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Going for the Gold
Participants hope VC fair may yield major bucks for start-ups — and a new rep for New Haven
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Business New Haven
5/14/2001
By: Lisa MiCali
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New Haven is rolling out the green to host Crossroads, its first-ever major venture capital fair, May 21-23 at the Omni New Haven Hotel. The event is expected to attract institutional investors, venture capitalists and other business people from all over New England to the Elm City in what sponsors hope will vault New Haven to the epicenter of New England's high-tech landscape - and catapult the fair itself into a premier national event garnering the region the attention it has sought desperately.
Taking place over three days, Crossroads 2001, now in its eighth edition, is presented by the Connecticut Venture Group (CVG), a Fairfield-based non-profit professional association. It is hosted this year by Yale University and the city of New Haven. The fair opens at 6 p.m. May 21 with a welcome reception on the Green followed by two days of exhibits and company presentations attended by numerous networking events.
This year's highlights include three high-tech panels of world-renowned experts in biotechnology, molecular electronics and broadband wireless, a private, investor-only dinner, a gala reception at the Yale Center for British Art to view the Paul Mellon bequest, and a facilities tour of the newly opened 300 George Street Technology Center in downtown New Haven, followed by a “Chapel Street pub crawl.”
This year's fair will introduce about 75 companies to the investor community; attendees will be limited to the first 1,000 registrants. Last year, the Stamford fair was able to accommodate just 50 presenting companies and 850 attendees and had to turn people away at the door. That's part of the reason CVG board members sought a bigger hub in which to house and promote the event.
Selecting New Haven as Crossroads' new home seemed an obvious choice. Its status as a city at the crossroads - both to the Boston-New York axis and of the New Economy - seemed a logical choice for its members. The Elm City's entrepreneurial roots run deep: More than two centuries ago, Yale graduate Eli Whitney invented the cotton gin, a machine that revolutionized the cotton industry and the U.S. economy. Today, in the 21st century, New Haven entrepreneurs are toiling to creating bioscientific remedies fueled with technological advances that promise to revolutionize healthcare.
Frank Marco, fair chairman and managing partner of the recently opened New Haven office of Mintz, Levin, a technology law firm, believes this year's venture capital fair in its new central location will be set a new standard over last year's - especially for the city itself.
“When we looked at New Haven, we felt it was a great site because of its location: dead-center between Boston and New York,” Marco explains. “Secondly, we wanted to capitalize on the momentum in the greater New Haven community with biotech companies coming out of Yale and the general excitement of startups in Connecticut in general.
“We believe the this is not only a wonderful opportunity for Crossroads but a extraordinary opportunity for New Haven to highlight its burgeoning tech companies, cultural activities and nightlife,” he adds.
City and Yale officials agree. Says Henry Fernandez, New Haven's development official: “Sponsoring Crossroads in New Haven gets the word out that New Haven is a great place to start a business - and that's the message we want to get out. We're working very closely with the Connecticut Venture Group to facilitate growth and support the efforts of emerging enterprises in a business-friendly way.”
Adds Nathan Taft, program director for Yale's Office of New Haven & State Affairs: “We possess the intellectual capital, multiple cultural diversions such as music, theatre and dance venues and a support system committed to new ventures. Holding the fair here sends investors and the community a strong signal.”
With close to 250 online applications from companies eager to show their wares and meet potential suitors, 75 companies were chosen to participate in this year's fair based on the strengths exhibited in the six-part online application.
Henrietta de Veer, managing director of the New York private equity firm Trautman Wasserman & Co. and Crossroads' executive director, says companies were selected to participate by a panel of industry investors and were notified on April 30. According to de Veer, company names would not be released to the public before the event.
Judging is rigorous, and so is the selection process. “Each section of the application is rated on a scale of one to five by investors familiar with that space,” de Veer explains. “Things such as management team, business model, marketplace, technology use are just some of the criteria used to evaluate companies looking for money. A panel of judges then votes. After selection and notification, CVG works with them to refine their pitches and coach them as they prepare for the fair.”
Starting on the morning of May 22, 50 “Quantum” companies will pitch their eight-minute stories to investors and finish up the following day. (“Quantum” companies are those who have already received at least one round of financing, or have revenues and are profitable or close to achieving profitability, and are seeking more than $5 million in financing.)
In those eight short minutes, Marco says, companies must get across a quick, effective summary of their business plan. What will they talk about? “Who they are and what they do, “ says Marco. “Who the competition is and why they're better than them; what business need is being satisfied by what they're doing; their financial model, what kind of capital they're looking for to accomplish it; and who the management team is.”
