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Getting in on the ground floor
Harbert
Venture Partners has helped fund Virginia health care, tech
startups
BY
JEFFREY KELLEY TIMES-DISPATCH
STAFF WRITER
When Harbert Venture Partners was created in 2002, the business wanted to focus its investments on young health-care and information-technology companies from Maryland to Florida.
But the venture capital firm's concentration hadn't necessarily been on central Virginia.
Yet after 11 deals, three companies in this region -- two in the Richmond suburbs and one in Charlottesville -- have secured financing from the most active venture capital group in the capital city.
Harbert's Wayne Hunter and Tom Roberts have been pleasantly surprised with the quantity and quality of regional companies that hint at high growth.
"Over the long haul, central Virginia is going to turn out to be a very attractive market to invest in," said Hunter, the firm's managing partner. "The current environment for venture investing is good in this region, but we think the next five to 10 years is going to get even better."
Venture capital is a risky game Harbert has been willing to play. Found at the top of Shockoe Slip, Harbert is a division of Birmingham, Ala.-based Harbert Management Corp. The parent company manages more than $7.5 billion in assets, from domestic and European real estate to backing startups with venture capital.
Venture capitalists pool large sums of money from a variety of sources -- pensions, banks, endowments, foundations, corporations, the rich and the firms themselves -- for the purpose of finding and funding rapidly growing companies that have potential to give investors big returns.
Harbert's fund, at $52 million, is considered small by industry standards.
"A venture fund always likes to invest close to home, so you have that by having Harbert in town," said Carl Johnson, president of The Venture Forum, a local networking group for investors and entrepreneurs. Though Harbert's fund is small, "that's probably a benefit, because the size of the [investments] that they do is probably what most of the companies in town need," he said.
Where a Silicon Valley tech company may lure tens of millions of dollars in venture money, most in Harbert's portfolio receive smaller infusions, between $3 million and $5 million.
Money from a fund is put into several companies, all avidly researched before an investment is made. Partners at the firm typically join a company's board of directors.
Roberts, a partner, sits on three boards, while Hunter is on five. Their jobs can be daunting, many days spent flying to meet with companies in their portfolio unless Richmond's central location lets them drive.
The still-growing firms are hiring employees and refining their products, while the men make sure management stays on track.
"A lot of times entrepreneurs don't have the management experience -- they're great with an idea, but they're not the guys to manage a rapidly growing organization. Helping them to build the right management team is the challenging part," Hunter said. "But it's also the fun part."
The fund's investors, called limited partners, expect returns within five to seven years and for as much as 10 times the amount they put in. A return on investment is usually accomplished through a public stock offering, merger or acquisition.
But it doesn't always happen that way. Some portfolio companies fail. Some are successes, rewarding investors with big money.
Most fall somewhere in the middle, Hunter said. "At the end of the day, you're hoping to . . . generate a good return for your investors," Hunter said.
After climbing the ladder at the brokerage Wheat First Butcher Singer -- now Wachovia Securities -- Hunter paired with Will Brooke, executive vice president of Harbert Management, to start the parent company's venture capital arm. The men saw a need for private capital in the Southeast, an area that has long had a dearth of such funds.
High-risk deal-making in the Southeast lags behind that in California's Silicon Valley or Boston, regions fueled by strong universities that breed fast-growing technology and health care companies. Those firms are major targets of private cash.
"There are [local] companies that are fundable companies that aren't getting funded today because there's not enough capital in the area," said Roberts, a former senior investment banker at Wachovia Securities who was hired by Hunter in 2002.
What the Southeast boasts are some of the nation's strongest universities in North Carolina, Virginia and Maryland. The region has health care services, tech in Northern Virginia and research in Raleigh-Durham, N.C.
Richmond has a sampling of everything, and Harbert's pool of capital has room for two or three more companies, Roberts said.
However, "they're not going to invest in a [deal] just because it's local," said Gary LeClair, a Richmond attorney who has referred companies to Harbert.
Harbert, he said, is interested mostly in finding companies that have quality, "bankable" managers, but Richmond needs more of them.
"In my mind, there's never been a challenge in raising capital if you're good. In my 25 years of doing this, I've yet to see a quality company that couldn't find capital," he said. "If you took those [local companies], and moved them to Silicon Valley, they still would not get funded. When people can't get funded, the easiest explanation is lack of local capital. The reality is the deal should not be funded."
What homegrown money can do, though, is keep businesses and jobs in town, Hunter said. "If you don't have venture money locally, those companies will get taken away," he said. "A Boston venture capitalist will come in and say 'Yeah, we'll invest, but you have to come up here.'"
Harbert raised its first round of funding -- $52 million -- in 2003. The company, along with two other investors, backed Wi-Fi Internet provider Airimba Wireless in Texas with $8.5 million in January 2004.
In November 2005, Charlottesville-based Privaris Inc. announced that four venture firms, including Harbert, put $15.7 million into the company, which has developed a fingerprint-reading keychain that stores personal information. It can be used to enter buildings or make financial transactions.
Less than a year later, Harbert closed its second deal in the region, $5.1 million infused into sleep apnea-treatment company Ion Healthcare Inc. in Chesterfield County.
Most recently, Henrico County's Agility Healthcare Solutions, which has developed a wireless way to keep track of hospital equipment and patients, landed $6.25 million from Harbert and others.
Harbert is excited about the wireless trend, and many in its portfolio have a mobility theme such as Airimba, Agility and what Hunter considers its most successful portfolio company thus far, TapRoot Systems Inc., a North Carolina company that develops software for mobile smartphone handsets.
Wireless "is where most of the investment opportunity [in technology] is today," Roberts said.
With that in mind, Harbert will continue to scout for a few more investments, local and elsewhere.
"So far, we have been pretty proactive in trying to meet with all of the up-and-coming prospective venture opportunities here in the region. Some are simply too early for us to get involved with," Hunter said. "We're representing investors, so we have to do what's in [their] best interest."
This article is re-published with permission from the April 8, 2007, edition of the Richmond Times-Dispatch.
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