Venture Capital - Not Just for Tech Firms Anymore

Everyone these days is talking about money, or lack thereof, so if the banks are getting stingier and stodgier in lending to small firms, where can an entrepreneur find funding?

Venture capital could be your answer. Anecdotally, through multiple conversations with small business owners, I've found that many of them are deterred from even considering the VC path because they often wrongly believe that VC is only available for technology or health industry firms, which are the biggest and often most vocal users of VC funds.

There certainly are pros and cons to taking the venture capital route. VCs may have money, but not every entrepreneur is going to have any easy time possibly relinquishing partial ownership to somebody else.

John Burns of Highland Capital Partners manages a VC fund focused on consumer goods and services. (Courtesy of company)

But if you're interested in pursuing venture capital, you'll be happy to hear that there are many VC funds specializing in a wide array of good and services, including small retailers. I spoke with John Burns, a general partner with the Highland Consumer Fund. It's a $300 million fund affiliated with Highland Capital Partners and specializing in consumer products, services and retail companies. The firms in its portfolio include retailers of everything from pet products, guitars and yoga-inspired athletic apparel to flavored water.

Here are some highlights from our discussion:

SBB: What is a venture capitalist?

John Burns: Venture capital is almost like ice cream. We come in all sorts of different flavors. Many of us tend to get involved in more value-added business activities, helping a firm think through and set a strategic plan or help them make acquisitions, recruit and hire key management.

SBB: What is a VC looking for in an entrepreneur?

Burns: We're all looking at rapidly growing markets...along with differentiated products and services - something that makes it special and will remain special. We're looking at the people involved - who's the entrepreneur and who is on the management team that will make the company the winning company in their market.

A big thing that I do - like many VCs - is we are looking at big trends, not fads, but trends. We're trying to draw a distinction between the two. When we look at some of the trends - we see health and wellness as a big macro trend - despite cyclical ups and downs of the economy, there's a number of good business opportunities there.

We invested in a company called lululemon athletica (of Vancouver, British Columbia). When we were thinking of doing that deal we asked ourselves 'Isn't yoga a fad?' We did a lot of work trying to figure out that issue, but yoga has been around for a couple thousand years. We did detailed due diligence around yoga participation and gym memberships.

SBB: Do you have any examples of fads?

Burns: I hesitate to be real specific, but Heelies - the shoes with the rollers on the back - that company came out of nowhere, exploded and went public. It barely exists today, just a couple of years later.

SBB: Do you use a specific set of criteria when determining your investments?

Burns: No...this is more art than science at the end of the day... but VCs rely on pattern recognition and the ability to differentiate those that will stand out.

SBB: Does a company need to be a fast-growing firm?

Burns: If a firm is in a market that's growing 5 percent a year and you've found a firm that's growing 10 percent, that's attractive.

SBB: What sort of qualities do you look for in a management team?

Burns: There's no personality test and no report card, but it's a lot about an innate sense of how people can perform.

SBB: Flavored-water firm O Beverages (of Concord, Mass.) in your portfolio was started by Tom First who co-founded Nantucket Nectars. Do you have to be a known name to get funding?

Burns: No. We back many first time entrepreneurs. If you walk down the water aisle of the grocery store, you'll see there are lots of people in this business. The segmentation is getting sliced very thin, but we made an investment despite the fact that it's a crowded market.. He's been there before. He's done it. He's had relationships with distributors. But many entrepreneurs in our portfolio are first time businesses. We're tying it all back to trends.

SBB: Is venture capital funding just for start-ups?

Burns: No. We just invested in City Sports (of Wilmington, Mass.), a business that was founded by an entrepreneur 20 years ago. He's ready to grow and was looking for a partner to help him strategically. Unlike a Dick's Sporting Goods or a Sports Authority, which might use 50,000 square feet of space [for one store], City Sports is a concept that uses a smaller store and focuses on a premium well-educated customer. It focuses on the 24 to 45-year-old who is into running, and a desire to live a healthier lifestyle. Looking at what's going on with the retail environment, this business has outperformed anything you read about in the paper. City Sports, which has a store in downtown D.C., has doubled in size during the last four years.

SBB: What's the best way for a small firm to contact a venture capitalist?

Burns: As you might imagine, we get contacted quite often. You need to try and stand out. Two things you can do to have productive discussions:

1. Be very careful and targeted about whom you contact. I can't tell you how many times I get an e-mail or a phone call from someone who calls for $10 million to help develop a drug. Find the right person. If you are a consumer products firm, call me. If you're a pharmaceutical company, call them. It's all about target contacting.

2. It's always helpful to try some commonality with the individual you're contacting. Maybe it's through someone you know. If I get contacted from someone who is specific and they've drawn the commonality there's a much better success rate than a blind e-mail blast. These days most of the time people contact me via e-mail which is OK but picking up the phone still is the most effective. When people use e-mail they tend to get a little lazy.

SBB: What do you see as the business and economic landscape for small businesses right now?

Burns: Generally speaking, on the small business side, anytime there's an economic downturn or a slow down in activity -- whether the nation is in recession or not -- big firms have layoffs. I have found always that in those periods, small businesses and startups pick up. You have dislocated workers, who've been sitting around for five or 10 years thinking about a firm they'd like to start and realize that now is the time to do this. We're actually seeing lots of business starting or have been started during the last few years that have found ways to survive. Entrepreneurs are incredibly resilient people. Those firms that had not yet matured enough to be self-sustaining, they're struggling to get access to capital. It's getting harder to get debt financing, but that has opened up opportunities to more VCs.

I think there's a lag in these environments. Many people will go out and start a business, but most firms [that are not in the technology or health care fields] typically don't pursue venture capital until they've been around a bit, like a few years. For example, someone who got laid off in 2007, starts a business in 2008, but might start looking for capital in 2009. I would say it's a better environment right now for entrepreneurs because these economic downturns spur innovation...That's what makes the American economy unique.

By Sharon McLoone |  October 2, 2008; 7:28 AM ET How Do I... , Q&A , Tools and Tips
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thanks for writing about this. i never would have thought about vc money but maybe I can now.

Posted by: roz | October 5, 2008 8:31 PM

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