So what’s with what appears to be a flood of venture capital dollars flowing into the Ocean State? Joseph Hammang, associate director of science and technology at the Rhode Island Economic Development Corporation, believes it was just a matter of time.
”Venture capitalists don’t want to drive to outposts,” he said. “They don’t tend to stray far from New York, Boston and Palo Alto. But clearly there is reason to invest here.”
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One of those reasons, said Hammang, is the depth of resources at our colleges and universities.
”The colleges and universities have been turning out good ideas, and it has taken this amount of time for some of those to get noticed,” he said.
Hammang is quick to credit programs instituted by the EDC, and the Brown Venture Forum, headed by Bill Jackson. He also points to Zero Stage Capital and the establishment one year ago of a $15 million venture capital pool as a truly significant development.
Entrepreneurial spirit
Rhode Island has something else to offer that venture capitalists like – a driving entrepreneurial spirit.
That spirit is clearly evident in the likes of Ken Pereira and Vincent Giordano, two business people who have enjoyed the success of attracting venture capital – and are now in the process of building companies as a result.
Giordano is predident of DefendNet Solutions, Inc., a Providence-based Internet security firm received $8 million in venture capital funding earlier this spring – allowing the company to quadruple its workforce in Providence to 80, and to open a second office in Phoenix, Arizona with 20 employees.
KEN PEREIRA: ‘To me, the key to attracting venture capital was having a good story – high growth prospects and a hot industry.’
M/C Venture Partners of Boston decided to invest in the company, which is headed by Giordano, a former senior marketing manager at American Power Conversion. Giordano originally founded the company in 1996 as Virtual Media Technologies – an Internet integrator.
Slowly the company changed its focus to become an Internet security firm. Giordano describes the company as similar to a house or business alarm company, but instead monitoring business Internet sites for security leaks.
Tradesafe.com president and CEO Pereira is talking about hiring people and building infrastructure. An on-line Internet payment company, Tradesafe.com is banking on the explosion of e-commerce. Its business plan was solid enough to attract $10 million in recent venture capital investment.
Giordano and Pereira have found that venture capitalists are always looking for the same thing – a solid business plan that can succeed in scale. Location is less important than a proven track record and above all, to attract money, a company must demonstrate the ability to make money – fast.
In a roundtable discussion last week, Giordano and Pereira discussed the ins and outs of attracting venture capital with the Providence Business News.
PBN: In your individual situations, what was the key to attracting venture capital investments?
PEREIRA: Tradesafe.com has been around since 1995. I joined the company in February of last year. The company was relatively un-capitalized until then. I invested $50,000 to start the company up and then I raised a $1 million round and then a $10 million round. To me, the key to attracting venture capital was having a good story – one that involved high growth prospects and a hot industry.
What exactly does Tradesafe.com do?
PEREIRA: It is an on-line payment service for e-commerce. Between parties that don’t necessarily know one another, we arrange payments and make sure the goods are delivered in a guaranteed fashion. If you were to buy something on auction, you would use us to make sure you get your goods and the other person gets their money. It makes the transaction happen quickly because you can use credit cards, it’s convenient and it’s safe.
And the venture capitalists obviously see this as a growing industry?
PEREIRA: I think they look at our industry as a hot industry that is going from a couple hundred million to multi-billion to a multi-trillion dollar industry, especially in the business sector. And Tradesafe.com has a unique set of value disciplines that no one else is out there delivering. They liked our management team, they liked the way things were going. The fact that the company was in Rhode Island didn’t really make a difference – there was no one saying they wanted to invest in a Rhode Island company. In fact, on many occasions we went to Zero Stage Capital – and they had professed to wanting to invest in Rhode Island – and they were very clear in saying that they didn’t care if it was in Rhode Island or not. They want a good opportunity – and that’s the way most of them are.
And, Vince, what about your experience with venture capital investing?
GIORDANO: We started DefendNet in 1996, after having left American Power Conversion. We are an Internet security firm. We manage and maintain security systems for businesses that are connected to the Internet. We do it from small to large companies, so obviously there is no shortage with the hype of threats on the Internet. Security has really become a central focus. We were running the business independently and profitably for four years. And then we realize in 1998, going into 1999, that people were going to be buying security a different way. If we were going to be competitive on a national level – which is really where we saw ourselves – we had to seek out outside financing. As it turns out, the venture capitalists found us – through our press releases and a variety of other ways that we were communicating to the public. They were pretty aggressive in trying to capitalize on the opportunity. The key for us was that we had already built it. There is no shortage of business plans out there today – the entrepreneurial spirit is certainly alive. But going from a business plan to an executable model is pretty significant. We had already demonstrated that we could run an organization successfully with very satisfied customers for more than four years. We had demonstrated significant growth. Our management team was solidly in place. It was really a matter of adding resources to expand on that. We had a demonstrable service, where you could call a customer up and ask if they are happy with it? When you go with that, it is a much lower risk. As far as us being in Rhode Island, there were some concerns because they were unaware of the Rhode Island market.
