By guest authors Irina Patterson and Candice Arnold
Mark: It probably takes getting to $20 million or $30 million in sales before a larger technology company would be interested in acquiring a company. You’re going to have to get at least part of the way there. It’s hard to draw a line in the sand. At a minimum, if a company doesn’t have an opportunity to get to $100 million in sales, then it’s probably not the right opportunity for us.
Irina: What do you do for companies you choose not to invest in?
Mark: Oh, my gosh. A venture capital is not a panacea for startups. Venture-backed companies get a lot of press, but it’s a drop in an ocean of great companies. There are so many great companies that, for various reasons, aren’t good candidates for institutional investing.
There are dozens and dozens of reasons why a company might not be a good candidate for institutional investing. That doesn’t mean it’s not a great company.
Angel investors make up 95% of the funding of startups in our country. There are companies that are just wonderful businesses that grow 10% or 15% a year and kick off great cash flow and wind up being very big businesses.
But because of the nature of a venture capital fund vehicle being a 10-year vehicle, we need to invest in, scale, and exit our companies in a compressed time frame. That eliminates a lot of interesting, great businesses that just might not be appropriate for institutional investors. That doesn’t mean there’s not a lot of other funding mechanisms for those startups.
We try and do at least one thing for every company that approaches us. Again, that’s just … there’s a continuum, and the game is long. We expect to be here in the region for decades.
The more we can help businesses grow here in the region … you know, a rising tide lifts all boats; the more we can help that ecosystem, the better. Many times we simply introduce those startups that we don’t invest in to the angel community.
As I said, there’re many businesses that are great investments for angels that just, for whatever reason, aren’t proper for institutional capital. Maybe we introduce them to customers we know, potential customers. Maybe it’s a couple of technical founders who are looking for a business leader. We know a whole bunch of business leaders. We try and help however we can with every company we meet.
Irina: What are you usually investing in?
Mark: If you look at our portfolio, you will be hard pressed to find a tie to our portfolio companies, a core, common theme. There really isn’t one.
The only theme is that most of our companies are technology companies or technology-enabled businesses. That is a very, very broad statement.
We’re invested in medical device companies. We’re invested in wireless routers, software companies, information technology, 3D technologies, Web 2.0, travel, real estate technology, marketing technology, digital media, logo creation software, aviation technology, open source software, hardware companies, email companies, devices for the utility industry, and construction industry software. There’s absolutely no tie, there’s no theme in our portfolio other than the fact that all of those companies represent great high-growth opportunity.
Irina: How many companies do you have in your portfolio right now?
Mark: In Fund I (circa 2001), we invested in 12 companies. In Fund II (circa 2007) we’ve invested in 19. We’ll probably invest in six or seven more in Fund II, and then we’ll go out to raise Fund III (probably in 2012).
Irina: Did you have exits?
Mark: Let’s see … seven companies were sold. Some of them were terrific exits. Some of them were good. I think there was one where we got less than our money back. We’ve had one or two companies go out of business. Overall, we couldn’t be more pleased with our portfolio. Failing is a badge of honor in this business.
Irina: Do you have a preferred type of investment?
Mark: Most of the time, it’s preferred stock. We’re not big fans of lots of fancy terms. We pride ourselves on using plain vanilla terms for our investments. We’re not into a lot of the funky terms and conditions. We try, again, to create terms and conditions that are fair for both sides. It’s almost always preferred stock.