It's been a good summer for Laguna Beach-based venture capital firm Okapi Ventures (www.okapivc.com), which recently saw its first portfolio firm exit last month in Carlsbad-based Helixis, which was acquired by Illumina for $105M. In light of the recent success, we sat down with Marc Averitt and Sharon Stevenson to talk about the recent exit, where they are with their fund nowadays, and what advice they have for entrepreneurs.
Nice chatting with you today! Let's talk about the exitů
Sharon Stevenson: As you know, we had the exit of Helixis. The deal was at the end of April, but it wasn't announced until the end of July, when Illumina wanted to announce the launch of their product. It was about three years from investment to exit, which we were really thrilled about. We weren't looking for an exit, and were just in middle of building the business, when Illumina made their offer. We were literally on the cusp of launching our prpoduct, and all of our work and money to date had gone into getting the innovative technology out of Caltech, exploring the marketplace, and making sure the product features matched with the demand of the market, which it clearly did. Helixis really has developed an instrument which really has exceeded the current standards, at a fraction of the cost, and we're really excited about it.
So you weren't actually looking for the firm to be acquired at the time?
Sharon Stevenson: That's correct. All systems were go for the product, and we were really focused on getting the product out of the door, marketing it to customers, and setting up meetings in the academic space, with researchers who wanted to use the technology.
Marc Averitt: If you think about the one defining moment in the computing industry, that was the transition from the mainframe to the laptop and desktop. That's sort of like what is happening here, where we've got an order of magnitude better performance for the industry.
Interesting. So what's going on with the fund nowadays?
Marc Averitt: We're just plugging away. We had our fourth anniversary in May, and we passed out checks from the Helixis acquisition to our LPs, which was a pleasant delight. We actually went and calculated our returns, and lo and behold, according to Cambridge and Associates, we're in the top decile for the 2006 vintage of venture funds. We've got a number of companies which have now received subsequent financing and up-rounds, so we're now firing on all cylinders.
What kinds of investments are you particularly interested in right now?
Marc Averitt: We're doing both life sciences and technology deals. If you look at a Venn diagram, it's the intersection of IT and healthcare, which is an area growing in important in startup land. Healthcare reform has something to do with it, and also, healthcare has been a laggard as it comes to IT adoption, and is just now coming around. Technology, with ease of use, software systems, and information technology--is at the point where it's finally at a point of maturity, and we're finally seeing some traction in healthcare IT. We think the next five years will be very interesting.
Sharon Stevenson: There's a broader definition emerging of what healthcare IT is. It's not just hospital electronic medical records. What we're seeing are things like software-as-a-service, though not necessarily the same business model, but technology which enables doctors to do what they do better and more efficiently. It's software which enables doctors and patients to communicate, technology which facilitates the whole process of delivering healthcare in this country, which is broader than the old definitions of what healthcare IT was.
Marc Averitt: A lot of this also goes to the multidisciplinary approach. There's a lot of early stage projects, in university labs, such as nano-bio devices, wireless technology, etc., which have lots of interest, government dollars, and smart minds researching products around them. Those are becoming commercial grade, and are ultimately being spun out of academia.
Some of your firms have come out of universities, which has traditionally been quite difficult, is there a difference why your portfolio firms are able to cross that barrier from lab to commercialization?
Sharon Stevenson: Lots of this, is because we're absolutely rigorous in evaluating what it takes to get whatever it is out of the lab. With both of our operational and technical backgrounds, we're well positioned to realistically address what it takes. We do pass on lots of deals, where we've found those deals will take too much time and money to make sense with, using our funding model.
Marc Averitt: One of the common mistakes-and I did lots of university spinouts when I was at Intel--is backing technology looking for a problem, rather than something with an immediate impact. We're looking to take basic research only if it has a sponsor leading to a commercial product. Southern California is somewhat uniquely positioned, however, because of our depth and breadth of university talent. We're starting to see some very innovative product ideas out of places like Caltech, USC, UC Irvine, UC San Diego, and the like.
Sharon Stevenson: We're paying attention to if there really is a need for a technology. Is there a market? It's very easy to get seduced by the elegance of a technology, which can be a bad thing.
When you started, we were in a completely different kind of world, in terms of the economy. Has your investment thesis changed at all in this economy?
Sharon Stevenson: We were just laughing at our annual meeting, that we were ahead of the curve. We've become fashionable. Our whole model from beginning was to run ourselves, and run the fund in a capital efficient manner. We were not looking to shoehorn money into companies, giving them more dollars than they need. We are all about capital efficiency, and business efficiency, so this economy hasn't really affected us. We also didn't make investments in things that were looking to provide something incrementally better, and which wanted to charge a premium for that incremental improvement.
Are there one or more areas you think are the most promising right now for startups?
Marc Averitt: We're focused on a lot of areas in technology, including mobile applications. We tend to back companies with hardcore science and technology behind them. Things such as payment technologies, mobile apps in the financial sector, mobile security. We've been seeing more and more opportunities as computing and communications functions are moving into handsets.
Sharon Stevenson: In life sciences, there's no one area. Some people quote demographics--the population is getting older, they need more orthopedic application, there's growing obesity and increase in diabetes--and those things are true, but they have been true for some time. So, I don't particularly favor one sector over the other, it's more about the technology and team.
Are you willing to find a team, or do people need to have that in place?
Sharon Stevenson: They don't need a complete team for us to evaluate an dmake an investment. We often are talking to a team that may just be two people, but if they're the right two people, our model is to work with them to build out the management team. There are certainly lots of very talented and experience people in this area who are coming up with great ideas, and who we've found we want to work with.
Marc Averitt: And example might be RF Nano, which was just a professor who had hooked up with a guy from industry, a consultant. They had an idea, and wanted to build a company around the idea, so we helped built out the management, engineering team, and manufacturing team.
Sharon Stevenson: In fact, when we first talked with Alex Dickinson at Helixis, he had formed the company but he still had a job working for another company. So, we worked with him and he eventually made the switch to full time with Helixis. At the time we made our investment, Alex was the only full time employee, and we built it out from there.
Marc Averitt: That was the same in the case of My Damn Channel. It was literally just Rob and Warrne with the idea, with no web site. They just had the idea for short form, professional content, being developed using a different methodology than what was being done.
Finally, because we always ask the venture capitalist this: what's your advice to entrepreneurs nowadays?
Marc Averitt: In terms of entrepreneurial advice, I'd say that more market research is not necessarily the end all and be all. If you're the right person, for example you're a university professor who sees an opportunity, and we think it matches up, we'll go ahead and do our own research. We have an open door policy, we have our phone numbers and email on the web site, and we're very approachable. Southern California is a great place to be an entrepreneur.
Sharon Stevenson: I'd agree, talk to us sooner, rather than later. Some people are thinking you must have this fancy business plan, and have put together your team before talking to us. That's not necessarily time well spend. Talk to us early about your ideas, and get our feedback, which we're happy to give you.
Marc Averitt: Our model is different, and is truly seed and early stage. Part of our value added is to help build out the, build out the plan, and build out the management. It's classic venture capital.
Sharon Stevenson: We want to partner with the entrepreneur, and sometimes they don't realize our willingness to work with them to solve the problems they see.