PORTLAND – Although not the rule, Maine businesses tend to be smaller than those found in larger metropolitan areas. This means that not only are the business opportunities for investors smaller but the growth potential in these businesses is often not enough to attract traditional venture capital (VC) funds. However, a combination of the state providing early stage funding alternatives and some local specialty funds, with traditional VC companies, mean Maine entrepreneurs can find funding.

David Coit founder of Portland-based North Atlantic Capital said, "Given Maine’s size, the state has a reasonable number of investment resources." He sees more and more, funds cropping up to fill in various gaps.

The average size venture fund in the U.S. is now about $100 million with the average investment at $5 million, estimated Nathaniel Henshaw, president of Coastal Ventures I/ II Funds, a for-profit subsidiary of Coastal Enterprises. "Most Maine companies are looking for less. Our average investment is $500,000. This is smaller than an institutional VC looks for," he said.

The experience of Brian Rigney, president and founder of Portland-based Blue Tarp bears this out. "We had a fund that was very interested in us but only with a $25 million investment, which we didn’t need. Of course, it could have been a nice way of saying ‘no.’"

Regardless of the size of investment, VCs are all looking for five things – a quality and full management team with appropriate experience, growth opportunity, competitive advantage, attractive return on the investment, and a realistic exit strategy in five to seven years. Henshaw said, "We’re looking for about $10 million over five years (in growth) and standard VCs are looking for $50 million to $100 million. A 10 to 15 percent growth rate is often not attractive to the traditional VCs. We’re looking for a 35 percent return as a target."

The definition of attractive growth rate and return are the only things that distinguish Coastal Ventures from other funds. The former is also seeking investments that will create jobs for low-income individuals. The fully invested Coastal Ventures II fund created or retained 1,700 jobs (1,545 in Maine) – 249 were newly created ones, Henshaw said. Of the 1,700, 72 jobs went to formerly low-income individuals and 29 to former public assistance recipients. Ninety-seven percent of the jobs offer health insurance.

Coastal Enterprises has a new fund, Community Ventures, focused on creating jobs in northern New England’s distressed communities (as defined by the 1990 census). President Michael Gurau said he anticipates a $10 million fund with average total investments of $100,000 to $500,000. Because of the focus on distressed communities, the Community Ventures fund will consider multi-stage companies and multi-sector. For example, in this portfolio Gurau anticipates approximately: two pre-revenue companies, 11 early revenue loss-making ones, and seven later revenue companies with $5 million to $20 million in sales at the break even point or just moving into profitability.

Strong management teams are key to an investment, according to Timothy Agnew, vice president of Portland-based Masthead Venture Partners Capital. Masthead is looking at early stage information technology and life science companies – just past product development but pre-customer. "We’re looking for capital efficient companies," Agnew said, "something where you can get to break-even with a $5 million to $15 million investment." Masthead expects initial investments to be as little as $500,000 that accumulate to the $5 million to $8 million over a few rounds.

Investors will favor a company with an ‘A’ management team and a ‘B’ idea versus a company with a ‘B’ management team and an ‘A’ idea, Rigney said.

South Portland-based Intellicare CFO Rich Lester agrees this is true but grows less so as the product moves to market. Once there’s a product and customer the importance of product the importance of the product begins to weigh more heavily than the importance of the team, he believes. The reasons, he believes, is that early on, it’s much easier to tweak the product – to make changes. Once the product has gone to market, this becomes more difficult.

Geographical location can be a pro or a con, depending on the venture firm. For Masthead, it is a factor. "We like companies in Maine where they’re close to us," Agnew said. A requirement for one of Masthead’s investments in Cleveland, Ohio is that it move to New England.

Funds may say geography is the reason for not investing, Lester explained, but he feels there’s often other, unsaid, reasons. In Intellicare’s more recent round of funds, which closed in June 2002, one or two California funds declined, citing geography. Another with offices in San Francisco and Boston chose to invest and it’s the San Francisco partner that’s involved. "I just don’t see being in Maine as a negative for raising capital. It can be more of an issue for recruiting," Lester said.

