Clear Ventures focuses on investing in B2B enterprise softwareRead more...
Serra Ventures, headquartered at the University of Illinois, invests in startups from the Midwest
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh how times have changed. While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Hoerr has worked in the University of Illinois at Urbana-Champaign technology community since 2001 and is a charter member of the University’s Entrepreneur-in-Residence program at EnterpriseWorks business incubator in the Research Park.
He spent nearly all of the first 15 years of his professional career with RSM McGladrey in Illinois and San Diego. He was co-founder and former CEO of iCyt Mission Technology, a bio-instrument company.
VN: What is your investment philosophy or methodology?
Tim Hoerr: We were all CEOs of tech companies prior to Serra Ventures. I had been a tech CEO in a scientific instrument company called iCyt. Dennis Beard, prior to getting into venture, ran a home health care agency and a scientific instrument company. Rob Schultz, who joined us in 2013, came from Illinois Ventures, which was the official venture arm of the University, but prior to that he had been a tech CEO in a company called DigitalWork, based in Chicago. They were one of the very first platforms, in the late 90s or early 2000s, where they were offering a suite of accounting tools, and other similar tools, on an Internet platform, which doesn't sound terribly novel today but was groundbreaking back then. Finally, Steve Beck, our most recently added general partner, began his entrepreneurial career by launching California Cheap Skates (CCS) at the age of 23, which grew into the world’s leading action sports e-commerce business selling to Foot Locker (NYSE:FL). Later, Steve joined the founding team of C2B Technologies, one of the Web’s first and leading product search engines which ultimately was acquired by Inktomi (Nasdaq:INKT) in 1998. So, given our backgrounds are as tech CEOs, we really have the heart and persona of a consultancy, where we want to come alongside of our tech CEOs to share our experience. We bring unique value from having sat in their seat and negotiated deals with big companies for business development. We've gone out and raised capital ourselves, and plotted strategy and then pivoted.
That's our unique niche. We've been there and done that, and so we have a unique perspective on the needs of early and emerging high tech enterprises. We focus primarily on the Midwest, as opposed to elsewhere, and if you read any of the statistics then you understand that the Midwest is still a largely underfunded, under-resourced territory. We’ve had great evolution in the tech ecosystems, in Chicago,St. Louis, Indianapolis and Cincinnati and even some of the smaller markets like Ann Arbor, Champaign, Madison and Lincoln. There have been great evolutions in the tech ecosystems with a much better approach to entrepreneurship and a more vibrant climate where you still have a glaring need. There is just not enough venture here. There are really some exceptional, quality companies now emerging out of these more mature tech ecosystems, and they need venture, along the lines that we provide. We are the guys who have been in their chair, who have not only great empathy but real value to add. That's who we are.
VN: What do you like to invest in? What are your categories of interest?
TH: In general, if we use broad brush strokes, we enjoy B2B type plays. We have occasionally done a B2C deal, but we don't tend to do much of that. Most of our backgrounds tend to be more B2B, we've had more success in both the companies we've funded and in our prior lives, and in some of the investing we’ve done alongside the fund. So our experience tends to be there more.
At a thirty thousand foot level, to really scale a B2C enterprise, and to be successful at it, takes more capital. B2B models tend to scale with less capital. That's a broad brushstroked type rule, but the B2C space tends to be, in our opinion, more competitive and tends to be fraught with more pitfalls and pivots. At the end of the day, we've probably had our butt kicked a couple of times on some B2C stuff, where's it's like, "Obviously we didn't understand the scope of what it really takes to see a successful B2C play and we don't have huge war chest." Obviously this isn't true in every case.
I would say probably 50 percent of what we do, from an investment category standpoint,is information technology. Within that, we tend to look at mobile plays, enterprise SaaS. Again, typically they need to be B2B. The other half of our investing, in terms of categories, tends to split into agriculture technologies, and what I would call "devices," so scientific instruments and med devices.
We don't tend to get terribly fussy about the vertical that the company is in, unless it's a vertical that we have absolutely no understanding of, or no knowledge of, and we tend to stay away from that. Those are the types of categories that we tend to play most in, but it would be a misnomer to say we have a very sharpened vertical focus, because we don't.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
TH: We invested in a company called Clearstream, which was a video ad technology company. It was basically understanding the context in which a video ad would be running, both the news story that would run after the video ad, and the general milieu that the video ad would be running in.
