Southern charm, global flair

Crossbow Ventures

Swiss support
Crossbow launched that fundraising drive and told potential LPs that the firm had a strict geographic focus. ?Most of the Silicon Valley funds would invest in 50-mile radius, and we felt we should raise funds within a 50-mile radius,? explains Eichenberger.

However, with regard to its source of investment capital, Eichenberger tapped relationships from his homeland. Back in 1998, many Swiss LPs were making their first VC commitments. Eichenberger explains that Crossbow garnered substantial support from the Swiss because the new VC firm offered the rare chance to diversify away from commitments to funds in Northeast and Silicon Valley firms. He explains that anywhere from 50 percent to 80 percent of Swiss venture investments at the time were in the US. So Warner and Eichenberger compiled a series of metrics that stressed how the Southeastern region differed from others in the country, most starkly in the low, pre-money valuations when compared to more popular destinations for venture capital.

?In the era of drive-by financings, when certain firms were tripping over themselves to close deals before their peers could, we demonstrated how lower prices in the region might minimize risk and optimize returns,? says Eichenberger.

The pitch worked, as Crossbow closed their debut fund in 1999 at $160 million, among the largest first-time venture funds at that time. Their LP base, as planned, was mostly Swiss institutions and a few American investors.

Learning curve
Eichenberger cites a statistic that it takes $30 million to educate oneself as a VC. Crossbow may not have needed quite that much, but there were some costly ?lessons? at the start of the fund. ?While I won't name any names, our first investment was a $5 million pre money valuation that already had a term sheet of a $50 million IPO, which of course, never happened,? he explains. That setback stayed with him and Steve and they grew more skilled at turning around and working out their various investments. ?On your first fund you don't want to lose a major opportunity by walking away from a promising deal. That's something we learned to change once we had a deal flow of over 1,000 investment opportunities a year.?

That shift in perspective appears to have paid off as Crossbow touts 10 exits from the current portfolio, and 12 viable enterprises, three of which appear poised for major returns through IPOs. Their education in turning around their portfolio led the partners to divvy up their responsibilities along their respective industry experience, with Warner devoting his time to healthcare transactions and Eichenberger focusing on opportunities in the business services sector. A third partner would join the firm over the lifespan of this debut fund, brought aboard for his operational expertise in the tech industry. Crossbow's first meeting with this new partner was arranged by a member of Crossbow's advisory committee, a well respected professor. He rang Eichenberger one day and said ?How would you like to meet the best student I ever had??

Born in Mumbai, Ravi Ugale attended college in India but pursued his masters in computer science in Marquette University in Milwaukee, Wisconsin. ?I've been a Green Bay Packers fan ever since,? says Ugale. From there he honed his operations and investment skills at a number of firms within the technology industry, with stints at IBM, Xerox, Siemens and Océ, all the while earning his MBA through a two year Saturday-only course at the Florida Atlantic University, where he would meet the professor who would eventually introduce him to Crossbow. Ugale joined the firm shortly thereafter. He is a new managing director.

The firm's investment committee consists of Warner, Eichenberger, Ugale and two other investment principals that review deal opportunities, though there need not be unanimous approval for every deal. ?No one partner has a veto. This avoids wasting precious time trying to sell a reluctant member on a deal,? says Eichenberger. ?However if more than one person expresses reservations, we don't move ahead.? While each partner has a rough industry focus, all deals get evaluated by same three factors.

The first and possibly most vital question for Crossbow concerns the people leading the company under review. ?Early stage investments are a hard road,? says Ugale. ?I need to know that the management team has the passion and character to weather the highs and lows of this process.?

?Larger firms may have the luxury of investing in nanotechnology or the like, but we need investments for a market that already exists.?

Crossbow prefers to spend sufficient time with the management team to see them in various situations, and gauge their personality. Ugale warns that the best investment case can crumble in the wrong hands. ?You've got to invest in the people, not just their ideas,? he says.

