Nothing Ventured, Nothing Gained
Venture group’s new head is bullish on investing in Connecticut
Liddy Karter of Old Lyme is the new executive director of the Connecticut Venture Group, a business trade and networking group for the venture capital industry. A graduate of Columbia University and the Yale School of management, Karter has worked in investment banking for Morgan Stanley, was an entrepreneur at a family-owned recycling company, and was chief financial officer at Netkey, the Branford kiosk software company, when it raised more than $15 million in venture capital. Karter has also been an angel investor and is a founder of the Angel Investors Forum in Connecticut.
How did you get involved in angel investing?
In 2003 I sold my interest in [Netkey] and went on to found the Angel Investment Forum in Connecticut. I started it as a result of my efforts to invest in other small companies. I was trying to [invest] on my own and I realized that was not very effective. I needed the participation of the group because of the expertise that was required. We transitioned as a startup and it became a real organization with a board of directors and an executive director and is now a standalone entity that is self-perpetuating and has invested many millions of dollars. We have a portfolio of approximately 30 companies and it’s become a force in very early-stage investing in Connecticut.
So how did you go from there to CVG?
Angel investors are essentially investing their own money. [Unless you have a lot of money] after a while it becomes untenable so I began thinking maybe it’s time to start investing other people’s money. I transitioned from investing on my own to working with other people and groups of people to invest in companies and that effort was called IRON Ventures. We invested particularly in Industrial Resource Optimization Networks (IRON). As I got into the world [of venture capital], particularly in clean tech[nology], I realized how large the opportunities were. I was spending weeks on end in Silicon Valley, I was in Boston all the time, regularly in New York and almost no time in Connecticut. I thought, ‘Why is there no venture capital [activity] in Connecticut? There are opportunities here.’
There are plenty of VC firms in Fairfield County.
And that brought you to CVG?
I’m a clean-tech investor, and I thought what better place to invest in clean tech. In a place where we have a manufacturing base that is unparalleled. Connecticut has a level of expertise in high-tech manufacturing. We have tremendous assets in the skills that are required for clean tech manufacturing. I thought we need to change this, and then Mike Roer, who had been running CVG for 17 years, retired and some of the board members asked if I would be interested in bidding on the contract to run it. I said I would be interested in helping build the investment community for venture capital but I don’t run an organization that would run events. So we hooked up with the Connecticut Technology Council. So I am doing a lot of the outreach work and strategic work for CVG and we hired people with the Connecticut Technology Council to work on the events.
Is there any change in the mission, or is your role to reinvigorate the effort?
A little bit of both. We certainly are trying to reinvigorate it, we’re going to try to make sure our events are up to date. In terms of re-orientation, our focus is going to be on assisting the venture capital community in Connecticut in its growth and development and understanding what venture capitalists need. [We need to] form an eco-system around their activities so they can feel they have what they need here in Connecticut. They shouldn’t have to go to New York, Silicon Valley, to have the social connections that are required, the kind of information resources [investors need] only come from personal interaction, and now they have to travel to get that. Also we’re going to try to get the Connecticut community to recognize the strengths of the VC community here. There are 86 venture capital companies here, more than ten percent of the venture capital resources in the country.
Does Connecticut lack the type of entrepreneurs and innovation that appeal to VC investors?
Connecticut certainly has the educational institutions to create the ideas that will be the genesis of the next great companies. Missing is the infrastructure to capture those ideas and turn them into companies here. That infrastructure comes from having a base of investors. Investors will invest wherever the great companies are. that’s clear, but they will also invest and prefer to invest from my experience in companies that are as convenient as possible. Look at all the companies that have moved to Silicon Valley or to Boston, because that is where their investors are. We’re blessed to have the investors here; we have to make sure the companies are here as well.
What else is needed?
You can’t just have the big private equity guys; you have to have the ‘angels’ — the early-stage investors, the mezzanine debt, a branch of Silicon Valley Bank here. The community has to be built cluster by cluster.
What industries beyond clean tech are most promising for Connecticut?
I think we’re very well positioned for financial services. In fact, we’re in an unparalleled position for financial services investing and very well positioned for health-care investing as well.
Are angel investors interested in the same things, the same companies, as venture capital investors?
