It's displayed all over Grotech Ventures' website: "Early investors in high-potential technology companies," the investment firm's strategy. And it's a successful one, evidenced by Grotech's being named the second highest performing fund in the 2013 Preqin Consistent Performers in Private Equity report released recently..
Based on its performance among all private equity funds with more than $100 million in vintage years 2006 to 2010, Grotech's net internal rate of return to limited partners – what Grotech CFO Chuck Cullen says the performance rankings of the approximately 6,000 funds are based on – was more than 52 percent, just short of first in the rankings. For those of you who don't understand a word from that last sentence, believe me, it's a good thing.
Cullen attributes this success to a hybrid of things, but a strong focus on the company's core strategy is leading the way.
“It’s a combination of a lot of things. Our strategy is to target the first institutional round of capital," the CFO said. "So it’s key for us to get into these deals early and to spot these better performing companies – and there is a better potential early on in the investing cycle."
Essentially, it's mitigation of cost and risk that is leading Grotech to its success.
"So our strategy really is to target these companies that we can buy in at a lower valuation and then put smaller amounts of capital into those companies at that stage and then continue to follow on as we track the progress of the company – and continue to invest along the life cycle of the company," Cullen added. "It really is back to the roots of venture capital, back to the fundamentals of good venture investing.”
Typically, Grotech will look to invest between $1 and $3 million on these early stage companies. As far as the industries they look to invest in, Cullen said, that can vary pretty widely. Generally, though, Grotech looks to those innovating information technology.
"Those (deals) are less capital intensive, and typically that means software," he said of his firm's investments. “We will continue to invest –because we think we’re still on early days – in software that is focused on solving the challenges of our markets. We’re still in the very early innings of the mobile stage and cybersecurity challenges that are presented from remote computing and cloud-based computing. We will continue to invest in SaaS-based applications as the market has clearly embraced those and we’re continuing to focus on security applications generally going forward, as well as healthcare IT.”
Most recently, Grotech helped fund Optoro, a super-cool niche company that provides software to aid in asset recovery for returned, damaged, overstocked and refurbished merchandise for retailers, as part of a Series B round of $23.5 million with Ted Leonsis' Revolution LLC.
"This is a company where they have been able to secure good initial attraction that has attracted additional follow-on capital," Cullen said. "We had other local investors who came in after us and invested at much higher valuations. And they’re continuing to seek good traction with their initial partners.”
And Cullen pointed out that when deciding to invest in or continue investing in a company, that's something Grotech likes to see.
"We really like to see demonstrated traction with the company, that there are some early signs of success if we can get them in terms of the market’s acceptance, or likely acceptance of the product," he said. Additionally, " people are very important. It’s harder to put your finger on that, but they’re prior successes and experience in the particular space that they’re going after is very helpful to us – their prior track record of successful leadership is really critical to us and is a good indicator. We spend a lot of time trying to evaluate the people who are leading these companies and new opportunities."
Grotech is in a position to continue making these kinds of deals in the mid-Atlantic region. While the firm may have a typical geographic range from New Jersey to as far south as Charlotte, N.C., Cullen said they love to make deals in the D.C. area.
“Our firm has invested over $300 million in Maryland-based companies over our history and a number of these have been very successful investments," Cullen said before referencing past deals with companies like LivingSocial and BroadSoft. “I think that the resources here –the combination of talent and government resources – as well as the strong educational ecosystem we have here provide a great framework for new startup companies. The track record of success here is a good track record."
And Grotech is in a better position than it's ever been in to put money in the hands of brilliant enterprise entrepreneurs.
"We have a very robust pipeline now, and I think it’s a good time to be investing as we’re seeing lots of different opportunities in the space and there’s been less competition because there’s less early-stage institutional capital in this local market in particular," Cullen said. “We’re deploying our capital at a very healthy pace and then we also, with our existing portfolio in the current market conditions, are seeking opportunities for investing more in our existing portfolio companies and leveraging the growth that they have achieved over the last couple years.”
That's fantastic news for early-stage entrepreneurs in the D.C. area, because not only does Grotech have the money to offer, but Cullen said his firm is also eager to do so.
“We are looking for very strong entrepreneurs with the best opportunities, and we have capital to deploy," he said. "So hopefully we can put the two together.”
