Small Town, Big Ideas

Third Security

In the past, I’ve expressed my distaste for the venture capitalists in Southwest Virginia and in some of my ramblings, I have mentioned Third Security specifically (to their credit, they are the only venture firm left that I know of that is doing any deals at all these days—the other ones are pretty well entrenched with their portfolio companies and I count my lucky stars that I’m not one of those businesses). I’ve blogged before about why I think the region is struggling and how I believe the local investment community is going to have to be a little more open with the entrepreneurs, CEOs, and business owners in the area, among other things. Since I posted that, I’ve had a great response from several members of the community (there was a little backlash too) but I still never had any interaction with anyone from Third Security—until recently. I bumped into Matt Crisp, one of their business development guys at a wine festival a few weeks ago. It turns out he is a really cool dude—who would have thought? :-)

Matt and I had a great conversation followed up by lunch last week. I explained to Matt that my issues with Third Security don’t have anything to do with their hard-nosed investment philosophy—I respect them very much for that. My issues are:

1. As a Virginia Tech graduate and local entrepreneur, it pains me to see the Virginia Tech Foundation investing in a venture fund that I know isn’t going to make many investments (they’ve only done one small deal in 17 months)—and especially one that isn’t going to pay any attention to my company, my market or the Internet in general. As a future donor to the Virginia Tech Foundation (and I know several others very well), I think I at least have the right to express my opinion.

The press release from this fund states that:

As part of their commitment to regional economic development, Carilion Health System and the Virginia Tech Foundation have established a private equity/venture capital fund and an investment consortium that will make investments in promising companies willing to initiate operations or relocate their business to the Roanoke and New River Valleys.

Very cool at face value. Not very cool in reality.

2. I don’t love how Third Security shows up to technology and entrepreneurial events (every now and again) to express their support for the community and local economic development. If this were anything other than bullshit, it wouldn’t bother me—in fact, I would embrace it.

Those are my own personal opinions. Take them however you like.

On the contrary, I think that Third Security (and most venture capital firms) gets a bad rap because people forget what their job really is—to make money for their investors, bottom line. I give a lot of credit to Third Security in this regard. They know exactly the types of deals they go after (mostly bio-tech stuff that is way over my head) and they stick to what they’re good at. At the end of the day, they’re very smart business people and great at what they do—that simply cannot be disputed. Smart people, great at what they do, bad reputation—sounds to me like they should start a blog. Seriously.

My hope for Third Security (being a local venture firm) is that they do take more of a proactive interest in the community. I’d love for any of the VCs in this area to get more involved with the entrepreneurs and businesspeople. I think that is a key ingredient to the future successes of this area—and that, I care a lot about.

Capital Raising: The Story Behind the Story

Yesterday, we announced that we secured $400,000 in a ‘Series A’ round of funding that we raised primarily from the local investment community. Today, the Roanoke Times picked up the story, which as always, is great local press for our company. Now, here is the story behind the story...

First of all, this entire process started about three years ago when I met Howard Kossak, an investment banker here in the New River Valley. Howard and I talked then about raising capital to grow our company, but we mutually decided that we weren’t ready at that time - and neither was the market. A year and a half later, business was picking up at a tremendous pace and the market was rebounding, so I decided to revisit my talks with Howard. I engaged his services and we began to develop our private placement memorandum (PPM).

Howard did a great job in assisting me with our capital raising activities. He was a mentor for me in a number of ways and I learned an awful lot from him. Throughout this process, there were a lot of cynics in the community that “warned me” against bringing on an investment banker to help raise the capital. A few of the investment groups I spoke with were strongly against seeing someone else being paid a fee on money they would invest. Most of them, in my humble opinion, were simply tire kickers looking for reasons to say “no” – that or they didn’t realize the type of impact I was able to make on the business with the time Howard saved me from capital raising – in that case they shouldn’t have invested anyway, and they didn’t. Howard shouldered a lot of the paperwork burden behind our deal and made quality introductions to a number of potential investors – many of which ended up investing. All in all, Howard was able to help us accomplish our capital raising goals while allowing me to focus most of my attention on growing our business. The results of that showed through and I never once guessed my decision to bring him on board.

Developing the PPM took several months, partially because I was still located in Northern Virginia at the time. It was while Howard and I were developing our PPM that I realized I needed to move our business to Blacksburg. I spent the summer in Blacksburg living out of a hotel and we opened our office here in the Virginia Tech Corporate Research Center in August of 2004.

By this time, Howard and I had contacted most all of the high net worth individuals in the New River and Roanoke Valleys, along with dozens of others throughout the country. Since we were only trying to secure between $250,000 and $500,000, we had a difficult time attracting any institutional investors. Likewise, because our business had been performing so well, we never felt any pressure to take on a deal that didn’t feel right. One of the most frequently asked questions I received from potential investors was: “why are you going for so little money?” While there are several answers to that question, the most frequently used answer was and still is, “because we don’t need it.” We’ve been a cash flow positive business for quite some time so we didn’t feel the pressure to chase money or a deal that didn’t feel right – from an entrepreneur’s standpoint that is a great position to be in.

As we began contacting the investment community, the rejections and non-call backs started right away. I learned a long time ago that people are very protective of their money, or the money they’re managing for others, so this was no shocker. At the end of the day I knew we just needed to get in front of enough people and we’d get the job done. Before long, we were able to secure investments from some very well known people in the New River Valley. Several successful CEOs and businesspeople came in as angel investors and others followed suit. In total, we were able to raise a hair over $400,000, all from smart, successful people, yet those that are willing to be patient as we execute our plans and aim to achieve our long term goals and objectives. That was very important to me and I’m thrilled that we were able to find those types of people who believe in us that much.

