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Investment insights Featured

6:02am EDT June 30, 2003
What are private equity investors looking for?

The MIT Enterprise Forum brought a panel of Boston area entrepreneurs and venture investors to Pittsburgh via a satellite broadcast to answer that question.

Some of the answers may be surprising. Contrary to what one might expect, there is plenty of venture capital available for start-up and later stage investments, says one venture investor. In fact, he says, if you can't find capital for your venture, it's likely there's a defect in your plan, not a shortage of investment capital.

"This is a very good time to start companies," says Paul Ferri, founding partner of venture firm Matrix Partners.

The dark side is that with an abundance of available capital, there are a lot of me-too companies landing investment capital, a situation that creates fierce competition among start-ups and reducing the odds for success.

"The environment for raising money is easier than it ever was, but the competition makes it harder to be successful," says Ferri.

Ferri says his firm went through a period in the 1980s when it invested in businesses as diverse as shoe manufacturers, commercial bakeries and airlines, and had little direct involvement with those businesses. In the 1990s, Matrix Partners narrowed its focus to its current approach of backing technologists that have designed successful products at good companies and who now want to be entrepreneurs.

"They're not people working in their garages," says Ferri.

Matrix Partners looks for technology businesses that are the first start-up in their market space, have high barriers to entry and will require approximately $30 million in total venture investment. Matrix partners also wants a seat on the company's board.

"We're looking for companies that will be true industry transformers," says Noubar Afeyan, senior managing director of Flagship Ventures, a venture firm focused on life science, and information and communications technology.

Afeyan says there is no question that great companies will emerge. The trick, he says, is to identify them.

Afeyan says Flagship Ventures looks for a company that addresses a problem that is worth solving, will transform large markets, has an experienced management team with a track record of success and is willing to think in terms of longer timeframes than companies or investors were considering in the late 1990s.

Helen Greiner, an entrepreneur who co-founded iRobot Corp., a Boston company that has raised $28 million in venture capital, suggests that meeting the right venture investor is key in getting funded. She suggests universities, personal connections, agents who can make the right contacts and networking to identify the appropriate firm.

When it comes to term sheets, Greiner recommends creating your own rather than waiting for an investor to submit its offer.

"It's easier to negotiate points into yours than out of theirs," Greiner says.

Greiner advises that entrepreneurs not put off raising capital until they're running out of cash. Venture investment should be a method to build on your business plan and expand your company, not a stop-gap financial measure. Solid financial management, says Greiner, impresses

"A good motto is "Make every nickel scream," says Greiner.

Ultimately, for venture investors, the basic game remains essentially unchanged. Venture investing remains a high-stakes activity, with a scattering of big hits making up for the more frequent misses.

Allan Wallack, who serves on a number of boards and consults with multiple companies in the Boston area, says what investors are seeking hasn't changed.

"They're looking for a great investment opportunity," says Wallack.

Adds Afeyan: "At the end of the day, we'll make money a few companies at a time." How to reach: MIT Enterprise Forum, www.mitforumpgh.com