The Less Obvious Reason Why We Need More VC Funds - 1

{{ story.headline }}

{{ story.subheading }}

{{ story.timestamp }}

As a member of the media, I'm typically not privy to the discussions and negotiations that happen between investors and entrepreneurs or general partners and limited partners behind closed doors. I know that numbers matter, but the side of the story I typically receive is the action plans for how to hit numbers that aren't always shared publicly.

That's why it's so cool to get a peek inside the workings of a venture capital firm each year at the Lookout Capital annual meeting. The Raleigh firm, now in its fifth year and admittedly post-startup, uses its annual event to highlight the progress of its seven portfolio companies and update its 75 investors on its pipeline and investment focus. And this year's event included a panel discussion about what Lookout calls "value-add investing" and a talk about the state of North Carolina economic development by Commerce Secretary John Skvarla (my summary of his thoughts here).

Different from most local firms, Lookout hasn't focused on a particular industry sector—its existing portfolio includes medical device companies, food processing, health IT, a clothing brand and a road race series. It hadn't previously focused on one stage of company either until repositioning in recent months to more of a private equity model—future investments will be in profitable later-stage companies with $5 million to $25 million in revenue. Lookout wants board and management control in the companies in which it invests. More on that here.

It has yet to make an investment under the new model, but used the time last Thursday to give an inside look at the progress and exit plans within its portfolio.

I start with the most recognized company, Raleigh Denim, which has appeared in the pages of Vanity Fair, The New Yorker, Outside Magazine and Fast Company and on shelves at Nordstrom, Bloomingdale's and Saks. After launch in 2007, the startup jeans-maker doubled in revenue each of its first six years. Attracted to that growth and the promise of the handmade denim brand, Lookout invested $1.1 million for a 20 percent stake in 2013. But building a profitable clothing brand can be tough—sales dipped a bit in 2014 to $1.6 million, forcing the company to reduce costs and operate more efficiently. But during the same period, the company cut its losses in half, launched an e-commerce site and in the first quarter of 2015, grew sales again 25 percent. 

According to Lookout, the company is primed for an exit within the year.

Perhaps the biggest bet in the portfolio is on an Inc. 500 food processing and packaging company called Aseptia. Though the Raleigh company is still operating at a loss of about $6.7 million, sales grew 70 percent in 2014 to $24 million and the company plans to position its NC State-licensed technology for improving the flavor of foods and extending shelf life as its growth strategy for the future. Lookout's $8 million investment in the company and subsequent board seat likely played a role in the replacement of the founding CEO in 2014. At the time, media struggled to get comment from investors. Today, food industry veteran and investment banker David Clark and private equity consultant/investment advisor Mac McAulay are running the company as CEO and CFO. 

Another coming exit could be Awarepoint, a San Diego-based asset tracking management and monitoring system for hospitals that grew 21 percent in 2014 to $14 million in sales. Beside Silicon Valley investors and Rex Health Ventures, the venture capital arm of Rex Healthcare, Lookout invested $1.25 million in the company to date in belief asset tracking would become increasingly important and critical as technology continues to transform the healthcare system.

Just across the hall from Lookout's Glenwood South office is Contego Medical, a company developing a first-of-its-kind device for removing the plaque from arteries to avoid strokes and cardiovascular disorders, and testing it through clinical trials in Europe. Lookout reupped in Contego's $5.6 million Series B earlier this year and expects that round to get the company to exit.

Though sales of EnviCor's SmartTank liquid (like hot cooking oil) management system were down, custom orders for its injection molding and design services grew 20 percent last year. The Smithfield NC company makes everything from paddle boards and kayaks to rain barrels, tanks and containers (like window washing liquid holders at gas stations). EnviCor represented one of Lookout's first investments—the firm led its $850,000 round in 2011.

InfaCare is raising a C round to complete clinical trials for its drug that treats jaundice in infants. Lookout announced its $750,000 investment in the Philadelphia company at its board meeting last year.

Finally, there's Race 13.1, the series of half marathon races started two years ago by Lookout partner John Kane and announced at last year's annual meeting. In its first full year of operation in 2014, Race 13.1 earned sales of $400,000 through race sponsorships and fees. Though the company had $370,000 in operational costs during that time, Lookout's team was impressed "with how the company has taken flight and the team built." Management and cost structure changes are now in place to make the company more profitable—at least 18 races are planned for 2015. Lookout invested $750,000 for a 40 percent stake in late 2013 when the company was just beginning.

Lookout's "value-add" philosophy is to take an active role to be sure these companies succeed—with all companies still around and making progress, the strategy appears to be working. But according to managing partner Merrette Moore, the key to continuing that progress is larger amounts of money (helpful with 75 high net worth individuals now engaged), a pipeline of solid deals and the management talent that can fill critical roles along the way.