Leaders of Maine venture capital, private equity and angel investing groups say startups should be diligent when choosing investors, focusing on what will be expected of them and what they can expect from investors.
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Venture capital, private equity and angel investing have become big businesses within the innovation economy in Maine and elsewhere. Much larger amounts are going into deals, such as the $52.3 million raised this summer by Portland-based Direct Vet Marketing Inc. (doing business as Vets First Choice). It was one of three venture capital deals in Maine in the third quarter that totaled $67.8 million, according to the quarterly MoneyTree Report. Prepaid card company CashStar Inc. and Local Yokel Media LLC were the other two deals.
And, the three types of funders are increasingly going in on deals together or referring deals to each other, noted Sandra Stone, chair-emeritus of the Maine Angels. She pointed to a recent investment in Hyperlite Mountain Gear of Biddeford that was brought to Maine Angels by the Maine Venture Fund. That company pulled in $1.14 million in equity investment in November.
Stone and other investors on a recent Mainebiz panel on funding rapid growth agreed, however, that backing a company's growth isn't just about the money.
“I'd rather have an 'A' team with a 'B' idea than a 'B' team with an 'A' idea,” Stone said of company management.
Robert Gould, executive vice president at Spinnaker Trust, added that contrary to the focus on Silicon Valley and Boston, the company's location really doesn't matter.
“Investors want to know you are in an environment where you can attract and maintain talent,” he said. “It may be harder to attract talent to Portland, but once they're there, it's easier to retain them,” because of quality of life.
He cautioned companies seeking funding to be aware of what investors want long term. “Venture capitalists and private equity investors want to make 100 times their investment, not 3 to 5 times,” he said.
Companies also should vet their investors, and go with the ones where the highest-ranking company officers are interested in the deal.
As an example Gould pointed to Vets First Choice, which he said interviewed 40 people to invest in it before deciding on Clayton, Dubilier & Rice, a New York private investment firm. CD&R led the round, which involved 33 total investors.
The lead partner at CD&R, Ravi Sachdev, was formerly managing director for health care coverage at J.P. Morgan. Such investors have the contacts to introduce other powerful business leaders that can lend experience to a new company, Gould added.
For example, the large CD&R investment led to six full-day leadership sessions with luminaries like former General Electric Chairman and CEO Jack Welch, who spent a day with Vets First Choice's small team, Gould said.
“Focus on the level of interest of the most important decision-makers,” he advised companies seeking funding. He also urged them to become cash flow-positive as soon as possible, as that determines investor interest in follow-on financings.
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