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CT Innovations hopes its record 2017 returns woo more venture investment

BY Matt Pilon

4/9/2018
Photo | Steve Laschever
Photo | Steve Laschever

Economic Value

Between 1995 and fiscal year 2017, the state authorized $188 million in bonding for Connecticut Innovations, which has produced $309 million in investment returns over that time period, according to CI.

Like a gambler confident in his long-term strategy, Connecticut Innovations doesn't sweat a bad bet.

Losing — as much as $5 million on a single company in one instance — is part of the venture capital investment game.

It's a process that can feel like a slog, particularly in the seven- to 15-year investment cycles that early stage investors like CI focus on, but every so often a year comes along that justifies the strategy.

A white-hot mergers and acquisitions market in 2017, for example, helped Connecticut Innovations reap its highest annual returns ever.

Spurred by several significant acquisitions of companies within its portfolio, CI cashed out $27 million from various investments in 2017, more than doubling the $11.5 million it had originally staked in those firms.

It was also CI's most profitable year since the dot-com boom of the late 1990s, as measured by its return on investment, officials said.

The quasi-public agency, which has about 160 companies in its portfolio, will reinvest the money in other Connecticut-based technology, software and IT companies.

More importantly, CI's leaders hope last year's performance turns some heads, attracting more outside investment partners to Connecticut-based deals.

"Everybody wants to be a part of winning and success," said CI Board Chairman Michael Cantor, co-managing partner of Hartford intellectual property law firm Cantor Colburn.

Though CI's mission is different than most other venture capital firms — it has a dual mandate to generate both economic development and returns and can only make in-state investments — it increasingly wants to be seen by VCs as a savvy investor partner.

"They're calling me and saying 'I want to look at more of your deals, I want to look at more of your pipeline,' " said David Wurzer, CI's chief investment officer. "That's a big deal, to bring that capital into the state."

CI CEO Matthew McCooe said market conditions helped last year's performance, with more than 50,000 global mergers and acquisitions announced in 2017, according to Thomson Reuters, the third year in a row to hit that mark.

Wurzer admits 2017 was a bit of an outlier — CI has averaged about $10 million in annual investment returns since 2005 — but he's hoping for repeat performances in the coming years.

The deals that made CI's year

Like any venture fund, the most common way CI cashes in on an investment is if a portfolio company is acquired or goes public.

Several deals made the difference last year. They include:

• Avon tech firm iDevices, which was acquired by Shelton's Hubbell Inc. for $59.2 million. CI had a $3 million stake in iDevices and roughly doubled that investment with the sale.

• Norwalk's eTouches, which provides event management software and sourcing services, was bought by Palo Alto, Calif., private-equity firm HGGC for an undisclosed sum. CI had a $6.7 million stake in eTouches and roughly doubled that investment.

• Branford biopharma AxioMx was sold to the British company Abcam for $20 million plus up to another $25 million in potential performance payments. CI expects to earn back four times its initial $2 million investment.

In addition, New Haven-based BioHaven's $194 million initial public offering last May will lead to 2018 returns for CI, which took a $2 million equity stake in the company in 2014.

BioHaven is developing a migraine pill it acquired from Bristol-Myers Squibb.

CI's core fund invests in bioscience, medical device and technology companies, particularly those that have shown the potential to draw other outside funding and that have a revenue-generating product, or at least a strong drug candidate.

It often targets companies that are five to 15 years away from potentially getting acquired or going public, if they're successful.

CI holds some form of board seat on most of the companies into which it invests $500,000 or more.

About 50 of its portfolio companies have been acquired or gone public in recent years. CI has earned $309 million in investment returns since 1995.

It invested in 75 companies last year, but evaluated more than 500. The number of companies CI assesses has grown, up from 200 to 300 per year, with the introduction of the annual VentureClash competition, which is open to startups globally.

Foot to the pedal, for now

McCooe, a software entrepreneur, corporate VC and university tech transfer executive, arrived at CI in 2015.

Since then, he says CI's board has urged him to be aggressive. And he and his team have been. CI has been ranked regularly by Crain's as one of the most active VC firms on the East Coast. It did 75 deals last year, up about seven fold compared to 2009.

"Right now our board says 'put your foot to the pedal, we want more deals, not less,' " McCooe said, adding that the Connecticut market produces about 25 new companies per year that CI can invest in.

But he is starting to think about hitting the brakes at some point down the road. At an upcoming retreat, he and his team plan to discuss the fact that CI will soon have 200 companies in its portfolio. That means follow-on investments could quickly add up, perhaps $100 million a year, which is more than CI typically has available in state bond authorizations.

"We need to make sure we're selective and scaling back our commitments," he said. "And we're also trying to get [companies] to the point where they don't need CI dollars."

Cantor said the board discusses CI's future at every meeting.

They want CI to keep growing its portfolio, he said, but without greater participation from other venture funds its impact will be limited.

One key, he said, will be getting more venture capital firms to move into Connecticut.

"We need you in New Haven, we need you in Hartford," Cantor said.

Read more about CI's Biggest Flop.