Do you get the sense that venture capital firms are keeping a closer eye on Rhode Island – is there in fact more going on here?
PEREIRA: I don’t think they really care where it is – the critical mass of investment is the key. If there are a number of investments down here so that a venture firm invests in two or three ventures, and then they have a reason to come down, they understand the market a little more – they feel more comfortable. I don’t think that anyone is necessarily targeting – or ignoring Rhode Island.
So they are looking at companies, not geographic locations?
PEREIRA: Yes, you find that across the board. However, given an opportunity very often, if there is the same opportunity in the Silicon Valley versus Rhode Island, you have to have a much more demonstrable model. However, there are advantages to being in Rhode Island. People don’t jump to go to the next Internet company. People tend to be much more loyal. It’s a little harder to recruit, but once you get people you tend to hang on to them.
GIORDANO: I agree with Ken completely when he talks about the opportunities. A business plan is going to go across a VC’s desk and they are going to pull the trigger on that based on a variety of factors and location is very low on the totem pole. As far as recruiting goes, we’re in a unique situation because we recruit IT professionals – your network professionals who today are working at insurance companies or banks. Their motive is to catch on to the explosive growth of the Internet companies.
How do you find the talented people you need?
GIORDANO: We’ve been fortunate because we recently hired a professional human resources person. If you look at the very first few hires of a company, it is usually not a senior level human resources person. What we did was to slot resources for that person, brought them on – and now the issue of hiring has almost gone away. Now my managers can worry about managing their business.
PEREIRA: We recently hired a HR person as well. And that basically means you have someone focused on making sure ads are in the paper, talking to agencies, doing research and whatever it takes. You need to have some responsible for that. As you hire more people, you really need someone to handle the internal HR functions.
What are people looking for when they come to work for you – a bump in pay, I would imagine?
PEREIRA: Not necessarily. They’re looking for stock potential. If you are working for a company and making $80,000 – you’re going to make $80,000, with a little bump over the years. But if you all of a sudden have the opportunity to have stock worth over a million, that’s really exciting. Plus, being part of a start-up. There is an adrenaline rush.
And that’s not far-fetched, for someone to be thinking about that kind of money?
GIORDANO: Not at all. Look at American Power Conversion. When I was hired by APC in 1990, they were paying lower than what you could get somewhere else. But they offered stocks. And that turned out well for a lot of people. The company stayed here and a whole bunch of other companies have spun off.
PEREIRA: Think about how many millionaires were created by Microsoft. It isn’t far-fetched. For us, if we can create the next payment vehicle – one that may in fact replace VISA, or at least on the Internet offer a different quality – you can build a business huge.
Do you expect the state’s Centers of Excellence to pay dividends?
GIORDANO: I think the speed at which the state, the education community and the private sector – and the direction in which they move, is not always in lockstep. With that said, there are certainly contributions that these centers can make and have made. We do well to have a very close relationship with the schools. As far as a direct benefit, they have not touched our business – but that is not to say they are not important.
I get the sense that you aren’t waiting around for programs to develop?
GIORDANO: You can’t.
PEREIRA: To the extent that these centers develop people and make them available to the labor market – that’s good for us. But I don’t think anyone, especially in a business that is growing fast I mean, you have to do your own thing. I think the best thing the state can do is to create an environment in which businesses can thrive.
Let’s talk about that a bit. We continue to hear that Rhode Island’s tax structure puts it at a distinct disadvantage, that even our neighboring states offer more attractive tax structures, especially to top level executives. Does this play against the venture capital climate? Do you consider Rhode Island to be business friendly?
GIORDANO: I know from a fundamental standpoint, you have to run a business like anything else. Money comes in, you pay the bills and the taxes and you hope there is a little left over to pay the people. The fact for us is that it seems somewhat complex from a tax and a policy standpoint with the state to get certain things done. To us, the biggest challenge is knowing how to navigate those issues.
PEREIRA: I actually think the state has been business friendly because they haven’t gotten in our way. Compared, for example, to California – who we have major regulatory issues with and we have to comply with regulations that go back years and years and have nothing to do with what we are doing. Compared to any of the highly regulated states, it’s incredibly business friendly. The City of Providence, on the other hand, is very difficult. The tax rates in general are outrageous – the property tax rates.
