Four years ago, EmergiTech Inc. was looking for a boost.
The then-12-year-old Reynoldsburg-based software provider for the public safety and emergency services industry shipped its first 9-1-1 and computer-aided dispatch system in 1987. But by 1996, company officials were looking to expand.
“We needed some additional capital to fund the development of a Windows product so we could further exploit the market,” says Mark Collins, EmergiTech’s president and COO.
Venture capital investment proved to be the solution when EmergiTech drew the interest of Desco Capital Partners.
With new funding in place, EmergiTech added sales and development staff, transitioned its product and more than tripled its geographical reach from four to 14 states.
As for sales, Collins says, they’re nearing $10 million, up 65 percent from last year alone. Income has increased nearly 600 percent in the same period.
Fitting the bill
Roger Bailey, a general partner with Desco Capital Partners and CFO of its operating company, Desco Corp., says his firm owns between 10 and 90 percent of 12 different software, medical products and Internet infrastructure companies.
“EmergiTech was one of our smaller investments, actually, a half million dollars. That’s probably the lowest. They go up to the $7 [million] or $8 million range,” he says.
The firm has a venture capital fund of about $75 million and could bring in another $25 million easily, Bailey says.
Ideally, Desco likes to build infrastructure, like the sales and development employees at EmergiTech.
“With EmergiTech, it was an established company with a very loyal customer base,” he says. “In fact, one thing that impressed us the most is when we asked for customers, they said, ‘Just pick one.’
“Most of our investment went into development of a Windows NT product, which gave them a competitive advantage in the marketplace,” Bailey says.
Desco also looks for a product that can be sold commercially and is already on the market, at least in trial form.
Another requirement: A solid management team.
“I would take an A management team with a C product before I would take an A product with a C management team,” he says.
At EmergiTech, Desco holds an ownership percentage, which both Bailey and Collins decline to disclose, and a seat on the company’s board.
“In that particular case, we have a very strong management team, so we really don’t spend much time with them,” Bailey says. “We’re there to advise, we’re there to provide extra capital if they need it; however, they’re doing extremely well right now.”
Collins says having an investor on the board “brings some additional financial expertise. They also are out traveling in the market and are oftentimes able to spot some new trends and some synergistic relationships that may be of benefit to us.”
Due diligence
Collins says business executives should invest their time wisely in finding venture capital funding.
“The key is to make sure everybody understands what the needs are of the others in the group,” he says. “It’s not right for everybody, but if you go into the relationship with a clear set of expectations, it can be a win-win.”
Bailey offers the following advice to businesses seeking venture capital funding:
- Be careful when you predict your company’s growth.
“I think the most annoying things we get are these wildly inflated forecasts of future performance,” Bailey says, referring to a recent business-to-business dot-com proposal he received. “This year they’re going to make $50,000, and revenue next year, they tell me, will be $11 million. It seems to me if it was that easy to develop an $11 million company, everyone would be doing it.”
Bailey says the rule Desco uses is that only 3 percent of the software companies in the United States ever sell more than $10 million.
- Do your homework.
“Most entrepreneurs who come to us with an idea have very little idea of the competitive nature of the business,” Bailey says, adding that very often, Desco will find 15 to 20 competitors for a product.
- Be realistic.
Because of the competition, it takes a tremendous amount of money to distinguish your company in the marketplace, Bailey says.
“Most entrepreneurs don’t understand how much money that is,” he says. “For a retail product today, you’d probably need $10 million to $20 million to promote it, and a lot of the dot-coms are the same way.”
How to reach: Desco Capital Partners, www.descovc.com or 888-8855; EmergiTech Inc., www.emergitech.com or 866-6712
Joan Slattery Wall ([email protected]) is associate editor of SBN Columbus.