The company got referred to us out of the University of Illinois ecosystem. It was not located here, it was in Chicago, but we were attracted to the fact that the CEO had both a technical background, he had majored in computer science, and had worked on Madison Avenue in New York for an ad agency. So he had that business savvy of how this technology might solve a point of pain among a constituency that he understood fairly well. That was attractive to us.
The company went through a pretty significant pivot early on, so they were more of a pure technology play originally and then morphed in what I'd call an ad agency, with this technology as a differentiator. Instead of a pure technology play they became more of a full service agency offering that differentiator. That pivot proved to be massively successful. They quickly moved into double digit revenue, and were acquired about three and a half to four years after our investment. It was over a 10x multiple, which, for us, is the aim. So that's a good example of a company that we were also pretty intimate with along the way. We led the very first round, we participated heavily in the subsequent two rounds, we brought other parties to the table, we were involved in the decision to pivot, so we were much more than just investors in that company. We were very intimately involved.
Another company was ImmuVen, where I served an almost two year stint as the interim CEO. It was a very part time role in the very early evolution of that company. The company was developing a therapeutic approach to cancer treatment based on T-cell receptors. That company went on to have a successful exit to Abbvie. The actual multiple on that deal was in the high double digit range and it has some milestone payments attached to it that could produce substantial additional returns. The initial exit was very successful, and it was an example of company that had great, disruptive technology in a newly emerging disease treatment space. The founder had had a prior exit with not a similar technology but a different space and had sold the company to big pharma. One more I'll mention is a company in Chicago, 640 Labs. We saw a team that was very competent, they were offering a pretty novel solution: they had a widget that attached to a tractor, literally, and reported performance data up to the cloud. So this was all about precision farming. We just saw something in the founders. They had that rare combo of competence, disruptive technology, a big market, and they were willing to take our advice.
Unfortunately, it exited “too early.” They sold to Monsanto Climate Corp about six months after our initial investment. For the founders, the deal was too good to pass up. It probably would have been in our best interest to encourage them to stay the course, and to keep building the company and go for an even larger exit, but we felt like it really was a great deal for them as founders. They had very minimal dilution at that stage of the game, and Monsanto has proven to be a great distribution partner for them. That was one that was, ultimately, a win for all of the parties involved, even though conventional wisdom probably would say, "Ride this pony for a while and experience an even larger exit." As it was, we had 2.5x our money in a six month period of time, so the IRR was ridiculous, 486 percent or something like that. Those are three examples of deals we're pretty proud of.
VN: What do you look for in companies that you put money in? What are the most important qualities?
TH: We tend to be quite similar to what any other investor is looking for. It's obviously always about the team. The quality of the team, the competency of the team, and, hopefully, the teachability of the team. We like that rare combination of teams that are extremely competent and confident in their ability to achieve a vision, but yet, with a good dose of humility and teachability, have the understanding that we have something to offer them. That's the number one criteria that we look for. We also want disruptive technologies that solve a key point of pain and have a large potential market. That's pretty similar to what everybody looks for. For us, we're microventure; our funds are sub-$100 million, so we're doling out smaller dollops of capital, which sharpens the need to come into these companies at the right time and the right price. We see lots and lots of deals, as do most venture firms – which means that we need to be quite discriminating in the companies we select for investment. I talked to one yesterday that was a great company, starting to get some good traction, but pricing too far outside of our parameters. All the other stuff seemed to make a lot sense, but we tend to stay very, very disciplined about coming in at the right points, at the right price and right terms, in combo with those other things that I described.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
TH: For software entities we want to see them within striking distance of $1 million ARR, so it tends to vary what the actual number of customers is because it depends on the pricing model and if they're selling a $2,000 piece of software or a $25,000 piece of software. For us, it's about getting that millionish of ARR. We're also looking at the trend that has led up to the present. What's the trend looking like? What's the month on month growth, or the year on year growth, looking like? We don't tend to be super literal about it having to meet this specific number, but I think that, in general, that's what we want to see.
It's not as much so for devices. Those tend to be a little slower in the traction that they generate, a little more modest, so there we want to see into several hundreds of thousands of dollars of revenue, but not necessarily $1 million. In the case of medical devices, we might be coming in pre-revenue, which is a little bit of an anomaly for us; everything else we want to see generating revenue, but med devices, by definition, may not have much revenue. That's true even by the Series A, unless they have a research application of the device, as opposed to a clinical application.
