November 27th, 2012 by David E. Williams of the Health business blog
The audio for this podcast can be accessed here.
David Williams: This is David Williams, co-founder of MedPharma Partners and author of the Health Business Blog. I’m speaking today with Brian Model, Managing Director of Stonehenge Growth Capital and President of the Upstate Venture Association of New York (UVANY). Brian, thanks for joining me.
Brian Model Thanks for having me.
Williams: What is Stonehenge Growth Capital?
Model: Stonehenge Growth Capital is an investment firm. We spun out of BancOne in 1999. At the time that we spun out, we managed about $600 million in nine individually state targeted funds.
We focus on making investments in areas where there’s a lot of innovation, but a lack of locally available capital. In addition to our investment funds, Stonehenge is also a large provider of tax credits across the country from the federal new market tax programs and numerous other in-state economic development tax programs.
Williams: You have some concentration in underserved regions of the country. Can you talk about why you have that strategy and the regions that you’re involved with?
Model: Our funds initially were state targeted. We operate funds in New York, Florida, Connecticut, Texas, Colorado, Alabama, Missouri and Wisconsin. In each of those regions, state funds were created in order to provide incentives for capital to go to specific regions.
A number of these places are very strong innovation regions. They have strong universities, strong medical centers and strong communities focused on entrepreneurship. There’s not a lot of capital there, so we build a history in the specific region over a time period of about 10 years in places like Upstate New York and the Space Coast of Florida. We look for investment opportunities and build relationships where there are relatively few investors.
Williams: When you look at these regions, for example Upstate New York –where you and I are both involved with iCardiac Technologies–, what do these regions have going for them and what do you find that they lack? If you look at the Upstate New York region, what do you really see there?
Model: Upstate New York is the second largest recipient of federal research dollars. There are leading research institutions there.
There’s also a very strong entrepreneurial history when you look up at a lot of the great innovative companies of the 20th century such as Bausch & Lomb, Xerox, Kodak, Carrier, , GE, and IBM. Historically there have not been many investors in those parts of New York.
Investment has always been focused downstate towards New York City. In the Upstate region there are strong medical centers, strongly educated people, and a history of innovation that is relatively untapped.
There are over half a million college students across Upstate New York and these people are excited about what’s going on in the community, excited about the innovation that’s coming, and they want to stay and raise their families. Providing capital in those regions allows those communities to continue to grow. We also find a lot of opportunities to generate returns for our investors in that area.
Williams: Why is there a shortage of capital there? Does it just come down to investors liking to live in New York City, Silicon Valley, and Boston, and not in Buffalo and Rochester?
Model: That certainly is part of it. Investors like to invest within two hours of home or somewhere that they can drive to. I think that the quick communication tools and the Internet make remote working and monitoring of companies easier.
The other factor is there continues to be a split between urban and more rural communities. Those communities are then harder to get to. You cannot just fly into one area in Upstate New York and cover the whole state. Buffalo is far apart geographically and culturally from Syracuse and fromAlbany.
You need to be on the ground and to build relationships in those communities to make those deals. Every year there are a number of investors who fly in from New York City or Boston, or Chicago, or California ready to make deals but it’s hard to build local trust. It’s hard to spend time to do due diligence and they find that it’s easier just to stay home and do their deals there. That’s providing opportunities for us as we’ve been able to build that network of relationships across the region.
Williams: What do you find in terms of management talent? Is it closer to the high level of research that you see coming out of the universities or is it closer to what you see on the capital front where they are not native to the area?
Model: Most of the talent that’s in the region is homegrown, whether they came out of a local university or their family was from the area. The biggest challenge that we have is, there’s fundamentally two different types of entrepreneurs. You have academic entrepreneurs who create the technology and are looking for a market, and you also have business driven entrepreneurs.
We prefer to focus on business driven entrepreneurs, who are entrepreneurs out of industry who understand the big challenges facing the business. They’re applying proven technology to solve the problem.
