Photo: Alex McKnight
The Money Issue
A long view on venture capital
A recent arrival to Florida's venture capital sector says the state is only beginning to capitalize on the research and ideas coming out of its public and private institutions.
Florida companies continue to garner only a pittance of the venture capital that firms in California, New York, Massachusetts and Washington raise. The second quarter of 2015 saw nearly $158 million in venture capital deployed in 17 deals in Florida, but that sum represented just 1% of the total nationwide in that period, according to Pricewater-houseCooper's MoneyTree report.
One recent arrival on Florida's venture capital scene says Florida needs to take a long view when it comes to attracting more venture capital and venture capital firms — the state is still building the foundation for entrepreneurship it takes to generate the kind of ideas and companies that will attract more VC firms. But he says that foundation is taking shape.
Russ Vernon is a West Point graduate with an MBA from Columbia and a long career in finance and venture capital. He's worked at Citibank, as a senior manager at Deloitte and Touche, Commerce Capital Markets and as director of investment operations at Warburg Pincus Asset Management in New York.
Vernon's familiarity with Florida began when he attended business conferences in Sarasota County in the late 1980s. He says he and his wife fell in love with the area and in 2007 bought what they expected to be a retirement home on Siesta Key.
While vacationing at the Sarasota home, he enjoyed the weather and cultural opportunities but says "I could only spend so much time on the beach." And so he began looking for investment opportunities among the health care, digital media and marine science companies that had begun appearing in southwest Florida.
In the process, he learned that the state "has a great university system" that's generating plenty of research and discoveries with commercial potential. But he also learned that, "in the third-largest state, a state that is growing rapidly, there's a dearth of venture capital."
Less than two years ago, Vernon, together with investors Ross Barrett and Christopher Cogan, founded Seven Holdings in Sarasota to invest in, acquire and operate promising business ventures. Ultimately, the activities of BVM Capital, a firm that Barrett and Vernon founded in Louisiana, were folded into Seven Holdings.
Seven Holdings is a hybrid of sorts — it uses its founders' money to make investments and acquisitions like a private equity firm, but also creates and manages venture capital funds using money from outside investors. Seven Holdings expects to raise between $50 million to $100 million from outside investors for its first fund, which will focus on aquaculture. The fund "will typically make investments from $1 million to $5 million," Vernon says.
While technology and life sciences companies are mainstay investment targets for most VC funds, including Seven Holdings, the firm has one unusual focus: Sustainable foods. The U.S. exports 50% of the seafood it produces and imports 90% of the seafood it consumes. Vernon says Florida's coastline and traditional fishing industry are important assets, and two of the company's initial ventures in Florida involve efforts to capitalize on those strengths.
The first came from a relationship the company developed with Mote Marine Laboratory, an independent, non-profit aquarium and research institution founded in Sarasota in 1955. Originally focused on sharks, Mote had broadened its scope to include conservation and fisheries of all kinds. In the process, it developed a water recirculation system that enabled it to effectively raise sturgeon using much less "new" water. Mote had begun producing caviar and filets at an aquaculture park in the eastern part of the county that produces both fish filets and high-end caviar.
Mote's caviar developed a reputation among gourmets and gourmet restaurants, but the institute was much better at raising the sturgeon than it was at selling their eggs the caviar was marketed only informally, through word-of-mouth.
Vernon and Cogan saw possibilities in Mote's proprietary water system and the sturgeon hatchery. "Research institutions are focused on science and creating intellectual property, but they don't have the experience or means to commercialize it," says Vernon. "We saw an opportunity to take over that operation and turn it into a world-class sustainable food operation."
Seven Holdings has purchased Mote's entire sturgeon operation and the corresponding intellectual property. A subsidiary called Healthy Earth Sarasota now markets sturgeon filets and caviar. Vernon says the firm "is becoming profitable."
In addition to the cash from the purchase, Mote gets lease income and royalties that will enable further aquaculture research. Seven Holdings and Mote also have an ongoing partnership agreement that funds research in exchange for the commercialization rights to discoveries. "It's a win-win for us, for Mote and for the region," Vernon says.
Seven Holdings also bought the Anna Maria Fish Co. A few miles from Mote in nearby Manatee County. That company will produce bottarga — cured, sun-dried mullet roe that's a delicacy in other parts of the world — and also develop ways to make food, fish oil and other bio-products out of the male mullet, which are currently discarded as waste.
Through its funds, Seven Holdings also is exploring investments in life sciences and technology firms. Vernon says the state's cohort of public and private research institutions, both at universities and in places like Lake Nona, along with a large elderly population means there's "no better place" than Florida to launch companies focused on aging, dementia, Alzheimer's, cancer and diabetes.
The relative scarcity of venture firms in Florida means the firm "gets calls every single day" from entrepreneurs, Vernon says. Most, he adds, aren't ready for investments of the kind his firm makes, which involve a healthy measure of guidance and supervision along with funding. "We're stewards of our partners' dollars," he says. "We don't step into the CEO's role, but we want to make sure they're doing their job."
What's important about attracting more venture firms to Florida over time, Vernon says, is that venture firms like to coinvest, not compete. Vcs, he says, feel reassured by having a lead investor near the company they're investing in.
"Once you start having a firm like us on the ground, it will spur on other firms to come to Florida and be part of the ecosystem," he says. "We hope to get other firms to join us. I believe when you look 10 years down the road, the state's population and the venture dollars you see deployed here will be more in line."
This year, the Gulf Coast Community Foundation of Venice created a $500,000 contest called the Innovation Challenge. Teams from government, non-profits and for-profit businesses were invited to submit grant applications detailing how their particular project or technology created a public benefit and grew opportunities in the marine sciences, the region’s so-called “Blue Economy.” Five finalists were chosen in August. Community foundations and corporations throughout Florida could use similar efforts to spur on new companies and help build an infrastructure for entrepreneurship, says Seven Holdings’ general partner Russ Vernon.
Venture Capital in Stages
Venture capital firms rarely participate in the "startup" phase of a business — the first several years in which an entrepreneur begins to develop an idea or technology into a company. That phase is typically funded by the entrepreneur, with help from family, friends and so-called "angel" investors. Venture capital firms typically participate in subsequent stages in the following ways, with risk decreasing as the company matures.
4 to 10+ years to exit Founding entrepreneurs develop the business model, company goals and long-term product strategy. VC provides startup capital and helps refine the planning process
3 to 7 years to exit Key managers and technical experts develop product prototypes. VC funds and supports operating and development efforts.
2 to 5 years to exit Company tests, refines and starts initial manufacturing of prototypes to eliminate major technical or product risks. VC finances operations and provides business expansion expertise.
1 to 4 years to exit Management works to increase market presence and develop second-generation products. VC provides funding and consultation to achieve positive cash flow.
0 to 2 years to exit VC and management team position the company for an IPO or acquisition.
Entrepreneurs, management, employees and Vcs are rewarded with the cash-out subject to lock-up period and SEC restrictions.