An additional 25 “Ignite” companies - emerging or start-up companies seeking first-round financing of less than $5 million, from early-stage to pre-growth - will exhibit only and pitch their stories to booth visitors. The companies will represent a wide-range of high-growth industries including firms from the biosciences, health care, communications, information technology, e-commerce/Internet, software, financial services and other industries.
Which will be the hot industries at this year's fair is anyone's guess. Most of those interviewed for this article say there aren't any truly hot industries, as in year's past. Most B2B (business-to-business), B2C (business-to-consumer) models are long discredited. The next generation of start-ups is likely to come from for-profit health care, photonics, telecommunications, software, biotechnology, bioinformatics - areas where Connecticut and the New Haven region have burgeoning strength, Marco and de Veer agree.
So what are potential investors seeking? Barry Bronfin, general partner in Hartford-based Axiom Venture Partners, follows this criteria before making investments in new companies.
“They've got to have these five things,” he says. “One: innovative, enabling, defensible technology. Two: rapidly expanding markets. Three: enterprise customers/Fortune 2000. Four, a valid, sustainable business model. And five: a seasoned management team.”
Bronfin sees the next phase of Internet development and investment opportunities “as a continuous, ubiquitous connectivity where networks will be open and secure with unlimited bandwidth,” he says. “Software will be a substantive service with unlimited volume and universal access. The next generation enterprise will be completely collaborative among all groups - customers, buyers, suppliers, etc.”
“These are exciting times.” Marco says. “In a lot of ways, our time here in Connecticut is coming. We're seeing a tremendous number of exciting companies doing quite well. For example, Sirocco Systems in Wallingford, a venture-backed company, was sold last year for $3 billion [Ed. note: In stock - and investment now worth substantially less].”
Indeed, a stellar management team seems to be the key ingredient for landing funding - even more so today in a soft market than during the frenzy of the dot.com run-up. Investors, who declined to be quoted because of Securities and Exchange Commission rules against speaking to the Press, say they can't emphasis this point enough. The depth and breadth of the management team really refers to track record and experience, says one venture capitalist (VC). The caliber of people a company attracts is a very telling sign of how it will execute its mission, offers another. Investors agree that serial entrepreneurs typically fare best.
One presenting company at this year's Crossroads is New Haven-based Achillion Pharmaceuticals, which hopes to raise its Series-C funds. Says Bill Rice, president, CEO and founder of the 15-month-old firm: “The fair is a great way to gain exposure with other investors, institutional bankers and VC firms. Companies need great investors, and investors need great companies. And with New Haven, that's what we're trying to do. You need to meet with investors in your space, and with the strength of New Haven's biotech sphere we'll have plenty of opportunity to do so.”
Achillion moved to New Haven from its founding home in Maryland when it partnered with Yale University in 1999.
Crossroads' De Veer has been working hard to elevate the fair into the national limelight. “This year we've attracted some world-class technology sponsors and suppliers, including Compaq, IBM, EMC, Microsoft, Hewlett-Packard, providing both investors, entrepreneurs and high-tech professionals with an ideal opportunity to find customers and suppliers, network and get to know the New Haven region as a great place to conduct business” she says. “We're hoping to get some national press coverage that will help propel the fair into the investment psyche as a place where investments flow.”
Under de Veer's direction, Crossroads has been doing more targeted marketing to companies, incubators and tech centers, going farther afield to attract investment opportunities for the event. Her goal, she says, is to increase the number of fresh ideas, which in turn attract capital.
“We are in a region rich with opportunity,” she says. “If we are ever to step onto the national scene and be viewed seriously as a state and a region abundant in investment opportunities, we have to go further afield. We have to begin to create some excitement and create a self-fulfilling prophecy. Connecticut is at the crossroads, but we are smack in the middle of a region rich in capabilities.”
Over the last seven years Connecticut, particularly New Haven and Fairfield counties, has grown into a hotbed of high-tech activity, helping transform its image as an old-boy's network of conservative defense and financial-services industries into a flurry of young, new tech and bioscience companies. Part the transformation was fueled by Yale's commitment five years ago to focus on technology licensing and begin hatching new ventures from its own laboratories.