We want to see where are they relative to their competition, so we want to understand the competitive landscape, and how does their revenue ramp compare to the well established competitors, as well as the newer entrants to the market. It's more about a relative evaluation of how they're stacking up against everyone else in the market.
VN: How long does it take before you meet a startup and make an investment and how do you conduct your due diligence?
TH: There's two or three main metholodiges for us becoming aware of something. I would say one of the primary methodologies is we have cultivated relationships with various accelerators and incubators and the key influencers within several Midwest tech ecosytems. For example, yesterday we were getting a preliminary demo day pitch from four companies out of the gener8tor accelerator in Madison. They'll routinely queue us up to review their cohort of current companies. We'll get to kind of speed date them. Obviously we can do some of that on the Web, some of it we're going to actual events; we're scheduled to be in Indianapolis in June to look at their Winners Circle event, where there will be probably be 20 different startups that have come through some form of either an incubator or an accelerator program. So that's one methodology, looking at the already down-selected group of companies at those accelerators and incubators, because most of these programs tend to be fairly selective.
The other methodology is from co-investors. By this time we've now invested with maybe 45 different funds like ourselves in Chicago, St. Louis, Cincinnati, Kansas City, etc. We'll often get a referral from a co -investor, whether they're already in the deal or they're looking to go into the deal, and there's some amount of availability. Then we do see some amount of referrals from just our network. Our limited partners, accountants, attorneys and other centers of influence. Deals that have been warmly referred are the deals we probably pay the most attention to. There are obviously deals showing up through the Web portal and coming in cold. People find us on LinkedIn or they saw us speak at a conference, but we don't have the bandwidth to pay much attention to those because, in terms of warm or referred deals where we have some amount of organic connection, we're seeing maybe six or eight of those a week and then you're getting another four, five, six deals cold across the transom. So we just don't have the bandwidth.
I would say from start to finish, from introduction to actually investing, is no shorter than a three month process, and can be six months on average, it can be nine or 12 months on the outside. So it falls somewhere in that range. In terms of an initial evaluation, it can take two or three weeks to decide that this is a company we are likely to seriously consider for investment. We don't like to leave people hanging so we'll let them know we're interested in going deeper and moving into more due diligence. On the other hand, you want to give them a quick no. So we'll give a no answer within a couple of weeks, but if it's a yes answer it's still going to take a certain amount of time to execute, because you're going to go through due diligence process, and you're going to extend a term sheet, or, if there's already another party leading it, review the terms, and then there's the drafting of the documents, which is a three or four or five week process for the attorneys. Sometimes there's three or four sets of attorneys, depending on how many funds are in the deal, so the actual process from start to finish writing a check is three months. We’ve done a few in two months, but certainly not any quicker than that.
VN: These days a seed round is yesterday's Series A, meaning today a company raises a $3M seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes of a seed round vs a Series A round?
TH: Everybody defines these things differently. Frankly, it depends on who's doing the deal and where the deal is being done. The coasts are now seeing much larger seed rounds, and the so-called "seed rounds" are actually a little bit later than you would see in the Midwest. The Midwest rounds tend to be smaller.
Seed stage is whenproduct-market fit should be emerging, but it's far from proven, whereas, by the time you get to an A round you need product-market fit to be very well established. In a seed round, you're seeing some amount of revenue traction. In some cases, seed round companies are pre-revenue; by the time you get to an A you want to see pretty significant revenue traction. The team size for a seed stage company tends to be more modest, probably lacking certain pieces of business talent. It tends to be very tech or scientific heavy, not as much business development, sales, marketing talent on the team at that point. By the time you're at your A your team needs to be fairly well built out, and the players all need to be identified. At the A level you've got to be ready to scale very rapidly and very seriously, whereas at seed it's still being proven out.
