On the Outside Looking In

The Pittsburgh Venture Capital Association recently convened a panel of venture capitalists from outside the region to gain an understanding of what they are looking for in investment prospects here in Pittsburgh. Three of my colleagues at the University of Pittsburgh Innovation Institute, Tony Torres, Kelly Dane and Paul-Valentin Pitou, have spent the past 18 months in a focused effort to do much the same.

The panel was moderated by Newlin Archinal, vice president, BPU Investment Management, who has spent fifteen years as a television reporter and anchor in Richmond, VA and in Pittsburgh; their journalistic doggedness ensured that there would be no evading of their questions!

The four panelists were:

  • Bruce Gebhardt, Co-Founder, Pathfinder Capital Advisors LLC

Bruce is willing to do seed investments and recently invested in Carnegie Mellon University spinout Fifth Season (formerly RoBotany),

  • Sam Gerace, CEO, Veritix

Sam has led four software startups raising a total of $75 million in venture capital. Pittsburghers may recall one of those startups, Be Free, launching locally in 1996, and eventually going public.

  • Michael Kopelman, General Partner, Edison Partners

Edison targets companies with revenue in the $5 million to $20 million range. It has completed 225 deals to date. Edison invested via common stock in Pittsburgh’s, TrueCommerce, when it was at the $3-5 million revenue level, ultimately selling when it reached the $20 million revenue level.

  • Don Yount, Partner, Activate Venture Partners

Last year, the Pittsburgh Business Times reported that Don Yount’s firm was “eager to do more deals [in Pittsburgh]” when it led a $2.8 million raise by Othot Inc.

Now that we have a little background on the panel, what is it that they are looking for?

  1. Gebhardt shared three top criteria:
  • The people involved in the company are most important. He is seeking a CEO who will follow-up consistently.
  • He is interested in assessing the relevant markets as a business person where academic researchers may lack familiarity.
  • The company must transition its focus entirely toward sales when it reaches that point in its growth.
  1. Gerace begins by evaluating the CEO and his/her ability to build a team. Encountering an egotistical CEO is always a deal-breaker. He added that he believes Pittsburgh, with its combination of manufacturing and research talent, offers a unique pool of people for team building.
  2. Kopelman is seeking companies that can reasonably scale. In his eyes, a good deal is when both the company and the VC firm have settled on “mutually unsatisfactory terms.”

What are the areas that are currently of interest today and into next year?

  1. Activate Venture Partners is not a life sciences investor, but Yount observed that the life sciences activity in Pittsburgh raises the likelihood health information opportunities will pop up in Pittsburgh.  He feels the same way about analytics businesses and the research being done in the universities in Pittsburgh. Yount likes early investments and has made two in pre-revenue companies outside of Pittsburgh.
  2. Gerace pointed out that, despite venture capital firms making lots of investments in “big data” recently, they don’t tend to use it themselves to analyze possible investments. Gerace indicated that publicly available data exists on non-dilutive capital from Phase I Small Business Innovation Research (SBIR) program grants. A VC firm could use this data to predict the likelihood of success for the company to obtain a much larger Phase II grant award before making an investment.
  3. Kopelman doesn’t see any leveling off of venture capital investment – late stage or early. He said he is currently exploring companies with revenues of $1-3 million instead of larger firms. He likes to recycle “rock stars” from his prior deals to build out the C-suite in new investments.
  4. Gebhardt is typically interested in seed investments because he is investing his own dollars. As a graduate of Gateway High school, he comes by his “Pittsburgh frugality” honestly, and is looking for a business plan around new technology that makes sense to him and with big market potential.

Tony Torres, Innovation Institute Entrepreneur in Residence, said more must be done to attract outside investment in Pittsburgh startups.

“Pitt has just recently developed a targeted and direct approach to venture capital. While the majority of the University's efforts today are aimed at raising federal grant funding, it is important to recognize that a significant amount of dollars are also available to accelerate commercial translation opportunities through startups.”

Torres pointed to the 5,875 Angel or Seed-Stage deals valued at $4.44 billion globally made in the third quarter of 2019 according to Crunchbase. Angel or seed-stage deals have become of much more interest to VC’s in order to “get in early.” 

“Appropriately, these early stages are where University technologies resonate with the investor making our technical outputs the fuel of the venture capital investors’ strategy,” Torres said.

Torres has assembled a targeted team of professionals to identify, develop and grow relationships with VC’s to lower their risk and increase their returns while accelerating the translation of Pitt technologies into impactful companies.  Since the inception of the new targeted model there have been more than 40 venture capital companies involved in technology and business assessment with the University. 

“With 40 spinouts over the last two years we invite the entire city, who see Pitt’s leadership in global research, to join us in attracting investors and accelerating the real growth,” Torres said.

If you are an investor who is interested in reviewing seed or angel-stage opportunities from Pitt, consider attending the Innovation Institute’s annual Celebration of Innovation on November 20, from 5:30 to 7 p.m., where you can meet our staff.

Or you can email us at innovate@innovation.pitt.edu with the subject line: Investor

Join the Pittsburgh Venture Capital Association on Thursday, November 21, 2019, for a discussion of growing your company with venture capital or without. Click here for more details and to register.