Angel investors in many ways have taken over the early-stage investing space from venture capitalists. The average first round venture capital investment first round is $7 million. The average angel investment today is about $250,000 — it’s an order-of-magnitude difference. However, the fundamentals of the companies that are attractive to both groups are very similar. It’s fair to say they are investing in the same types of things, but typically at very different stages and with very different trajectories. An angel investor will look for a company that can flourish within the bounds of the angel investment capital capacity. Those [companies] are then targeted for exits as a sale, hopefully to a larger company.
Why that type of exit?
Typically in order to be successful with, let’s say, a million dollars in capital, you have to be focused on a single service or product. The ability to have multiple products is typically out of the range of most angel-backed companies.
So companies on that scale are not necessarily the type that have the capacity to get really big and go public and go to the next step and attract venture capital?
Not at all. Last year there were 60,000 angel investments made in the U.S., and a little under 4,000 venture investments. If the companies relied on venture capitalists to take the next step, they would never survive. There are very few angel investments that ever have venture follow-up.
So does the CVG have to become more involved with angel investing not just traditional venture capital?
We have to recognize with any of these definitions that you are working on a continuum. A number of angels are actually venture capitalists, and vice-versa. Some companies do really grow and get venture money and the angel investments are occasionally feeders for larger investor portfolios. It is essential for the investor community that early-stage companies are being invested in. That reaches all the way back into the university system we have here that is so strong but underutilized in Connecticut.
If the academic infrastructure is still underutilized, what still needs to be done leverage what we have in Connecticut?
I think they’ve done some of it. UConn now has six or seven incubators. They have a licensing model that seems to be very attractive. They have programs where they are engaging industry on a regular basis to make the industry [stronger] and make entrepreneurs and to make investors aware of some of innovations that are coming out of the UConn system. They now have a focus and staff on it and the university recognizes it is a necessary part of an innovation economy.
Yale has made real strides. It was only ten years ago that the Yale Entrepreneurial Society was founded. Now we have the Yale Entrepreneurial Institute. We’ve come a long way in developing an entrepreneurial awareness at Yale. We have all the other universities in Connecticut that haven’t really done it yet, but they are looking at creating tech-transfer offices to take advantage of both the students, the professors and the graduate students.
Is there too much focus on high technology? We’ve noticed over the years that many VC investments are in other industries — retail, for example.
There is a lot of innovation and fortunes made in retail. You’re right in that some of the classic definitions of venture capital for 20 years have focused on software, information technology and telecommunications. Those fundamentals platforms have spurred the innovations that are driving financial services, health care, retail.
How is CVG funded?
It’s completely independent non-profit. There is no state support; we are funded by our sponsors — a combination of venture capital firms, law firms, accounting firms. People who are in the innovation economy and understand the role a trade association can play.
CVG’s signature event has been its Crossroads Venture Fair. Now that you’re getting out of the events business, what will become of it?
We are going to modify the once-a-year Crossroads event. Every quarter we’ll have a Crossroads in a different part of the state. The first one will be May 4 in Cromwell, incorporating energy, health care and financial services. We’ll have a similar event to focus exclusively on health care, and a similar event for new media and another to focus on financial services.
Are there things state government should be doing to stimulate angel and VC investing in Connecticut?
Angel investing has really benefited from a 25-percent tax credit that was passed a year ago. That has driven angel investors to invest here rather than elsewhere. I think we can use it as a paradigm for keeping some of the venture dollars that are here invested here.
How does the angel credit work?
If you invest in a company that meets the definition set out in the legislation you can offset 25 percent of your investment in a tax credit in the following year. It reduces your risk, because these are high risk investments and it encourages you to look in Connecticut for opportunities, in much the same way other states have also incentivized venture investors to invest locally.
What’s the current environment in angel and VC investments given the recession?
Investing is all about the future. It’s been a rough couple of years, but when you look at the coffers of corporate America, [they] are so full of acquisition capital it is hard to not be somewhat optimistic for the potential of positive exits in the venture community. And that bodes well for reversing a difficult trend.
The challenges being created by the upheaval in the energy sector and changes in the communications industry, I don’t see how you can be anything other than an excited innovation optimist today.
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