August 11, 2014

After a slumber, CT venture capital roars again

Photo | Pablo Robles
Photo | Pablo Robles
Bloomfield tech-services vendors Jerry Long, left, and Joe Singh are among those aboard venture capital's rebounding investment wave.
Photo | Pablo Robles
PCC partners Jerry Long, left, and Joe Singh say their recent funding will expand their staff.
David Wurzer, chief investment officer, Connecticut Innovations

Connecticut venture investors are circling again, with their wallets open widest since the 1999 "dot-com" investment debacle and the Great Recession a decade later.

This time, fledgling in-state companies — particularly those in software development and biotech — are drawing significant interest at the "up" stage of this venture-capital investment cycle, observers say.

The $316 million invested in 30 Connecticut firms in the first six months of this year was more than state startups collected in any full year since 2001, according to the latest quarterly venture-capital MoneyTree report from accounting giant PwC and the National Venture Capital Association.

For all of 2013, venture capitalists poured $215 million into Connecticut companies, including only $69.9 million from January to June, the national survey of venture-capital investors shows.

The numbers say plenty about what is taking shape in Connecticut's venture-capital market, says Eric Dale, partner and chair of Hartford law firm Robinson & Cole's emerging companies, private equity and venture capital practice group in Stamford and New York City.

"It's not that there are so many more deals as it is that the dollar volume is up so much,'' said Dale, who also is president of the Crossroads Venture Group, a state coalition of investors, entrepreneurs, lawyers, accountants and other professionals working in support of venture-capital investments.

"This may be the beginning, or no more than the middle, of a growth cycle for Connecticut's emerging companies,'' Dale said.

Software developers and biotech startups both are among the biggest Connecticut and U.S. venture-investment targets, the MoneyTree report shows.

Late last month, Springfield insurer Massachusetts Mutual Life Insurance Co. announced its new, $100 million Boston venture fund set up to invest in fledgling but promising software and other technology that can make its core life, retirement and asset-management businesses run more efficiently and profitably.

Nationally, venture capitalists pumped $3.1 billion into 644 fledgling U.S. firms in the six-month period ended June 30 vs. the 631 American firms that collected $2.2 billion in the first half of 2013, the survey showed.

Jobs bill push

The state of Connecticut itself is among the most active when it comes to investing in nascent businesses. Five of the 11 Connecticut firms listed in the second-quarter survey got money from the state's quasi-public technology-investment arm, Connecticut Innovations.

"We are seeing more significant activity in the state because we have additional dollars from the jobs bill,'' said David Wurzer, chief investment officer at Connecticut Innovations (CI).

Passed in 2011, the jobs measure meant to stimulate in-state employment by pumping $125 million over five years into CI's venture war chest. As a result, CI has doubled its venture-capital investments the last three years, Wurzer said.

CI is participating, Wurzer said, in a broader U.S. trend that took root two years ago, one that has seen an explosion of initial public offerings, led by Facebook. IPOs and other "strategic'' cash-outs via a merger or a sale of companies are how angel and venture investors extract value from their investments.

All that fresh liquidity in the hands of venture investors who have patiently waited — some as long as 15 years — for their investments to yield big returns is now searching for new investment opportunities, experts say.

Moreover, rock-bottom interest rates and concerns that the bull stock market offers few investment bargains has swung the pendulum back in favor of venture capitalists, they add.

Connecticut entrepreneur Louis Hernandez Jr. built Glastonbury software developer Open Solutions Inc. from a $12 million company to one that drew a $1 billion buyer two years ago. Today, Hernandez is CEO of Avid, a publicly traded Massachusetts maker of audio-video-media software.

He and his partners' at Black Dragon Capital venture fund recently pumped $12 million into Wethersfield's online electronic-payments vendor Payveris and online financial-transaction security provider Fortress Risk Management. Black Dragon has another $50 million available to invest specifically in Internet technologies, Hernandez said.

The ongoing "digitalization of our lives,'' he said, is the reason venture investors, even ones who may have been burned in the spectacular "dot-com collapse'' of 1999, are looking to invest in the next sustainable tech bonanza that could yield even greater fame and fortune.

"We're in for a long bull run'' in venture investing, Hernandez said.

However, Hernandez points to what he says is "frothiness'' in some sectors of the Internet-technology space, particularly development of applications, or "app,'' technologies and pure consumer technologies, such as social media tools.

But, the major difference that could prevent another dot-com bubble and subsequent blowup, Hernandez said, is that today's market is "more mature'' in its understanding of the prospects — and limits — that Internet technologies possess.

First equity injection

On May 23, Bloomfield software developer, PCC Technology Group, closed on a $5.5 million funding package that involved CI's venture and mezzanine debt fund. New York venture investor Stonehenge Growth Capital LLC also participated.

Part of the funding retired PCC's bank debt, with the rest fueling its recent hire of nine software engineers and code writers, as well as PCC's pending move into 3,381 square feet of new administrative office space on Day Hill Road in Windsor, opposite ING, said PCC President and CEO Jerry Long. PCC plans to occupy another 10,500 square feet of office space by next June.

PCC plans to add another 12 to 15 full-timers before year end, Long said. It currently has 51 staffers scattered among its 21 state markets.

"This is the first time we've ever gotten any outside financing," not counting its bank loan, Long said. PCC has contracts to sell its custom operating software to municipal governments in 21 states.

"We could be doing $8 [million] to $10 million in revenue all day long,'' he said. "But we needed extra money to make the jump to $15 [million] to $20 million in sales.''

State policy changes also have benefitted a cadre of pioneering investors, more commonly called "angels'' who typically are the first up to the investment plate with startups.

Connecticut angels got a boost from state passage of a tax credit that allows qualified angels who invest at least $25,000 into a startup to collect a 25-percent credit against their state income tax, said Glastonbury full-time angel investor Joe DeMartino, who is managing director of the Connecticut Angel Investor Forum.

The forum, whose membership lately has risen 20 percent, to 45, as venture-investment momentum has climbed, typically gets 300 to 350 global solicitations a year, DeMartino said. The group parses those pitches down to 30 to 40 that members vet.

Finally, a lucky six or seven actually wind up with angel funding of $350,000 to $400,000 apiece, usually alongside much bigger, million-dollar stakes from CI and other institutional venture players, akin to a syndication, he said.

Lately, the venture surge has been reflected in the quality of funding petitions from startups, DeMartino said.

"We're seeing better, more interesting deals coming into the system,'' he said.

Potential threats

So, what's out there that could potentially upset the venture-investing applecart?

For Connecticut, its high cost of living remain a barrier to sustaining its levels of venture investment, according to Hernandez. He said he supported keeping Fortress and Payveris in this state, partly as a reward for Connecticut's financial backing of Open Solutions in its early days.

But his VC peers, he said, often scratch their heads over how any Connecticut business can support itself faced with such high costs for labor, taxes and other expensive overhead.

According to DeMartino, he and other angel and venture investors are eyeing closely, efforts by the nation's top securities cop, the Securities and Exchange Commission, to alter the financial threshold as to who is eligible to be a "qualified investor.''

Currently, individuals must have a minimum net worth of $1 million, not counting the value of a primary residence, to qualify. The SEC seeks to raise that to $5 million, DeMartino said. The securities overseer also has proposed changes in the way venture firms raise capital, he added.

The course of the economy, too, is a wild card, according to DeMartino. A slump in demand for startups' goods and services would obviously dampen angel and venture investors' enthusiasm.

"But I don't see that slowing down anytime soon,'' he said. "There's a lot of capital out there, ready to be invested.''

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