Thursday, May 16, 2013
How Grotech Ventures Is Finding Success--and Exits--On The Front Range
It's been a difficult few years for non, Silicon Valley venture capital firms, particularly in the area of raising new funds. However, one of the most active investors along the Front Range, Grotech Ventures (www.grotech.com), has bucked that trend, by raising a big, $225M fund, its eighth--of which a big chunk is dedicated to local investments here in the region. We caught up with Joe Zell, who leads the firm's activity in Colorado, to learn more about the firm, it's new fund, and its investments.
For those who aren't familiar with Grotech, can you talk about the fund?
Joe Zell: We're a 28 year old venture capital firm, headquartered in Northern Virginia. We've picked out a number of regional markets where we focus our investments, including the Mid-Atlantic, the Southeast, and now also in the Rocky Mountain region, especially Denver and Boulder. Our firm has just closed its eighth fund, a $225M fund, and our investment focus is all on early stage A and B rounds in technology. It's a combination of innovative IT companies in categories that include digital media, social media, mobile, crowd computing, enterprise and infrastructure software, security/storage, Internet/ecommerce, energy, and healthcare IT. There's a wide range of IT categories that we invest in.
You're one of the more active investors here in Colorado. How'd you end here while your headquarters are in Virginia?
Joe Zell: I actually joined Grotech about eleven years ago. Prior to joining Grotech, I had spent nine to ten years in Denver, working for U.S. West Communications. Eventually, I joined a startup, before I joined Grotech. I moved to Northern Virginia eleven years ago. At the time, it was strictly mid-Atlantic and Southeast investments.
In the meantime, what happened in the Denver/Boulder market, as you're well aware, is unfortunately we went from fourteen to fifteen active venture firms making A and B round investments, to just a handful. Because of that, about five or six years ago, I started getting calls from my network in the Denver and Boulder area, with great opportunities. They were all telling me that there was just not enough money in this marketplace. So, for about three years, I was traveling from Northern Virginia out to Colorado to make investments. But, it became such a great marketplace, I've now moved back to Denver and live and work in Denver full time. Our firm now invests about a third of our fund in the Rocky Mountain region.
It turned out to be a wonderful marketplace for us. As you're aware, there's a very strong startup community in Boulder, a growing one in Denver, and some activity in Fort Collins and some activity in Colorado Springs. There's only a few, really active early stage funds here, and we've really been welcomed into the market by the ecosystem here. The marketplace really needed another, high quality institutional investor in the mix. It's worked out to be a great opportunity for us, and also allowed me to move to Denver, where I wanted to live.
It's been difficult being a non, Silicon Valley venture capitalist nowadays. How as your fund managed to raise a new fund and see success?
Joe Zell: You're absolutely right. It's been a very difficult market for most funds to raise funds over the last few years ago. What has happened over that period is unfortunately only the strongest of the firms really ended up with positive returns. If you don't have a strong, and long term track record, it's very difficult to raise in the market. Fortunately, Grotech has had a number of successful funds, and a very strong base of LPs, who have been with us in some cases for 20, 25 years. When we last went out to market five years ago to raise fund seven, we have very good support. It also turned out that the strategy that we implemented in fund seven was really successful for us.
In a nutshell, that strategy was that we would focus on these regional markets where we had a very strong network, and focus strictly on technology categories where we had strong personal and fund knowledge and experience. We make strictly small, A and B round investments, and essentially feed our winners and continue through their lifecycle. Our objective with our last fund was to have more than 20 companies in the portfolio, so we could benefit from the law of large numbers. It's a difficult business to pick winners. We ended up with 25 companies in that last fund, and it's already been a very successful fund, returning many times its value. Because of that, of the successful strategy and very strong team, we were able to go to the market in the last eighteen months for this new fund. We went back to our same LPs, told them we've be using the same strategy, the same sectors, the same investments overall, with our same core team of six general partners, and do it again. We are doing it with a slightly larger fund, which gives us greater benefit of diversity within the portfolio. We were fortunate in that we had a strategy and team that had been successful, and we were essentially going out with same story and got a very warm response from our existing LPS, and were able to add a few new ones as well.
What kind of investments are you looking for right now?
Joe Zell: I think that, in each of the markets we operate in, there are some differences in the technology categories you see in those markets. But, generally, generally, what our firm is looking for is software or internet related businesses. We are focused strictly on A/B round investments. We are typically writing "A" rounds from 500K up to $5M, with probably and average $2-3M for an A round. We're able to do B rounds that range from $2M to about $7M. At the A round, most of the companies we're investing in now, have got their minimally viable product in market, and at least a handful of customers. Their run rate revenues are between half a million and 1 million a year, and are typically firms that are attacking very big opportunities or problems, and have a really good early lead in their marketplace. We're looking for really innovative teams, with big ideas, and who have some strong early customer traction.