Title: Michael Burgmaier

Author: Jennifer

Date: October 01, 2008 3:07:43 PM or Wed, 01 October 2008 15:07:43

Summary: General Parnter / Co-Founder Clear Venture Partners; Topic: The Venture Capital Process

Body: Michael Burgmaier is a General Partner and co-founder of Clear Venture Partners (http://www.clearvcs.com/), a $50MM venture capital fund-in-formation, and a Principal with CEI Community Ventures Fund (http://www.communityventures.com/), a fully-invested $10MM fund which he joined in early 2004.  Both funds are based in Portland, ME. 

Michael sources and evaluates deals, negotiates with potential companies, helps lead syndication efforts, serves on boards of directors and helps portfolio companies build value. Previous experience also includes three years as a Consultant/Case Team Leader at the management consulting firm Bain & Company, Inc. in Boston. While at Bain, Michael worked with clients across several industries, including consumer products, biotechnology, durable goods and health care.  With these clients, Michael gained high-level functional experience in marketing effectiveness, growth strategy, supply chain, lean manufacturing, organizational strategy and cost reduction, among others. 

Prior to joining Bain, Michael was the Acting Director/Senior Policy Associate at Children Now and served as a fiscal policy analyst in the Executive Office for Administration and Finance under former Massachusetts' governor William Weld.

Michael holds a MBA from the Tuck School of Business at Dartmouth, an MPP from Duke University and a BA in Economics from Boston College. He currently serves on boards of directors for several companies from CEI Community Ventures; Michael is also on the board of directors of GrowSmart Maine, an organization dedicated to creating sustainable economic prosperity for Maine.

For more information, contact mb@clearvcs.com or mburgmaier@communityventures.com.

Notes: The Venture Capital Process: Pizza and Nanotech?

As a venture capital investor, I am often asked what it takes to get an equity investment from a VC firm.  I hear business ideas spanning from magazines, to social networking web sites to consumer products. One of the funds which I co-manage has invested in New Hampshire businesses ranging from pizza crusts (Rustic Crust) to nanotechnology (Nanocomp Technologies).   One may ask how can pizza and carbon nanotubes both get venture funding.  What common elements make both of these opportunities venture-worthy?

First, some ground setting.  Venture capital equity fills a gap - business with too much risk for banks (losing money; early stage) and are not yet cash-flow positive enough to internally reinvest enough capital into the business for growth.  A venture capital equity investment is an exchange of capital for partial ownership in a business.  Equity can take many forms, but for the most part, it is patient capital that does not require/demand real-time interest payments; rather "repayment" is deferred and dependent on company performance.  This form of high-risk capital bases its return on its ownership stake - if $1 million of equity buys 40% of a business and the company sells in three years for $100 million, the equity is now worth $40 million.  Conversely, if the business goes bankrupt, the equity is worthless. 

So where does venture capital come from?  While an individual investor ("angel") invests their own capital, a fund's capital typically comes primarily from others: banks, insurance companies, pension funds, etc...  VCs manage funds that have a ten-year life: investments typically occur in the first five years of a fund and value creation/growth and eventual exit events (businesses sold to another company or an IPO) occur in the latter five.  Typical holding times for a venture investor can be from three-to-seven years.  So if a business owner does not want to build and sell in t hat timeframe, venture capital is not an appropriate match.  And these institutions expect a return commensurate with risk.  In venture capital, that means that funds must have, on average, at least a 25%-35% IRR (Internal Rate of Return, essentially, the effective interest rate). 

To achieve such an IRR, a fund must then return to their investors around three times the capital invested.  To get such returns, venture capital must seek riskier opportunities and high risk means that there will be failures.  Typical venture funds lose a third of their investments (complete capital loss), break even on another third and make the bulk of their returns on the remaining third.  Thus, to average out around three times capital invested, VCs need to make at least eight to 10 times their money on their winners.  Of course, nothing works out exactly like this.  There will be losers, singles, doubles and triples - but to make a fund, a VC typically needs at least one home run - but there's no need to swing for the fences every time. 

What do venture capitalists and angel investors look for in businesses?  First, we assess two areas of risk: stage and business.  First, stage.  Simply put, the earlier the stage, the greater the risk (of execution, of failure).  Earlier stage companies often require more of an investor's time as well.  Much will still be missing: a complete team, a formed plan, a cohesive strategy, a product, customers....  Angel investors typically serve on the front lines of equity investing and have more tolerance for early stage deals than most VCs.  That said, early-stage focused funds (such as the fund I manage) do exist.  But you need to understand your stage and find investors for whom your stage (and sector, and story) is a fit.

Business risk is a little more complicated.  An investor will look at several areas of the business, including management, market, product/technology, business model, financial and legal, among others.  In these areas, an investor will assess your situation and compare it with an ideal (recognizing of course, that the true "ideal" never really occurs).  The following table illustrates the ideal that an investor looks for in these categories:

<TBODY> </TBODY>

Management	Made money for investors Successful startup, ideally in same sector/space Complete team in core areas (sales, marketing, finance, etc)
Market	Large, fast growing with few competitors
Product/technology	One-tenth cost or 10X performance of nearest competitors Proprietary position (barrier to entry such as established market position and/or intellectual property, patents)
Business Model	Scalable: make once, sell many times Appropriate for venture capital financing--no real estate
Financial	Sustainable gross margins > 50% Limited financing risk (future rounds likely) No financial liabilities that affect value or equity position
Legal	No legal contracts that affect value or equity position No outstanding litigation around intellectual property or other assets

 

For professional investors, the greater the distance between the ideal and your company, the greater the risk. That risk will either addressed by requirement of a higher return, or by not making the investment.  So how did nanotechnology and pizza crusts both pass the screen?  Both companies had solid management, were in fast, growing markets with few competitors had innovative products with scalable business models, strong gross margins and a positive outlook for value realization (company sale, IPO).  The nanotechnology materials company is a traditional technology-oriented company pursuing large existing and emerging markets, whereas the pizza crust business reflects an opportunity the lead a new product category (shelf-stable natural/organic pizza crusts) in the context of a large market with strong prospects for liquidity. 

So if you think your business has what it takes to access venture capital or angel equity, check out the Speed Venture Summit website at http://www.abi-nh.com/www.speedventuresummit.org.  On October 28, 2008 in Manchester, NH investors and companies will come together.  Perhaps your company has what it takes to be the next deal.

Michael Burgmaier is a General Partner of Clear Venture Partners (www.clearvcs.com), a $50 million fund-in-formation focusing on growth opportunities in New England he is also a Principal with CEI Community Ventures Fund (www.communityventures.com), a fully-invested $ 10MM fund; he can be reached at mb@clearvcs.com.   

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