Monica Doss (MD): What do venture capitalists (VCs) look for in an investment opportunity?
Jason Caplain (JC): VCs are looking for the three Ms: Management, market and momentum. We want to partner with outstanding entrepreneurs who are passionate and driven to succeed, no matter what obstacle gets in their way. Usually, we like to find people who have experienced repeat successes in building and exiting similar businesses.
We also look for large growing markets, or even a major shift in the market that will help benefit a company. In addition, we look for momentum in a business. Not only can that be the obvious ramp in revenue, but also momentum in areas such as customer wins, user growth, press and key hires.

MD: In your experience, what are some common mistakes entrepreneurs make when approaching investors?
JC: Unfortunately, the biggest mistake is that entrepreneurs cold call VCs. It seems like cold calling should be rewarded, but in this case it is the opposite. Very few VCs have invested in businesses they learned about through a cold call. Instead, they rely more on warm referrals from trusted sources.
Another mistake is that some entrepreneurs begin building what they believe is an interesting technology, but they haven’t talked to potential customers. Customer feedback and input is important and shows validation.
Lastly, it is disappointing when entrepreneurs say they are waiting for an investment to start the company or even to finish the technology. VCs love to see entrepreneurs who are resourceful and who somehow will figure out a way to start, albeit more slowly, without investors. There are plenty of talented developers out there. Some will work at nights just for equity. Entrepreneurs should seek them out.

MD: What can entrepreneurs do to attract VCs and seal the deal?
JC: Venture capital is not for every business, and VCs end up funding a very small percentage of companies they review. There are a lot of other options available for companies, and entrepreneurs should never build their companies just to attract VCs. We believe that is a recipe for disaster.
Here are a few things we’d recommend to build a company:

• Surround yourself with the best people you can find, not only on your management team but also throughout your organization, including your board or an advisory board. Find people who have been in your shoes before and have been very successful. Get them actively involved.
• If you’re focused on securing venture capital, make sure you get to know the VCs, and go where they are. Start building a relationship even before you need capital. CED does a great job each year with its annual venture conference, attracting VCs not only from North Carolina but also from throughout the country. Go to Venture 2007 and introduce yourself around, but don’t wait for the conference. CED runs programs throughout the year that help entrepreneurs strengthen their investor pitch and help match them up with VCs that might be interested. PricewaterhouseCoopers has a quarterly Shaking the MoneyTree Breakfast that is free for entrepreneurs and VCs. It is a great opportunity for local entrepreneurs to meet VCs here in North Carolina.
• If you’re looking for capital, you should network with other successful entrepreneurs in the area who have received venture capital. They also can be a great resource to steer you to a venture-capital firm that can help.

MD: Are there specific industries or sectors that are attracting more attention from VCs than others?
JC: Nationally, software and biotechnology companies have attracted the most amount of capital. Between both industries, they attract about 40 percent of the total dollars raised by companies. There also are several hot sectors, including Web 2.0, open source and clean technology. For example, in the first nine months of 2006, clean-technology companies raised $634 million, three times that of 2005 and up more than 10 times that of 2003.

MD: How can a company decide how much to raise per financing round?
JC: There is no simple answer. The average deal size nationally over the past few years has been just over $7 million, but a lot depends on the industry the company is in and what the company’s objectives are. It generally is difficult for larger venture funds to write small checks (or those for less than $1 million). Companies should raise enough capital to help them reach a major milestone, which hopefully will increase the value of the company. Typically, companies will raise money in rounds focused around milestone points, which works to the benefit of the investors and the company. If a company raised sufficient funding at the start — when valuation typically is at its lowest — economics will force the company to give up an unusually large share of the equity. By staging it, shareholders will have less dilution.

MD: What is the state of venture capital nationally and locally? Does our local venture environment mirror national trends?
JC: We continue to see a shortage of formal and active angel groups in North Carolina that have the ability to add strategic value well beyond their capital. There were a handful a few years ago, but some of the funds either have dissolved or no longer have the ability to write new checks. This is interesting because nationally, we saw the number of angel organizations grow consistently from just below 100 in 1999 to above 250 in 2005. We definitely need more active angel investors in North Carolina to help fill the capital gap.
Looking at sectors in the market, total life-science investment nationally is much greater than it was at pre-2000 levels. From 1998 to 2005, life-science companies went from attracting 17 percent to 30 percent of all venture capital invested. During that timeframe, dollars invested in North Carolina life-science companies also rose. In 1999, biotech investments in the state were a little over $100 million. That number almost doubled in 2005, although we did notice a pull back in 2006.