The next question Crossbow asks is whether a market exists yet for a given idea. ?Larger firms may have the luxury of investing in nanotechnology or the like, but we need investments for a market that already exists,? says Ugale. Crossbow wants investments that meet a current need, not one that hasn't arrived yet. They ask whether a given technology is nice-to-have or must-have in the eyes of a likely consumer, and unless it fits in the latter category, the firm passes. ?It just takes too long to wait to see whether a market develops or not,? he says.

The last question is, how global is the product? Is it a technology or an idea that can leverage Crossbow's networks in Europe and Asia? The firm takes full advantage of the fact that its three partners hail from three different continents and hunts for opportunities that can tap the full scope of their combined Rolodex.

While the firm's investment process may have been streamlined and upgraded over the past six years, Crossbow remains as committed as ever to their belief in the potential of the Southeast. By the numbers at least, their faith back in 1999 appears to be well-founded.

Still fertile terrain
According to VentureXpert, as of the end of 2006, the Southeastern region of the US is the third-largest venture market in the country behind the Northeast and the leader, California. VentureXpert also reports that average pre-money valuations in the Southeast are the lowest in the country, hovering around $15 million (€10.2 miilon), with New England and California nearing $30 million. Ugale credits the dearth of local venture firms for exerting downward pressure on valuations. ?Certainly the brand name firms can invest here, but they're simply more comfortable investing close to home, as are we,? says Ugale.

While these deals are sourced locally, they're often sold to a larger national or international strategic buyer or exited through an IPO. VentureXpert reports that as of the end of 2006, the average VC-backed IPO offer in the Southeast was $128 million, while the average VC-backed M&A exit was $134 million. Without even crunching the numbers, the returns are evident. According to data compiled by Cambridge Associates and Venture Source, venture-backed portfolio companies in the Southeastern region of the US delivered an average internal rate of return of around 16 percent, compared to eight percent from the Northeast and California, between the years 2000 and 2005.

Furthermore the demographics provide evidence of ample intellectual capital. The Southeast ranks third nationally in terms of the number of doctoral scientists and engineers residing here and second in terms of science and engineering doctorates awarded in the region according to recent statistics from the National Science Foundation. The region also receives the third-highest amount of federal R&D obligations in the nation, at 12 percent. These federal dollars are wedded with local support at the state level.

For example, in 2005, the State of Mississippi started the Mississippi Technology Alliance, an initiative deigned to promote the development of high tech businesses in the state. That same year, the South Carolina legislature passed the Venture Capital Investment Act, establishing the South Carolina VC Authority. This government entity was given the mandate to ?increase the availability of venture capital for emerging, expanding, relocating and restructuring enterprises? in the state. North Carolina offers the BioNetwork program, an initiative that connects community colleges across the state to foster a homegrown workforce for the biotechnology, pharmaceutical and life sciences industries largely found in the Research Triangle area. Similar efforts have been undertaken in Georgia and Tennessee as well, all pointing to political support for deal flow.

Crossbow may have been an early proponent of the region, but they aren't alone these days. The total amount of venture capital in the Southeast has been rising steadily since the fourth quarter of 2005, with a major jump in volume in the first quarter of this year, according to a report filed by the NVCA and PricewaterhouseCoopers among others. The report said there was $376 million invested in the fourth quarter of 2006, and $579 million in the first quarter of 2007. This growth may be sharp, but the total amount remains small when compared to more developed venture markets in the country.

Taking this into account, Crossbow's second fund will have only a slightly higher target than its debut, around $200 million, though it will substantially change the make-up of its portfolio, with less early stage deals. ?Now we're more focused on expansion stage investments,? says Eichenberger. He expects the next portfolio should feature two to four early stage deals, two to four later stage deals and the rest expansion stage investments. The biggest change for Crossbow in raising and investing its second fund may be in the attitudes of its peers.

?When I first joined Crossbow, my friends in Silicon Valley asked me ?What in the world are you doing in Florida??? recalls Ugale. ?But now they call me up and ask: ?So what hot deals are you chasing???