We're seeing more seed rounds done by what I would call "non-institutional investor money." That means angel groups, individual angels, grants, friends and family money. You see some funds that have an appetite for seed, but not that many on a comparative basis. Most of the funds are operating at the post-seed round level, whether that's the seed extension or seed plus, or waiting until the A. I'd say the investor base tends to be less institutional, a little more company friendly, at the seed stage than at the A, where now you've now attracted some other funds into the equation that are participating.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
TH: I grew up in an entrepreneurial family in Peoria, Illinois. We owned a garden center, nursery, and landscape business that was fairly large scale, probably one of the larger downstate, outside of the Chicago region. We had about 120 employees. So that was the environment I grew up in. I started to work in the fifth grade, and worked all the way through my college years in the family business.
I studied accounting at Illinois State University, as well as information systems, so I had a dual degree when I graduated. I took the CPA exam, and scored fairly well on that. Took the CMA (certified management account) exam, which is more of an industry focused version of the CPA. I took a staff position in Champaign with a company that was called McGladrey & Pullen at the time, which is today known as RSM, and is now the largest non-big four accounting firm in the world. I transitioned over to the management consulting side relatively quickly, because I had the dual degree in information systems and, at that point in time, the IBM PC was new, the Compaq Luggable had just been introduced, so the whole world of spreadsheets and automated tools for accountants was just emerging and that became my bailiwick. I spent 15 years with McGladrey, the first half being very technical and focused on the hard sciences of consulting, which are information technology and operations and finance. The latter part of my career I morphed into leadership development, strategic planning, more of the softer disciplines. I relocated to San Diego to start the consulting services group for our San Diego office, because it was nonexistent. That would have been in mid-90s.
I ultimately left the firm. I wrote a book and had intentions on becoming a professional speaker, facilitator, etc. So I jumped off the ledge in the late 90s, and sort of fell off the edge. It was a pretty unsuccessful couple of years and a massive career crisis for me. In middle of that, I moved back to Illinois and ended up taking a job in software. The company I went to work with was taking the Mosiac browser out of the University of Illinois and porting it down to handheld devices, cellphones and personal digital assistants. The company had been founded by a guy who worked with Spyglass, which was one of two companies that licensed the Mosaic browser, ultimately creating the product that became known as Microsoft Internet Explorer; Netscape was the other company licensing Mosaic from Illinois, and Marc Andreessen went on to great fame with that.
I got pretty well baptized into the tech milieu through that company and then, in 2001, I met a scientist at the university that was doing flow cytometry and he asked me to help him put together a strategic plan, and that led an opportunity to co-found iCyt with him. I never intended to be there more than a couple of years, but I was there until 2008, and then the company was sold to Sony in 2009.
Serra Ventures evolved out of a consultancy that I started in 2008, upon departing iCyt. The University made a large commitment to tech commercialization back in the 2000 to 2001 era. They created a research park, a venture capital arm and they brought in business talent to run the tech transfer office. We started iCyt in 2001, and we grew up with the tech ecosystem here. I started Serra Ventures really out of what I perceived as the growing need for these companies, starting up and spinning out of the University of Illinois, to have some amount of assistance relative to their business model development, their strategy and so forth.
Very quickly it became quite obvious that the most felt point of pain for my clients was capital, and the need to acquire capital. I was only about a year into it and was joined by a venture capitalist, Dennis Beard. Dennis and his group, Open Prairie Ventures, had done the final round of funding in my company 18 months prior to its acquisition by Sony. He was looking to do something slightly different, and joined me, and together we pretty quickly realized that we needed to put together a more efficient vehicle for getting funding into our clients. That's how we put the toe in the water and started our first fund, which then became a second fund, and now has evolved to a third fund. Over time, we've added more talent and increased the size of the fund. Today we look much more like a venture firm than a consultancy, though we still do both.
VN: What do you like best about being a VC? What makes you excited?
TH: I hadn't charted an intentionalcourse toward venture capital. I viewed myself as a consultant, somebody that comes along side people and encourages them and catalyzes them to realize their dreams. What I discovered along the way is that venture capital is a lot about that as well. It's just that you get to participate in the upside of the dreams, because you make an investment in them. It's sort of the evolved version of consulting that I've done my whole life, but you get to do it by putting some resources into the company, and then you get to come alongside these teams that are literally changing the world. They have a large vision, a passion, to solve a point of pain in the marketplace, and do it better than it has been done before. That's really what venture is ultimately about. That part of it has really clicked for me. It happened a little bit by fortuitous accident, so to speak. I suppose if I'd not had the really nice exit event at iCyt then I wouldn't be doing Serra Ventures and doing the things I'm doing today. It was probably a nice combination of some very fortunate circumstances that took me to this place.