MD: When VCs invest in companies, they are looking for an acquisition or public offering from portfolio companies within a certain period of time. What is the climate looking like for exits in 2007?
JC: We believe 2007 will continue to be a challenging year for companies that want to go public. Venture-backed IPOs (initial public offerings) are far below peak levels. Looking at past data, most IPOs were in 1996 and 2000, and there was some activity in 2004 but it has been quiet since. The Sarbanes-Oxley Act has added cost and complexity to going public in the U.S.; however, we have seen a sharp increase in the London AIM IPOs and registrations. We see a robust mergers-and-acquisitions market for strategic buyers, but most of their deals are limited to the $10 to $50 million range.

MD: Are there enough resources in the Research Triangle Region to match de-mand from start-ups for early-stage funding? What can be done to get these companies far enough along to where they’re more attractive to traditional VCs?
JC: There definitely is a shortage of capital here for early-stage companies. There’s a number of firms in North Carolina, including Intersouth Partners, Frontier Capital, Aurora Funds, Wakefield Group, Pappas Ventures, NC IDEA and Southern Capitol Ventures. But for the most part, the angels in our market are not as active. This has created a void.
We are seeing increased interest from out-of-state venture capitalists in North Carolina-based companies, though, which is great for our region. We believe that the markets are somewhat efficient, and great people and ideas are always able to find money. But today, we believe that the process to raise capital just takes longer than it has in the past.
If an entrepreneur is seeking capital from a VC and getting turned down, it is important to understand why. If the VC is looking for more traction, the company must continue running hard and lean to build the company. The key is to not give up.

Deals of Note

The Council for Entrepreneurial Development (CED) publishes a monthly list of deals of note in and around Research Triangle Park. Below is a sampling of 2007 deals:

Chapel Hill

• Near-Time, a developer of Web 2.0 collaboration applications, has raised $2.25 million in funding from Wakefield Group and individual investor Bruce Boehm to hire 10 to 15 software developers and salespeople.

Durham

• Amphora Discovery Corp., a molecule drug-discovery company, has entered into an agreement with Genentech Inc., in which Genentech will purchase Amphora’s program for an unnamed oncology target with the potential to treat multiple oncology indications.
• Phase Bioscience Inc. has raised an undisclosed amount in Series B financing from Johnson & Johnson Development Corp., which joins long-term investor Hatteras Venture Partners in supporting the company’s growth.
• Trinity Convergence, a provider of embedded software solutions, has acquired Michigan-based Swell Software for an undisclosed amount. Swell Software products are used in a variety of embedded applications, including printers, MP3 players, handheld GPS units, home security systems, medical electronics and digital cameras.
• Aldagen Inc., which is focused on stem cell research, has received $17.3 million in debt and Series C equity financing, which was co-led by Harbert Venture Partners LLC and Intersouth Partners. Also participating in the round were existing investors The Aurora Funds, Trelys Funds, LP, Tall Oaks Capital Partners, Village Ventures and Piedmont Angel Network.

Morrisville

• Ziptronix, which seeks methods to enhance the design and manufacturing of semiconductor products for the electronics industry, has secured $2.8 million in financing from Intersouth Partners, RTI International, Grotech Capital Group and Alliance Technology Ventures.
• Integrian Inc., a mobile video camera technology innovation company, has acquired Signal Innovations Group (SIG) for an undisclosed amount. SIG develops tactical target recognition algorithms for air, ground and sea-based tier-one military operations. The SIG acquisition will be Integrian’s third in the past two years, following the purchase of Digital Safety Technologies in March 2005 and Innovonics Ltd. in late 2005.

Raleigh

• Accipiter, which sells ad-serving technologies to Web publishers in more than 20 countries, has been acquired by Seattle-based Atlas, the technologies business unit of aQuantive Inc. Accipiter’s outstanding shares were acquired in exchange for cash consideration of $30.3 million.
• Southern Capitol Ventures (SCV) has closed its second fund, Southern Capitol Technology Fund II LP. With more than $15 million in subscriptions, the fund will allow SCV to expand its current portfolio of companies, including Art.com, Batanga, ChannelAdvisor, eMinor, Motricity and Synthematix.

Research Triangle Park

• InnerPulse Inc., a privately held company developing technologies for the treatment of abnormal heart rhythms, has announced the closing of $50 million in new equity financing. The syndicate of investors includes Johnson & Johnson Development Corp., Medtronic Inc., Synergy Life Science Partners, Ascent Biomedical Ventures, Delphi Ventures and Frazier Healthcare Ventures. The capital will be used for completion of the InnerPulse’s implantable defibrillator and to support infrastructure required to advance the company from its early developmental phase to human clinical trials and commercialization.
• IBM Corp. has acquired Vallent, a Washington-based supplier of network performance monitoring software, for an undisclosed amount. Vallent’s software enables service providers to manage network infrastructure by monitoring and reporting problem areas such as dropped calls and traffic bottlenecks.
• Cisco has acquired Tivella, a Half Moon Bay, Calif.-based digital signage and systems firm, for an undisclosed amount. The acquisition is subject to various standard closing conditions and is expected to close in the second quarter of Cisco’s fiscal year 2007.