Thursday, December 9, 2010

Edison Ventures growing Boston investment deals

By Galen Moore

Edison Ventures (formerly Edison Venture Fund) backed NetProspex this week with a $5.5 million growth round – a story that broke Tuesday in Mass High Tech. That makes four investments in New England companies so far in 2010: the firm is positioning itself among the most active deal makers working here beyond the seed stage.

Edison invests in healthcare IT, financial services IT and interactive marketing companies along the East Coast, with offices in Boston, New Jersey and Washington DC. Mass High Tech reporter Galen Moore talked with Edison General Partner Michael Balmuth, who heads the Boston office, and Principal Ryan Ziegler, who works out of New York.

MHT: What do you look for in an investment?

Michael Balmuth: We look for talented entrepreneurs that have gotten to at least $5 million or so in revenue on little or no institutional capital. We look for some defensible IP, and capital-efficient business models that suggest the company can grow fast without taking in a tremendous amount of capital.

What is core to our strategy is being the first institutional investor. In most cases we are actually the only institutional investor at the start of the project. Many of our companies attract other co-investors, brand names that come in. Frequently other investors are joining us. The company is growing fast and doing well, and could go cash flow positive but decides instead to go for more growth. The founders and the board can decide.

MHT: Do you look at consumer-focused companies?

Ryan Ziegler: We do both B2B and consumer, and have businesses in the portfolio that represent both. Vis a vis consumer, we do look at going direct over time, but it’s typically a more efficient strategy to go to market and support it by channels in an OEM or reseller structure.

MB: Because of this capital efficiency we will look at direct to consumers, but most of the plays we have made have been B2B2C. That channel provides the leverage to go after the vast consumer market in a more efficient way.

MHT: A lot of startups are using the lean mantra. I guess that benefits a firm like yours?

MB: We think it’s great. This is our fourth investment in New England and we’re adding to the staff in this office. Deal flow is great. What isn’t good for our model is companies raising millions in capital at zero revenue. When companies are getting further raising the money they have today, that’s good for us. We want the entrepreneur and the management team to own as much of the company as possible when it comes time to have a liquidity event.

MHT: What about liquidity events? It’s all well and good for Groupon, but do you think skies may be a little cloudier in the middle market?

MB: There’s most definitely a dearth of liquidity opportunities for companies – but I think that’s all the more important reason for companies to select an investor with a long-term perspective. Our average hold period is over six years. We’re looking to help entrepreneurs maximize valuation and optimize liquidity but if that means going long we’re highly supportive of that. Companies do need to put themselves in a position where they can control their own destiny and they don’t have to pursue a liquidity event because of a lack of financing.

MHT: Beyond capital efficiency, how can you guard against that?

MB: Typically when we invest they are around break-even. They’re going to try to grow faster by losing money for a while. Usually they come out of the chute after a couple of years and they come back to this trade-off between growth and profitability. It’s always better for companies to be bought than sold, so we encourage companies to strike strategic partnerships – ideally ones that are generating revenue for them. Sometimes those business development partnerships that are generating revenue become the M&A buyers of the future.