“Traditionally Connecticut hasn't had the culture that promoted emerging growth companies,” Marco explains. “By 'culture,' I mean the combination of venture start-ups emanating out of large research institutions, a modern-day history of entrepreneurial companies and people taking risks and starting new ventures with an idea and technology. Instead, we had a historical climate which didn't encourage new ventures.”
Could New Haven become the next Silicon Valley? De Veer and Marco believe so. De Veer's thinking stems from a background in economic development and studying the underlying factors that drive healthy, sustainable growth in small regions and businesses.
“The notion of a collaborative culture where key universities coupled with strong corporations in the region join together with entrepreneurs and emerging companies to create an environment that makes the whole region successful is, I believe, currently taking shape in New Haven,” she says.
“You need a world-class university to set the pace,” De Veer adds. “Yale has evolved very rapidly over the last five years into a biotech hub. Last year, it was No. 1 in New England for licensing technology revenue and spinning out new companies and made $40 million-plus in licensing technology while Harvard and MIT were far behind. This is a huge turn-around in a sort amount of time.”
Smart money has been cautious since last fall, but that doesn't mean VCs are not signing term sheets and handing out cash where warranted. IPO.com, a Web site that tracks VC deals, reported 306 deals totaling $3.7 billion for the month of April - the highest amount this year. That's good news for those seeking money in an uncertain market.
As well, VCs are sitting on a lot of cash, says David Yarnell, general partner of Brand Equity Ventures, a Greenwich-based private equity firm. Most of that money, he cautions, is aimed at current ventures and not new players.
“Companies getting funded now are the companies that were funded in the past - and that probably won't change any time soon,” adds de Veer. “It's more important than ever for CEOs and presidents to get out there and find new faces with money to invest. Companies that have funding, whether or not they just received funding, should be constantly looking for that next round.”
In the last nine months, most capital investors have been busy working on their current portfolio companies while keeping a watchful eye on the public markets and an ear to the ground in anticipation of the next wave of hot new technologies. They haven't been busy funding new ventures.
Nationally, VC firms have been absorbed with their own bleeding portfolio companies. Marco says, however, that “Some of [his] clients feel the end may be in sight. Tech entrepreneurs that do get funding in today's climate will have to do more convincing, make the capital last longer and accept lower valuations.”
While Yarnell and other VCs have been lying low, he says he is feeling more optimistic these days.
“There are still plenty of good companies to invest in,” he says. “That's not changed. What has changed is our ability to appropriate risk and return. Valuations are down. We went through a very uncertain time. It was unclear who the winners would be and where the opportunities lay. I think this is a fairly attractive time to invest, but we're focusing on cash flow-positive and growing, stable ventures.”
Money follows money, of course, in Connecticut as elsewhere. “Connecticut,” Marco says, “has always been very high, in fact in the top five in the country, in terms of investment dollars under management here. A lot of it is in Fairfield County. Venture capital investors are not fungible; they follow the deals. The investment capital is here, but VCs are not exactly investing in their own back yard.”
More of them might like to. “We look at this as our hometown fair, and in part, we like to invest here because we live and work here,” Yarnell says. “For us, it's a big state and we like to put our money in Connecticut-based companies. We're looking forward to seeing a bunch of new companies from the tri-state region at the fair and also see what's going on here, too. But no, we don't favor Connecticut companies.”
The richness and diversity of start-up companies in the region has evolved dramatically since the Internet transformation of the '90s, when seemingly any college dropout with a laptop and a few friends could launch a business out of their dorm room based solely on a good idea and a few angel investors.
“The whole landscape has changed. We're seeing it in real-time,” says De Veer. “The companies applying to Crossroads are backed by more mature management teams. It's dramatically different than it was three years ago. That's true across the board in every high-growth industry. Most of those entrepreneurs that got tired of commuting to New York have stayed home here in Connecticut and are trying to build here again.”
Crossroads is more than just a way for entrepreneurs to raise capital. “For companies, it's a great networking event and a great opportunity to expose themselves to possible strategic partners and collaborators as well as just positioning the company for later stage follow-on financing,” Marco says.
“For the investors, it's exposure under one roof to a group of highly qualified, pre-selected companies,” he adds. “Investors attend for the reciprocal reason to hopefully run into companies that may be of strategic interest to them. Investors like to interact with companies and get a sense of what is going on in general. Also, it's a great way for them to catch up with each other.”
According to de Veer, between 50 and 75 percent of participating companies landed funding at previous fairs. (CVG doesn't have exact numbers because not all companies returned questionnaires.) Some $300 million was raised at last year's event, and CVG expects to top that number this year.
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