Sean Marsh is a general partner at Point Judith Capital, an early stage venture capital firm based in Providence, and he leads the firm’s communications and Internet investing. As with many industries, the economy and the financial industry crisis has had an effect on venture capitalism.
PBN: You mentioned that Point Judith is part of a second wave of newer venture capital firms that is hitting its stride. Can you talk about that development and what kind of effect it has had on the venture capital business?
MARSH: The venture capital business began in the late 1960s and early 1970s by a group of East Coast and West Coast firms that arose out of academia, wealthy families that had been investing in private companies and entrepreneurs who decided to put together pools of capital to fund new companies. These pioneering firms initially managed small amounts of capital –funds under $20 million – provided by large academic endowments and very wealthy families. Many of these firms still exist today after having been very successful investing in many notable companies.
Fast forward to today and the venture capital business has changed quite a bit. There are now many firms across the U.S. and internationally, and the pioneering firms have built on their success and raised larger pools of capital and expanded their partnerships to include many people – sometimes on the East Coast, the West Coast and internationally. These larger pools of capital have led some of the pioneering firms to expand their investment mandates into later-stage companies, which look more like private equity and sometimes buyout transactions than the traditional venture capital investments made in the past. These firms have certainly been successful in funding later-stage companies while still doing traditional investing but the tension created is that when a firm has a $1 billion fund, their inclination is to invest larger amounts of money per investment, which sometimes doesn’t fit an early-stage company’s business plan. The countervailing dynamic here is that the average venture-backed IPO and [mergers and acquisitions] liquidity event in the past 20 years has been $140 million, so to achieve venture level returns for investors, venture capitalists need to invest smaller amounts of money in highly capital-efficient companies, or they have to achieve massive, multi-billion dollar exits.
The result is that there are still many early-stage companies with fantastic entrepreneurs that need less capital and may not become billion-dollar companies that are no longer served by the pioneering firms. However, these entrepreneurs still want sophisticated, knowledgeable and proven venture capital partners to help them build their companies. That has created an opportunity for a group of firms, including Point Judith, to enter the market and be successful by operating as the original pioneering firms did in the past. We manage pools of capital that are sized correctly to invest in venture capital stage companies, we are sector-focused (health care, Internet, communications and software) and very experienced at building early-stage companies and so we can act as highly value-added partners to our portfolio company entrepreneurs. Point Judith specifically also has a unique differentiator in that we have a strategic partnership with Tudor Investments, which is a global alternative asset management. This partnership enables us to provide the resource scale to our companies that the larger venture firms are able to provide, but we can still be effective venture capital investors because of our operational and capital structure.
PBN: We’ve heard a lot about the lack of initial public offerings and merger and acquisition opportunities. How does that effect the way Point Judith operates?
MARSH: We recently had a portfolio company sign a large ($400 million-plus) acquisition deal so we have been fortunate to have had success at a large scale in this market despite the broader challenges. I will say that we have worked with our companies to make sure they have a path to build a great business and that the company can operate in a manner that doesn’t require it to be dependant on an IPO or an M&A event at a specific time. This allows these companies to be able to wait for liquidity until the market is available and it makes sense for the company.
PBN: When do you foresee liquidity events picking up again?
MARSH: I think it will take some time. The macro economy needs to work through the credit problems that are still prevalent, and the recessionary fears/pressures have to abate which will simply take time. I don’t have any specific views as to the date we might return to a robust IPO market, but I do believe this will happen eventually. The really good news is, innovation and entrepreneurial activity is very much alive and moving forward. Great teams are still striving ahead to build businesses that will have substantial impact on the world.
PBN: Can you detail some of Point Judith’s success stories?
MARSH: As described above, our portfolio company, www.Optasite.com, just signed a deal to be acquired for $430 million (we and our partners were founding investors in this company and helped build it from startup with a fantastic management team lead by Jim Eisentstein, the co-founder of American Tower).
I don’t have a specific company at Point Judith that I would describe as the “one that got away,” although there are a number of notable companies that I and my partners could have invested in but chose to pass – all for reasons that seemed rational then, but in hindsight, we missed the boat.
PBN: What are your criteria for agreeing to finance a business?
MARSH: We have many criteria that center around a variety of aspects of the company, the actual investment deal, etc. But I would say the two most critical factors are the strength of the team and the size and attractiveness of the market the team is planning to go after. If these two items are lacking, then it isn’t a good fit for us.
Point Judith Capital is an early-stage venture capital firm focusing on the communications, Internet, health care and information technology sectors; it has a strategic partnership with alternative asset management firm Tudor Investment Corp. Additional information is available at www.pointjudithcapital.com.
