“Find a niche and fill it” is perhaps one of the oldest bits of advice in the business world.
Charlie Goff believes he’s done that with the New Capital Fund, which invests in Wisconsin companies that need infusions of between $250,000 and $2 million.
That places New Capital, an Appleton-based venture capital fund, in a sweet spot between angel investors and larger VC firms.
To date, New Capital has backed three companies — two in Madison and one in Green Bay — and plans on investing in as many as 12 to 14 firms by 2010.
“There are a lot of exciting things happening in Wisconsin and where there is opportunity, the capital will follow,” Goff said in a recent interview with WisBusiness editor Brian Clark. “I think it is just a matter of pioneering the path to demonstrate that you can make investments of less than $10 million and do really well for a group of investors.”
Brian Clark: How long has the New Capital Fund been around and how did it come to be?
Charlie Goff:It started in January of 2006. About a year prior to that, a number of people in northeast Wisconsin answered a call to action from the Northeast Wisconsin Economic Opportunity Study, which was a precursor to the New North organization. The study was prepared by Dave Ward of Northstar Economics in Madison.
One of the things he identified in northeast Wisconsin was a gap in risk investment capital. To come up with a solution to that, one of the solutions or action steps was to establish one or more angel investor groups in this area and take down a deal within a year.
So a number of us got together and asked “How do we do this and what is the best model to use to go forward?” I happened to be a member of the Kegonsa Fund that is headquartered in Madison and was familiar with how that fund was structured.
Rather than an angel group, where you have volunteer part-time help, I thought the better model would be to put together a small venture capital fund with at least one full-time position so we could have continuity and a sense of permanency for the investments and then following them to exit.
Clark: What happened next?
Goff: The group that was charged with going forward with this agreed with that suggestion and I subsequently took the role of general partner. We then put together the private placement memorandum and then went out and proceeded to raise the funds.
Clark: How much have you raised?
Goff: Just shy of $10 million.
Clark: Is it mostly from people in the northeast part of the state?
Goff: Right. We have 76 partners from this region and we deliberately made an effort to get people from outside of Appleton and Green Bay, where most of the people who were on this committee lived and worked. So we have investors from Sheboygan to Manitowoc to Door County.
Clark: What is a typical investment, if there is one?
Goff: Our minimum is $100,000.
Clark: What are the requirements to invest? Is there a certain level of net worth?
Goff: Sure. Any time you do a venture capital fund, there are a number of hurdles you must jump with the Securities and Exchange Commission. The one that makes it easiest for everyone in terms of documents you have to submit is that you sell only to accredited individuals. As long as they are accredited, they can hear the story and we can register it as such and we get a number of exemptions at both the state and federal level. That’s what virtually all people raising VC funds do.
Clark: But what is the minimum net worth?
Goff: It is $1 million. There is also a salary level and you can meet one or the other, but the net worth level is easiest for most people to meet.
Clark: Does it include the value of a person’s home?
Goff: It does. And there are some who will raise the bar a little bit and say that you have to have $1 million in investibles, if that is a word. Or you could say assets, but it doesn’t count someone’s house. The SEC definition doesn’t say you have to exclude a person’s home.
Clark: What did you do before this?
Goff: I started an industrial distribution company about 25 years ago and grew it until selling it to a national public company. So I’d had the experience of both managing, being a majority owner and finding a way to an exit. I felt that was a good background for looking for other companies to do just the same thing with. My company was called Forward Enterprises out of Appleton.
Clark: When did you sell it?
Goff: In 1998.
Clark: What have you done in the meantime?
Goff: I’ve been investing in a number of small companies on my own. It became clear, early on, that the better opportunities are the ones where you can invest more dollars. So the question is how can you come to the table with more money than I was willing to put at risk personally. This was a great vehicle to do that.
Clark: Who decides in which companies you will invest?
Goff: Investment decisions are made by a five member investment board and the day-to-day operations of the fund are managed by me, the general partner.
Clark: How many deals have you done so far?
Goff: Three. We have invested in GenTel BioSciences of Fitchburg, which recently purchased the enterprise protein chip assets of GlaxoSmithKline; Renovar, a Madison bioscience company that has developed novel urine-based in vitro diagnostic assays to predict various kidney diseases; and Frozen Codebase, a Green Bay computer game software developer.
Clark: Is there one that you are most excited about?
Goff: Well, what we look for when you are putting together portfolio companies are ones that are very early stage. Of course, the newer they are the more risk there is of failure.
Then there are later-stage companies and GenTel is one of those. You already have proof of concept, the management team is in place and in their case, they actually have seven-plus figures of sales.
Clearly, that’s not going to be a home run, though it certainly could be a double or a triple. If you can affect an exit in a timely fashion, you will do fine. But it’s not the kind of 20-to-one or 30-to-one kind of return you could get on an investment if you come in on the ground floor with a new company that you start up from scratch.