So... now that we’ve raised some money, what are we going to do with it? For starters, we’re going to be as smart as we can with it. One thing about us that you can say for sure is that we’ve learned how to stretch a dollar as far as it can go. Our founding team lived through the dot-com demise, we went years without paychecks, we worked in some grizzly environments… and as long as I’m at the helm, we won’t forget where we’ve been and how we got to where we are now (I will be blogging more about our story in the future). But more specifically, we’re going to invest as wisely as possible in three core initiatives:

1. Enhance our level of customer service and support
2. Expand on our R&D initiatives
3. Reinvest in our sales force and marketing activities

We see a very bright future in the messaging marketplace with lots of opportunities for growth and development. You’ll see a lot of “innovation within the inbox,” as we like to say, from us. We’ll be adding a great deal of features and functionally to our existing platform as well continually improving its overall performance. And as we develop our products and services, we will not lose sight of our customers and how well they need to be treated. Customer service and support excellence is a top priority at Webmail.us and everything we do we do with the customer in mind.

I’ll be expanding on many of these initiatives moving forward, sometimes exclusively through my blog. Stay tuned... we’ve got a lot to talk about.

Losing the battle, learning from the experience…

Kevin and I spent the last two days at the 2nd annual Capital Access Forum in Roanoke. It turned out to be a very successful event, one that I’m happy to see taking place down here in Southwest Virginia. The NCTC, the corporate sponsors and the event organizers did a great job putting it together and I see this event really helping shine a light on this region in the coming years.

Last night was the reception, dinner and first networking phase of the event. We met quite a few people in the investment community, fellow entrepreneurs, professionals from throughout Virginia and Jeff Taylor, the founder of Monster.com. Jeff was the keynote speaker, talking to us about his outlook on the job market and how he sees it in the future. In a nutshell, Jeff believes that beginning in 2008, the United States is going to experience the biggest labor shortage of our lifetime. He believes this is due to the fact that the baby boomer generation will be retiring and this will create millions of jobs that employers will need to fill. He believes that this is going to cause a major paradigm shift in corporate America as business owners and executives are going to have to do whatever it takes to recruit and retain great people (I don’t know about you, but I think this is extremely important now as well). He hypothesizes that in this new era, employees will be in more control of companies than the business owners or executives, and that companies will go out of business if they’re not good at retaining employees.

Jeff talked a lot about what businesses need to do to go the extra mile to keep employees happy with their jobs… he talked about allowing employees to continuously learn new things over the course of the career, empowering them to make decisions and do whatever else it takes to keep them on board. I took a lot from his presentation and at the same time, it reinforced a number of things that I believe we do very successfully with our employees at Excedent.

I truly believe that employees are what make great companies. In my presentation at the forum today, I borrowed a phrase from Jim Collins, author of the “Good to Great,” the book I’m currently reading. I spent several minutes (we only had 15 total) talking about how I personally believe that in order to build a great company, we must first get the “right people on the bus.” I sincerely believe that it is extremely important to build a company with great people, and over time, I will do what it takes to recruit and hire the right people, empower them and hopefully create an environment where they will love working for our company.

Today was the business plan competition phase of the forum. Although we were not victorious, it was an interesting and rewarding experience. It was great to see all of the other companies give their pitch and I really enjoyed the opportunity to give ours as well. I think we did a pretty good job and I have no doubt it will pay off in the near future, even if for no other reason than the experience of it all.

Congratulations to Diffusion Pharmaceuticals, the winning team. They seem to have a great vision and a leadership team that knows how to execute. I wish them luck in the future and I hope they spend Third Security’s $10,000 check wisely.

The Capital Access Forum

For the past few years, Roanoke, Virginia has been home to the Capital Access Forum, an annual event used to showcase some of the up-and-coming companies in Southwest Virginia. I don’t know too much about the history of this event, as I’ve never attended, but this year we entered the business plan competition they sponsor and we’ve been selected as one of the finalists to present. The winner is awarded a $10,000 cash prize.

At first I really didn’t want to enter this competition. There aren’t too many exciting Internet companies down this way and because of Virginia Tech’s large presence in the area, most of the startups tend to be biotech related… something well outside my realm of expertise and comfort zone. Nevertheless, after some prodding from some people I know well and some I do not, we entered. Much to my surprise, we were selected as one of the ten to present. Here are the other nine (this is an exclusive list right now, as the Capital Access Forum folks have yet to update their Web site):

BAS Oncology
Clean Air Technology
Clever Systems
Diffusion
Exactor
Luna Nano
PhysioAdvantage
Soft Solutions
Verication

I’ve actually only heard of two of these companies – most likely because many are in the biotech field, which again I know nothing about, and some are undoubtedly early stage startups. The competition itself will be interesting. In my mind, we seem like somewhat of a misfit for the event… most of the companies are biotech related, the main sponsor is Carilion, the biggest healthcare provider in this region and the second biggest sponsor, Third Security, already passed on an investment in our company.

Regardless, I look forward to meeting leaders from each one of the above companies and learning about their areas of expertise. I also look forward to the other networking opportunities this event presents for my management team and myself. There will be good number of other potential investors in the room and I have no doubt some of them will take notice. Lastly, it will be a privilege to hear Jeff Taylor, the CEO and founder of Monster.com – he is the guest speaker at the main event.

Time to start practicing the presentations again… :-)