Although not with Intellicare at the time, Lester said being in Maine was an advantage for the company in its the early stages with the state’s Small Enterprise Growth Fund (SEGF). "What the state is doing for early stage companies is positive and hopeful," he said.

Agnew too sees positive progress in Maine with its incentives for VC investment such as the seed capital tax credit and the Maine Economic Development Venture Capital Revolving Investment Program. Also, the state’s commitment to investing in research and development over the last four years through the Maine Technology Institute has been incredible, he said. "It will be necessary, going forward, for the state to continue to focus on and make progress in this area," he said.

The Maine Technology Institute (MTI) seed money is very important is getting companies to the stage that venture capitalists can look at them, Henshaw said.

Brook Venture Funds of Boston is currently raising and investing its second fund. The company is just beginning to look at opportunities in Maine that are looking to expand existing business in medical instrumentation and software, IT, and enabling chemistry and optical applications – companies that need funds to help scale up revenues. "We’re looking for good small companies with high impact potential and global reach potential," said partner Ned Williams.

Williams explained that the fund will have initial investments averaging $2 million. "We’re looking for dramatic growth potential with a run rate in the high six figures to $1 million," he said.

Rockwater Capital Management, in Portland, is currently raising funds for a royalty-based financing fund. Managing director Peter Moore explained it will target expansions, intra-family ownership transfers, and buyouts. Unlike venture funds, which receive an equity position in exchange for investing and seek to exit the investment in five to seven years, Rockwater’s investment is repaid through the company’s revenue flow.

Moore sees Rockwater targeting a business audience not easily served by classic venture capitalists who have the expectation that their investment scale to enterprise size. The Rockwater fund will help provide the capital needed to expand and cover the soft costs (e.g. recruitment and hiring of expanded sales and service) associated with expansion from a local to a regional market or from a regional to a national one.

"Maine really is considered the backwater for many venture capitalists," said Rigney, "I heard one potential Boston investor ask if Portland was more than six hours away from there." "VCs think the labor pool is narrower here though we’ve never had a hard time finding good people but it’s something Maine entrepreneurs must overcome. Maine companies needs to have better management, better ideas, a better presentation, and caret a more compelling case to gain that investment," Rigney said.

North Atlantic Capital’s Coit is in some agreement. "Maine is at some disadvantage but there are success stories that revolved around lifestyle. Maine is great place to raise a family and there are entrepreneurs who want that. There are founders who want to be here – look at Idexx, Wright Express, Hinckley, Diamond Phoenix. You can be successful here but the resources (intellectual property, talent pool) are limited relative to Greater Boston. If you’re looking for a senior executive you often have to search outside of Maine."

When Coit came to Portland, 21 years ago, the Maine economy was natural resource based – fishing, lumber, paper, and tourism – industries that don’t typically attract venture capital or private investors. There has been, however, a slow increase in the types of businesses in Maine and this broadening is a plus, he believes.

North Atlantic is currently investing a late stage private equity fund that has a typical investment around $5 to 7 million. Its first fund was early stage.

As funds become successful they by necessity become larger and look for larger deals. Community Ventures’ Gurau explained, "Let’s say a fund does 20 deals with an average $500,000 per deal, making it a $10 million fund. With success in the first fund, say you raise the next one at three times the initial’s size. With more success, you raise more money and the ability to stay at the low end is harder. Earlier stage companies require more attention but in theory the earlier you make an investment the more you’ll make in return. On the other hand, there’s more failure early on. Whether you invest more dollars or less, there’s just as much work in creating both deals."

"A VC firm has requirements – they want to see ‘x.’ From the perspective of the entrepreneur, it’s a waste of time to pursue an investor who has no interest in your space," Rigney said.

Henshaw believes venture funds are available to Maine companies with reasonable growth prospects, good management team, and a good exit strategy for the investor. "The rub is when the pieces are not all there – it could be lots of technical risk, going after a small market, an incomplete management team," he said. Business owners need to keep in mind that a company can be a good business proposition but not a good venture investment, he emphasized.