GIORDANO: They come in and assess your chairs, your computers, your pencils and everything else.
PEREIRA:
The city is difficult. But we’re here because – particularly in the Jewelry District – a convergence of talent. There is technical talent. People like to be here. When you are dealing on the Internet, you get to deal more in art, with the Web designers.
Are you seeing different types of college graduates – more of the arts and sciences students, perhaps?
PEREIRA: Absolutely. The Internet has created a whole market for people who have been in the arts.
They don’t want to be starving artists anymore.
PEREIRA: They don’t have to be, because they’re in demand.
GIORDANO: What I’ve seen, because I’m more technicalwe joke that we are the Black Hole of design, with us it’s either on or off. But what we see is that the kids coming out of school have grown up so that the Internet is not foreign to them. It’s second nature. And now we see a lot of older people realizing that it is worth retraining themselves on their own time.
PEREIRA: If you take someone who has been in production all of their lives and they understand the supply chain, that has great value on the Internet. You are trying to automate the entire supply chain. If they can get computer savvy, they can enter a business-to-business opportunity and really apply their talents.
Where do you and your companies go from here?
PEREIRA: We’re just at the beginning. We raised $10 million – or first serious round of capital – in March. In the past 90 days we’ve been hiring people, moving infrastructure, doing deals with companies that make sense. Now it is really a matter of taking it up and growing exponentially – hiring more people, doing more deals.
GIORDANO: We’re looking to do the same thing. We demonstrated that we had a product and service that was working and running. We designed it really to be a Northeast company, with customers from New York to Maine, which is what we have and some international customers. Our initial process was really just a test run. It’s the real game now.
With venture capital investments, there is always the issue of control – of losing a certain amount of control of your company. But you both seem to maintain a strong sense of control. Is that the case, and if so, how did it come about?
PEREIRA: As a CEO, you have a number of constituencies. You have first round investors, second round investors, original founders. There are some 20-odd investors in our company. You don’t really have control, but you have absolute control. You are the center point, the communication point for all of the investors. In a lot of ways, they look to you to be in control and to be running the company. It’s a good thing. You have a board of experts and they tend to guide you. But you and the team have to move the company in the right direction.
GIORDANO: You hear horror stories all the time about people – venture capitalists – who have come in and destroyed a company. There are venture capitalists who are industry focuses and those that are stage focused. If you find the right VC that invests in the right stage – the stage that you are in and the industry focus that you are in – than nine times out of ten, it will be a decent match. They understand the market. The people who are behind us, have allowed us a lot of autonomy.
Is it important early on to be able to put your ego aside and acknowledge that you need help – whether it be expertise or money — to get to where you want to be?
PEREIRA: I think it’s well-accepted folklore that you have to do that now. If you were talking five or ten years ago, when venture capital wasn’t as prevalent as it is today – that’s what a lot of business owners were into, they were giving up. If your were running a lifestyle business and you were giving that up – I think that represents much more of a transition. Today, if you look at all of the companies that are successful, they’ve had venture capital behind them – the statistics bear that out. That being said, it is a challenge. These guys are highly charged. They expect when they put their money into a company, they are going to get a 30 to 50 percent return on that money. You have to grow your company fairly rapidly to do that.
GIORDANO: There are a lot of contingencies, but when things are going well, things are great. It’s when things aren’t going well that it gets complicated. Are they not going well because of bad leadership?
PEREIRA: I’ll tell you, in just the past 90 days the whole venture capital thinking has changed. There were on a stream of making investments and getting liquid very quickly. Now, their ability to get liquid has really halted. Not many of their companies are going public. So, the models are changing – the way they look at business is changing. If you start a business and you aren’t going to be profitable for two years that wasn’t such a problem six or nine months ago. Now, you have to have a model that gets you profitable much quicker. It really gets back to basic business.
What advice do you have for men and women out there who have the right idea, but are really just getting started in terms of attracting investors?
GIORDANO: Do your homework. Understand your market. Understand the process. And if there is one word that you hear all the time in our industry is scale. You can have the best idea in the world, but if every single widget you make is a masterpiece – then you can’t scale that. Clearly, if you are going down the VC route, what they are primarily interested in is scale. Can your model go from making one to 100,000 and be profitable.
PEREIRA: That’s right. And it doesn’t mean you can’t raise money any other way – you’re just not going to do it through venture capital. That’s a decision you need to make right away. You have to decide if you really want to go out to venture capital or fund it yourself. If you really believe strongly enough, maybe you’ll take a mortgage out on your house. Do you want a lifestyle business or a high growth business? If you want high growth, then venture capital is a great opportunity. If you don’t, don’t even think about venture capital.