One of the larger problems that we have is finding qualified and experienced sales people to come and work. People who don’t grow up in our region find this a challenge and wonder if they really need to move to Buffalo or Rochester to take the job.
We find that because sales forces can be so dispersed, that this becomes less of a challenge. The proximity of Upstate New York to New York City has also allowed a number of portfolio companies to set up outpost sales offices elsewhere.
Williams: Stonehenge Growth Capital recently received several million dollars from the Innovate New York Fund. What can you say about that fund and why were you handed this amount of money?
Model: Innovate New York is a program that’s going to be in New York state, targeting seed stage investments. Seed stage investments are not only pre-revenue science derived companies but also companies that have their products in the marketplace and are just beginning to generate revenue. There are also companies that have not yet received institutional financing. Stonehenge was allotted $6.5 million.
We are looking to invest the Innovate New York capital in companies that are at the intersection of health care and IT. We see a lot of opportunity in companies coming out of New York state that are working to provide innovative solutions to either help drugs get to market faster, to help streamline care, or to increase communications between patients and doctors.
Focusing on this industry, with the hospitals and medical centers, and universities across New York State, there’s so much innovation. We’ll see a lot of opportunity in the current investment cycle for that.
Williams: Can you describe what you consider the best investment you’ve made in the Upstate area and the characteristics of a good investment?.
Model: The best investment that we’ve made out of our New York State portfolio is a company that was actually based in New York City that has some similar characteristics to iCardiac. The company’s name is Medidata Solutions and is currently trading under the symbol MDSO.
We invested in Medidata in 2002 when the company had just begun to offer their service. They provide an electronic data capture platform that allows clinical trial data to be captured over the Internet electronically as opposed to in a notebook.
Data in a notebook is full of errors. By having that data captured through a browser it allowed the errors to be corrected early, which saves time and saves money. We invested when Medidata had processed about 12 clinical trials and they generated less than a million dollars of revenue.
By the time that the company went public in 2009 they were over $100 million in revenue. Similarly as we look at iCardiac up in Rochester, they’re providing software and services to enable more efficient cardiac safety testing through the clinical trials process. We see a similar market dynamic for that opportunity. We’ve also invested in another company in Rochester called eHealth Technologies.
As communication between patients, their doctors, and their other healthcare providers becomes more of a challenge in the industry, eHealth is providing a valuable service. It is a technology based service where they allow for the retrieval of records. If you need to request an MRI from your specialist they can provide that service. We think that’s another growing area as medical data gets digitized and electronic medical records become more widely-adopted.
Williams: What advice would you give to entrepreneurs outside of the traditional homes of venture capital, even if they are not in New York State where you’re serving them? How should entrepreneurs be thinking about getting investment for their companies? How do they attract investors such as yourself? Do they actually need to move their business to a place that’s closer to where the investment action is?
Model: The most important thing for any entrepreneur to do is to first to make sure that this type of investment is the right kind of partnership that’s going to help drive the company toward their goals. Not every business is appropriate for the type of private equity and venture capital investment that we do.
Once you’ve made that decision, the next important thing is to figure out who your appropriate investor targets are. I hear frequently that it’s hard to get investors from New York City to come to companies that are in Upstate New York. For example much of the activity that we’re seeing in New York City today are companies that are looking for social media, consumer focused businesses that naturally grow out of the publishing and advertising industries in New York City.
Those aren’t the kinds of companies that are going Upstate, so I think that there’s a natural mismatch there. Entrepreneurs need to think about who are the most appropriate investors for their company. Look at a competitor, look at similar companies, and target the investors that have invested in those companies.
It doesn’t matters as much where you are, provided that you target investors who are going to be able to add value and understand what you’re doing. They will then be willing to travel to you.
Williams: I’ve been speaking today with Brian Model, Managing Director at Stonehenge Growth Capital. Brian, thanks so much for your time.
Model: Thank you.