Strategy
The southwest Opportunity. It’s not surprising this region has a strong history of technology development. Its two national research laboratories, five research universities and multiple military research facilities spend more than $5 billion in research and development each year. The result is a dense population of scientific and engineering talent, as well as world-class technology.
Today, there’s an increasing number of experienced entrepreneurs, a growing sophistication in the technology transfer process at the research institutions and an unprecedented number of venture capital firms with offices in the region. Of all these factors, however, seed stage capital remains the greatest need. Most venture firms are interested in investing in companies with a higher degree of maturity. For these companies to reach that point, they require early funding, substantial mentoring and strategic advice. Verge Fund is successful by providing high-touch, value-added investing at the earliest stages of a company’s life.
Key Investment Tactics. Understanding this unique climate and opportunity for investing in the region, Verge Fund will apply the following tactics to maximize the rate of return to investors and to mitigate the associated risks of early-stage investing. These tactics have been developed from the team’s 64 years of combined experience investing in and evaluating companies.
1. Initial investments only at the seed stage: Verge Fund only makes initial investments in portfolio companies at an early stage: the seed or first round. For a smaller amount of invested capital, the Fund can own a much larger share of the company than a mid- or late-stage investor. Because of this, the Principals will have a much greater impact on the business and its strategy.
2. new mexico & southwest investments: The Partnership will only invest in companies located in the Southwestern United States, with a specific emphasis on investments in New Mexico and the immediately surrounding communities, subject to rare exceptions where the Partnership may co-invest with a strong local group from another geographic market. This will allow the Principals to monitor the portfolio on a continual, real-time basis and will provide direct access to the deal flow in the region.
3. Active participation with or as management: Many early-stage companies have entrepreneurs or inventors with limited or no experience in starting or running a company. That’s why the Verge Fund team is very active in working with management or, in some cases, serving as management until experienced executives can be recruited to the company. While extremely time-consuming, this “incubation” approach, coupled with the use of Entrepreneurs-in-Residence, provides the Fund with complete visibility into the operations of the portfolio company, so that issues and problems can be addressed early and quickly.
4. building operating companies: The Principals believe that the "hits" driven model prevalent in the current venture capital industry is not sustainable, and are focused instead on creating a diverse portfolio that includes a significant number of companies ultimately becoming successful. This means building promising opportunities quickly into operating companies. The Principals identify those opportunities which can make early entry into the marketplace, generally by identifying a specific target niche market which the company can develop and exploit before moving to broader markets. This allows for significant enterprise value creation on a small number of dollars, and strengthens the company's position - and therefore the Fund's position as seed investor - when raising additional follow-on rounds of capital.
5. Later-stage investments only in existing portfolio companies: Verge Fund makes later-stage investments only in follow-on rounds of existing portfolio companies as their business models are validated and the risk factors are reduced. The Fund continues to invest in each round of financing, but increasing amounts of capital will only be committed as portfolio companies show a more certain promise of a liquidity event, that will justify a return commensurate with the increased investment.
6. Technology investments: The Fund’s focus is primarily on investments in technology businesses including cleantech, electronics and materials, human factors and software-as-a-service. These are the industries the Principals know best and which represent the bulk of the opportunities into which the Partnership invests.
7. Leveraging non-equity dollars: The early stage of a new enterprise is the riskiest phase, so optimum use of equity cash is extremely important. The Principals help arrange non-equity funds for these companies with a variety of sources: bank lines, venture leasing, various federal government loan and grant programs, strategic corporate partner grants, state and local economic development programs, and extended or deferred vendor credits. Although often unused, these are commonly available to the portfolio companies with little or no dilution to the existing shareholders.