Clark: Which one is an example of that strategy?
Goff: The one that we started up from scratch is Frozen Codebase in Green Bay. It is a company that programs video games for the downloadable platform industry. Basically, that is Nintendo, Microsoft Xbox and the Sony Playstation.
We identified an individual who was passionate about this, who had connections and had sufficient background to do this type of thing. We funded it starting July 1 and seven months later, we have signed a couple of contracts to produce a pair of games on the Microsoft Xbox video arcade. It is now up to 12 people and we are really proud of it.
They wouldn’t be there if it weren’t for us. And we wouldn’t be there if it weren’t for them. That is what you are trying to accomplish.
Clark: At what stage is the third one in which you have invested?
Goff: The third one, Renovar, is a little later stage. They have been around several years and are a biotech company that has identified some specific biomarkers that predict kidney disease. The founder is one of the leading transplant surgeons not only in Madison, but in the world.
He got together with some researchers to come up with a better way to predict the condition of the kidney post-transplant and actually was able to identify some things that were in the midst of FDA trial for getting approval.
Clark: Two of the three companies in which you’ve invested are in the Madison area. Do you hope to do more investing in the northeast?
Goff: We are going to try as hard as we can to identify northeast Wisconsin opportunities and there is a fair number of them being generated both up here and in Madison.
Our fourth opportunity, though we have not yet closed on it, is in northeast Wisconsin. So at any one point, the ratio might not be equal. But that is our goal, to have a 50-50 split.
Clark: Down the road a few years, how many deals do you hope to have done?
Goff: Like most venture capital companies, you have a five-year timeline. That is the time where you identify and then close on your opportunities. The next five is to nurture and then effect an exit. We are talking about doing three to four investments a year of anywhere from $300,000 to $750,000. In subsequent years, we probably would be talking about additional rounds with exiting companies.
We will probably do four deals in 2007. I tell you, there are a lot of opportunities out there for a company that is in our space.
Clark: What does that mean to be in your space?
Goff: Well our niche is investing in dollar amounts that are greater than an angel group would be willing to put in, but not at the level at which some of the larger venture capital funds in this state can invest.
For example, Venture Investors in Madison is at the $2 million-and-above level. For an angel fund to come up with $250,000 is usually a fairly significant investment for them. So we are in that middle ground between $250,000 and $2 million and there aren’t a whole lot of folks who can come up with that kind of capital for early stage investments in a relatively short amount of time.
Clark: Are you continuing to raise funds for more investments?
Goff: No. The way venture capital funds are structured is that you go out and collect commitments and you may have one or two preliminary closes. But once the fund is closed, it’s closed. So everyone who is in participates in all of the investments on a pro rata basis. It is now a closed fund.
Clark: Is there a rule of thumb for how much a fund should return to its investors?
Goff: If you are in the high-tech or biotech areas, you shoot for a 40 percent internal rate of return. But if you can achieve 25 percent, you will be in the upper quartile.
Clark: Why did you invest in GenTel?
Clark: It is one of those companies that fell into that niche we talked about before. It won’t be a home run because it is pretty far along in terms of the product development curve. But they found themselves in the situation where they were looking for upwards to $1 million. And they had pretty much tapped out the angels that they were aware of.
They were looking for someone who was in the venture capital area and that fit us like a glove. We were able to get involved in a company that has significant growth potential, a lot of solid intellectual property and a solid management team. It matched with us very well.
Clark: Was it your investment that allowed GenTel to recently buy the Glaxo protein chip platform?
Goff: GenTel was able to secure a number of investments in this round. But whether it was our dollars or a combination with others, the fact is that as soon as they closed on our investment, they were able to go forward with the Glaxo deal. I don’t want to take credit for it, but I’m sure our investment helped. The timing suggests that.
Clark: What is the venture capital situation in this state, in your opinion?
Goff: I think it’s gotten kind of a bad rap. Some people like to call Wisconsin a fly-over state. I think the governor and the Legislature have been very helpful with Act 255 and its tax benefits, which encourages the kinds of things that we do.
Right now you could look at the statistics and ask “Gosh, where are our state’s investments?” I really see it growing. When people see the results that I expect from funds like ours and the Kegonsa Seed Fund, a lot more people will be jumping into this space.
There are a lot of exciting things happening in Wisconsin and where there is opportunity, the capital will follow. I think it is just a matter of pioneering the path to demonstrate that you can make investments of less than $10 million and do really well for a group of investors.
Clark: How would you compare your fund to Kegonsa?
Goff: We actually look at a lot of the same deals, we are roughly the same size and we are trying to do some syndication between the two of us. It hasn’t worked yet, but I suspect that it will. Ken Johnson, managing director of Kegonsa, is a very good resource to be able to bounce some of these ideas off.
