With the liquidation of its first investment, $150,000 in Medtrex Inc., the Western Pennsylvania Adventure Capital Fund has reached an important benchmark.
Medtrex returned two-and-a-half times the fund's investment in the company and, says G. Richard Patton, president of the fund, validated the venture fund's model.
"I think it shows our original model, providing economic development and free market profit, works," he says.
The Western Pennsylvania Adventure Capital Fund, launched in 1997 with a $2.7 million public offering from a pool of private investors, was founded to fill a rather large void by investing in very early-stage companies with the potential to reach $25 million in sales within five years. Last September, the fund raised another $3 million in its second public offering.
The role of intermediary
While the coffers of many venture capital firms are flush with funds waiting to flow into quality deals, entrepreneurs continue to find it tough to land early-stage venture funding. Venture capital investment provides large amounts of funding to growth firms -- $17 billion nationally in the first quarter of 2000, reports PricewaterhouseCoopers. But Patton estimates that angel investors account for at least as much investment as do venture capitalists.
"The problem with angel investment is that it is an inefficient process," says Patton. "What the fund does is, in a large part, play the intermediary."
The Adventure Capital Fund seeks to streamline that process by giving private investors a chance to participate alongside its own investments.
The Adventure Capital Fund typically invests less than $200,000 in a given company, a small amount relative to other venture capital firms. But despite its modest investments, the fund usually brings with it additional direct investment by its shareholders, small investors who have the opportunity to get a close look at deals and participate privately.
After an investment is approved, the company makes a presentation to its shareholders, who then have the opportunity to invest privately on the same terms as the fund. The fund's first round of investment in Medtrex, for instance, attracted private co-investments totaling $300,000 by its shareholders.
While the Adventure Capital Fund's investments are relatively small, the role it plays in helping its portfolio companies can be substantial. In the case of Medtrex, a manufacturer of electrosurgical equipment, Doug Schofield, an Adventure Capital Fund director, played a key role in engineering the deal with Johnson & Johnson, which Medtrex targeted in its business plan as a potential acquirer.
Late-stage bridge financing by the fund helped the company with its ultimate sale. George McKee, founder of Medtrex, describes the fund's investment in his company as "absolutely vital" to its survival.
Handling home runs
The fund maintains no paid staff; its five volunteer directors oversee it and evaluate and recommend investment opportunities.
With limited staff to evaluate proposals, there are constraints on the ability to sift through potential deals. A significantly larger fund would mean a bigger administrative burden, something Patton says the existing management structure of the fund may not be able to support.
"At some point, we'll reach the limits of the patience and the resources of the five directors," he says.
The structure could change substantially if the fund chalks up some big gains, as other companies in its portfolio, several of which Patton describes as having "home run" potential, execute their exit strategies. Medtrex was sold to Johnson & Johnson in January in a $7.4 million cash acquisition, providing a tidy return for the the fund. The company, which expects to rack up $1.8 million in sales this year, is expected to be in the $100 million range within two years.
The Medtrex example, while not a home run by current standards, may indicate how lucrative some of the fund's investments could prove. Several companies among its holdings could prove successful enough to dwarf the Medtrex deal.
Take CoManage, for instance. The Adventure Capital Fund has invested $180,000 in the Wexford company that produces management software for the telecommunications industry. It's only a tiny fraction of the venture investment in the company, which totals close to $20 million, but a home run by CoManage -- if it stages a successful initial public offering in the next 18 to 24 months -- could make the fund and its shareholders big winners.
CoManage isn't the only company in the portfolio with star potential. Patton says there are several others, including WebMedx Inc., a medical software manufacturer that closed on $11 million in venture capital funding in February.
An interesting problem
Patton says the fund has a number of options for handling the proceeds from liquidations, should portfolio companies begin hitting the ball out of the park. One would be simply to distribute them to shareholders. Individual investments in ventures could be increased, or the fund could broaden its investment strategy.
With larger amounts of money to invest and more deals to evaluate, the fund may have to hire permanent staff to administer its activities or partner with a financial institution to assist in management. Ultimately, as with any publicly held company, says Patton, the decision will be up to its shareholders. Says Patton: "It's an interesting problem to have."
How to reach: The Western Pennsylvania Adventure Capital Fund, www.wpacf.com; PricewaterhouseCoopers' Money Tree report, www.pwcmoneytree.com; Medtrex, www.medtrex.com; CoManage, www.comanagecorp.com; Webmedx, www.webmedx.com.
Ray Marano (email@example.com) is associate editor of SBN magazine.