Michael Gurau is a venture capitalist working out of Freeport, Maine. For five years, Gurau and his partner, Michael Burgmaier, have run a venture-capital fund focusing on opportunities in northern New England. Now they’re attempting to raise a fund that will look for financings in other “secondary cities” in New England – Providence and the surrounding area is their primary target. Gurau is in the process of raising money for the fund now.
PBN: Can you outline the process of starting a new fund?
GURAU: Venture-capital funds are structured as 10-year investment partnerships (LP) – funds raised are deployed over the first five years and harvested over the second five. If a fund has an established track record (from prior successful funds) or has a promising portfolio, it will seek to raise a new fund – sometime between the fourth and sixth year of the partnership – thereby starting a new 10-year LP. Once raised, the fund manager has, in effect, two jobs: to manage the harvest period of the earlier fund while deploying and managing investment from newly raised capital. Venture-capital funds raise their capital, typically, from institutional investors (pension funds, university endowments, insurance companies and banks) and from wealthy individuals.
For the past five years, my partner and I have been investing and managing a $10 million fund called CEI Community Ventures (CCV); CCV is a northern
New England-based fund (Maine, New Hampshire and Vermont) targeting secondary cities in that region. CCV is now through its investment cycle and is largely in harvest mode.
Based on the emerging track record we are showing at CCV (coupled with my prior background and track record at Boston-based private-equity fund Advent International), we are setting out to raise Clear Venture Partners, a $50 million to $75 million fund targeting early-stage investments in select sectors in our target region. Clear Venture will focus on the six New England states, seeking to drive capital into secondary New England cities – essentially most of New England outside the Interstate 495 belt (as Greater Boston serves that market quite well). We see secondary cities as an opportunity and competitive advantage given less completion for deal flow.
Our story is unique in venture capital in that most capital raised over the last 10 years has been for larger later-stage funds, whereas the “capital gap” in the market is at the early stage end – i.e. there’s less capital than demand for capital for early stage ventures. Focusing on early stage “capital gap” deals with a secondary-city overlay makes us unique in the venture-capital market and so provides us a “story” that differentiates us from other funds. We believe that our track record and unique story will translate to interested investors. Ironically, the current economic environment has both challenges and opportunities – the challenges are that a) companies that might be recipients of venture capital might find their opportunity for growth diminished by the economic impact on their prospective customers, and b) investors in venture-capital funds might take a more conservative view toward investment in new funds, either biasing later-stage funds (rather than riskier early-stage funds) and/or avoiding this asset class altogether, focusing instead on more conservative, safer places for their money. The opportunity for a new fund is that exacerbated supply-demand dynamics translates to more opportunities and better value (e.g. company valuations will likely be more realistic in this environment, by contrast to the dot-com boom times).
In summary, our obstacles are a) convincing investors to part with capital at a time when they may be trending toward avoidance of this asset class, and b) finding investment opportunities that are less recession sensitive.
PBN: How much are you looking to raise, and when do you plan to be able to start investing?
GURAU: Venture-capital funds typically require between six and 18 months to raise a pool of capital. Often, a fund will have a “first close” on a goodly portion of capital raised (e.g. 50 percent of the target raise) so that they can begin investing while they continue to raise the balance of capital. Starting in the second quarter 2009, Clear Venture will commence raising $50 million to $75 million and expects to take 12 to 24 months to raise its target amount, with a view to a first close when the fund reaches $25 million. With luck, we hope to be in a position to have a first close by end of 2009.
PBN: There are some funds already operating here in Rhode Island. Is there a need for the fund you’re proposing here?
GURAU: In Rhode Island, there are two funds that serve the capital market: Slater Technology Fund, which does “seed” investment, and Cherrystone Angel Group, which funds early-stage companies. Both funds reflect “small money” by venture-capital standards, investing $250,000 to $1 million. Most fast-growth companies not only need large capital raises ($1 million to $3 million typical for first rounds), but need multiple financing rounds over a four- to six-year period to achieve their plans. Accordingly, there is currently a capital gap in Rhode Island, with less capital available to fund opportunities than funds to support them. Slater and Cherrystone would heartily welcome a fund like Clear Venture, both as co-investment partner for financings in which they are investing and as a subsequent round (next phase) investor. In fact, the capital gap is sufficiently large enough to support two or three Clear-sized funds.
There are no shortages of opportunities. Recognizing this, [the R.I. Economic Development Corporation] has embraced Clear Venture’s efforts and has partnered in co-developing a financing seminar series designed to educate the market on capital sources in Rhode Island; on Nov. 25, nearly 150 attended Clear Venture’s Financing Fast Growth seminar (hosted by RIEDC) in search of information and capital.
PBN: One might think this might be a bad time to establish a venture-capital fund, because we’re in a recession and the economy is showing no signs of a quick recovery. Why do you believe differently?
GURAU: As noted, the next two years may be ideal from an investment perspective (given the supply-demand imbalance); investors with capital are likely to not only have their choice of opportunities but also to find attractive valuations for those opportunities they select. The challenge, as noted, is to find opportunities that can thrive in a down market. Clear Venture believes that its focus areas (clean technology, healthy living and information technology) have ample opportunities that fit this profile. Given that venture-capital funds tend to focus on cashing out some four to six years following investment, Clear Venture will not have the challenges of funds that are currently trying to realize value through IPO and/or sale/merger, provided that the market returns to normalcy and growth by the time Clear needs to exit its investments.
PBN: What advice can you offer startups considering venture capital to get things off the ground?
GURAU: Until Clear gets funded, startups should be sure that they are familiar with all local and regional sources of funding (e.g. Slater Technology Funds, Cherrystone Angels) and their sector and stage interests. Absent a robust funding market, startups should do what they’ve always done in terms of capital (bootstrap, look to friends and family) while ensuring that their business model addresses today’s market environment – i.e. enterprise software is not the most attractive software sector in a contracting economy, as corporations reduce their capital investments, generally and their IT spending specifically. Companies should also look to alternate sources of funding – e.g. state/federal grants, getting customers/vendors to act as funding sources, use of barter in lieu of cash, etc.