I love working with people. But, more than that, I do have a philosophy that I am wired to fulfill a purpose or calling, if you want to call it that, sort of at a more mystical level. What I see in venture capital is that I get the opportunity to work with people who do have some sense purpose or calling, and I get to come alongside of them and help them flesh that out in a very practical way. I get to bring my 34 years of business experience to the table, I get to bring my team and colleagues, and my network, and I get to bring my cash to the table. I don't just get to come alongside and catalyze these people and encourage them, but also share in the upside of what they're creating. That is really, really fulfilling stuff. So that's what I love about the venture business and what I love about doing what I do.
The other thing is that it is fraught with difficult challenges. These companies, invariably, are going to face considerable difficulty in executing their plan. I've rarely seen the company that just puts a plan in place, and goes and executes it and just knocks it on its rear end. Life doesn’t happen that way. That's the other thing that's really rewarding about this business, that you're always solving difficult problems. That tends to create meaning, at least for me. I love problem solving and love working with people. That's what makes venture capital truly unique.
VN: What is the size of your current fund?
TH: We are presently at $32 million in Fund III. We are in the process of creating a sidecar fund through an SBAprogram called SBIC, small business investment company. We're in the still final approval process for thet sidecar fund, and we anticipate it will end up in the $10 million to $15 million range, based on some preliminary commitments. It will sit side by side with our Fund III.
VN: What is the investment range?
TH: For Fund III the typical investment has ranged between $250,000 and $750,000. Over the life of the company we anticipate investing twice that check amount, so if we write a $500,000 check initially then we reserve $1 million. A $750,000 check means reserving $1.5 million. The ultimate investment in each deal will end up in the $750,000 to the $2.25 million range. There have been exceptions where we might go outside those ranges, but that, by and large, is how it's going to work.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
TH: We target a percentage position in the company, as opposed to the round, so we typically want to be somewhere in range of 8 to 10 percent total ownership of the company. That's the target. Sometimes we can't achieve that, just based on the dynamics of the deal, so sometimes we're a little lower or higher. We want to maintain that position through the next couple of rounds. We may not be able to maintain that position through the entire lifecycle of the company, but we attempt to.
VN: Where is the firm currently in the investing cycle of its current fund?
TH: We're still very young as a firm. Our first fund was circa 2011 so we're five and half or six years into the 10 year life on that. We're just starting to see it come into its own. Our second fund was in 2014, so it is two and half years old. We wrapped it up with a final close in January of 2015.. Both of those funds are still relatively young, and the story has yet to be written on them – but the early returns have been quite promising.
We had an initial close on Fund III roughly a year ago, March 31 of 2016, and we had a final close for investors in May of this year. We began investing in the middle of last year, and we have invested in 13 companies from Fund III so far. The investing cycle is, for us, typically around a three year total period of time give or take. Since we've been investing for about a year, we will be investing out of the current fund for another two or two and half years.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
TH: Our sweet spot is the Seed Plus, or the bridge between the Seed and the Series A, or the A. We have moved more in that direction with our third fund. The first two funds tended to do a certain amount of true seed stage deals, and we're doing less of that now.
VN: In a typical year how many startups do you invest in?
TH: We'll do roughly 10 companies a year. We've done 13 so far, we'll probably have another 10 total in the next 12 months, and then another 10 in the 12 months after that. The fund will end up somewhere in the 30 to 35 total company range.
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Related Companies, Investors, and Entrepreneurs
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Serra Ventures, LLC, along with Serra Capital I and Serra Capital II, work closely to provide professional advisory services and entrepreneurial capital to emerging enterprises in the Central Illinois area and other selected geographies.
The Serra entities are playing a vital role in the entrepreneurial ecosystem by focusing specifically on early-stage technology enterprises, helping them to bridge the gap from formation to successful commercialization of their products and services. Deploying an “efficient capital”model and embracing lean start up practices, Serra Capital invests strategically in the sectors of Information Technology, Devices & Instrumentation and Materials & Ag Tech. Serra Capital I has invested 24 companies, while Serra Capital II has just recently launched.
Joined Vator onCEO and founder of Serra Ventures, a micro venture capital firm that provides coaching, management guidance and funding to seed and emerging stage companies in selected high technology sectors throughout the Midwest.