honest people, they really should focus on the value, both capital and otherwise, that a firm can bring to them," says Graham.

Tip two: Be realistic about what your company is worth.

"Entrepreneur expectations on valuations are always high," says Graham.

But there's no sense in pricing a piece of your fledgling company so astronomically that you set yourself up for a fall, especially when you don't deliver the promised numbers and have to go for later rounds of funding.

Tip three: Don't rush the hiring process.

"One of the things that we see commonly is the wrong people in the wrong jobs," Brandewie says. "That's something we see as a flaw in a lot of businesses.

"Sometimes what you see is people hire people out of convenience. It was somebody that was available, as opposed to looking for the best person for the job."

Tip four: Don't worry about a VC seizing control of your enterprise.

"Most venture capitalists have no interest whatsoever in running somebody's company for them," says Graham. "In fact, the more involved they have to get on the operational side, typically that means the worse things are going in the company itself."

Adds Brandewie: "We want the majority of the incentive to rest with the management team. We want people that act and think like owners, not like hired guns."