We’re not in the business for singles and doubles we swing for the fence every time.”
That is the motivating force behind institutional investment firms, which lend money to entrepreneurs hoping to expand their companies, according to Michael Shanahan, a general partner with Egan-Managed Capital, a Boston investment firm. Shanahan was addressing a recent joint meeting of the Brown Venture Forum and the Rhode Island Technology Council when he made that comment.
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”The bad reputations we get about throwing CEOs out of a company come because he wasn’t prepared to go the distance,” Shanahan said.
The distance he mentioned is a reference to the return investors expect on their stake.
Though he sounded like a tough and unyielding businessman at times, that is exactly what some local high tech entrepreneurs needed to hear, said David Durfee, who moderated the panel discussion. Durfee also serves as RItech’s treasurer and is president of Bay Computer Associates, Inc., in Providence.
”When we formed our group (RItech) a couple years ago I felt it was really important to get together with the Brown Venture Forum,” said Durfee, adding he has been attending Venture Forum meetings for about 10 years. “To me it really showed the purpose of the Brown Venture Forum, which is to wake up the entrepreneurs.
“I think people in the high tech business don’t understand business, they’re engineers by trade,” Durfee said after the forum.
Durfee, who is a computer engineer, said he has not personally dealt with the intricacies of attracting institutional or angel investors, but has observed other companies. “I’ve seen a lot of people get burned,” he said.
The Venture Forum meeting actually laid out the path one company – Softrax Corp. of Braintree, Mass. – took to attract investors. Softrax develops and markets business software, which is designed to track important software company data such as licensing agreements. A Boston area company was used for the forum. Because of scheduling problems the organizers couldn’t sign up a Rhode Island company.
The March 18 meeting, which was held in Brown’s Barus-Holley Building, was the second annual joint Venture Forum-RItech meeting.
RItech is scheduled to run its own venture forum in June in Newport. It will be a forum for companies interested in attracting investors to present their business plans.
What really helped get institutional investors interested in Softrax was hooking up with a so-called angel investor, said Robert O’Connor Jr., Softrax’s chief executive officer. And once the lead investor is on board, O’Connor joked other investors follow suit “like lemmings.”
Angel investors, according to Shanahan, are individuals who might invest smaller sums of money and will sometimes help an entrepreneur better organize his or her company. These investors typically come in during the first round of funding and may invest more money later.
In Softrax case, the angel investors appeared in the form of Ralph Wagner, an individual investor from the Boston area. Wagner belongs to Walnut Venture Associates, which is a team of 16 individual investors who have joined forces to research potential investments. Wagner added that each investor makes up his or her own mind on where to invest money.
Walnut Venture’s members discovered O’Connor and his company at a forum very much like Brown’s in November 1997, Wagner said. O’Connor at the time was looking for $2 million, but Wagner’s group wasn’t prepared for that kind of investment and had some questions about the company’s business plan.
According to O’Connor there were several facts the investors wanted resolved, including: The potential market for the product, and getting key management positions in the company filled. “One investor said, ‘your company is a good thing, but the deal has a lot of hair,'” he said.
Ironing some of those issues out and having some satisfied customers in place were key to winning the investors’ confidence, O’Connor said. “We knew they were going to spend a lot of time talking to customers,” he said of the due diligence process.
The Softrax team managed to hammer out a deal that appears to have left both them and the entrepreneurs satisfied. With the funding they have received, Softrax has built up its management team and sales organization, expanded its product development operations, increased market awareness of its product, and established a board of directors.
O’Connor said he learned several lessons from the experience:
Analyze your business as the investors do.
Look at “the fit” between you and the investors. He asked himself, “can I work with these people?”
Be persistent, follow the potential investor’s lead.
Secure a lead investor and other investors will follow suit, “like lemmings.”
