Now with seven portfolio companies
and $15 million invested, Raleigh-based Lookout Capital
has retooled and restaffed to better meet the needs of its network of 75 high-net worth men and women pumping hundreds of thousands of dollars each year into local companies.
A year-and-a-half after creating a venture arm to make early stage investments, the firm has abandoned that strategy to acquire fast-growth healthcare, software and digital media companies with $5 million to $10 million in revenue. Its new mission is to take a majority stake in one or two of those companies each year, gain leadership on their boards, and help round out executive teams with its own talent. The goal is to grow portfolio companies to three to five times their size over five or seven years before selling or bringing in new investors.
Because fewer of those kinds of deals exist in the Triangle, the new model means Lookout could invest across the Southeast.
Early stage is risky and bubbly
The change comes primarily at request of Lookout's investor base, which has grown significantly from the 30 original investors co-founders Merrette Moore and his father Bill Moore lined up to start the firm in 2010. Many investors are older and either don't like the risk profile of an early stage company or they've had bad experiences with angel investing in the past, the younger Moore says. He also admits belief in a bubble forming in the Triangle.
Early stage valuations are unreasonably high, some ideas getting funded just don't seem doable, and there are the me-toos, he says. His insights come from 15 years of experience in the Triangle's venture capital industry, first at Franklin Street Partners and then Idea Fund Partners. The elder Moore was a former investment banker who founded Trident Financial Corp., which sold to KeyCorp in the late 1990s.
"There will be successful companies that come out of it, without a doubt," son Moore says. "But I'm 100 percent certain we're in a bubble."
Unique model means more investor feedback
Lookout operates more like an angel network than a traditional venture capital firm. That gives the investors more say in the deal flow. Rather than putting money into a fund, investors pay an annual upfront fee of $5,000 to $50,000 for the option to invest up to 10 times that amount in Lookout deals each of the following five years. Lookout handles the due diligence and negotiations and investors choose whether or not to opt in—an LLC is created to make each investment. Deals can range from several hundred thousand dollars to $10 million. Its largest investment to date is in food processing startup Aseptia of Raleigh.
Moore says the change in focus wasn't a result of any flaw in Lookout's previous strategy. All seven of its portfolio companies are still in business, and many are growing quickly. But the company made a record four of those investments in 2014, prompting investor feedback about the firm's future. They wanted to make larger bets in fewer companies, and they wanted those bets to be safer ones.
"The most successful deals are the ones where we have the most control and most influence," Moore says. "I don't think that's a coincidence."
Some precedent for wanting more Lookout control
Lookout hasn't yet
acquired a majority stake in a company, but has two examples of the type of control the firm is looking for. Race 13.1, an early 2014 investment, is quickly growing its footprint of half-marathon races. Lookout employee John Kane is CEO and co-founder of the company and Lookout put in place the COO and president. Two of three board positions are held by Lookout investors and the firm owns almost 50 percent of the startup.
Contego Medical, meanwhile, is located in the same building as Lookout. Its director of finance and COO were both placed by Lookout and the CEO is a long-time friend of the firm. Lookout invested in the medical device company 2.5 years ago and though an institutional investor will soon lead a series B round, Lookout investors are back in and raised more than the pro rata required.
To help achieve the new vision, Lookout brought on a new principal late last year to help source IT deals. Robert Williams (pictured above right) has spent 20 years in IT and management consulting and operates his own Raleigh consultancy CaWaSa. He's primarily focused on tech-enabled service and software-as-a-service companies. Walt Clarke, former co-founder of MedThink, will target life science.
Both men will be positioned to take temporary C-level positions in Lookout portfolio companies. Moore doesn't expect Lookout to replace entire management teams when it gains controlling interest. In most cases, a CEO or founder wants to move out of the day-to-day operations after the transaction, or needs someone to handle finance or operations as the company grows.
Moore admits his strategy is unique to the Triangle and that his team could be "idiots or geniuses." Where most private equity firms look to acquire companies with $50 million or more in revenue, he's focused on the "shallower end of the pool."
Community (and investor) benefits
That could be a benefit for the Triangle in more ways than generating returns for investors. If Lookout acquires a local company, it won't be laying off staff or moving a team across the country, as has happened after other high-profile exits. (Moore witnessed iContact's mass layoff first hand as the deal lead at Idea Fund Partners).
That said, if Lookout finds a deal outside the region, it has no qualms about moving the company—and those jobs—to the Triangle.
"Most of our investors are local so there is a lot of provincial pride here," Moore says. "it's about doing good for the community in addition to making money."