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Florida Shakes the Money Tree

Venture capitalists are beginning to take notice of entrepreneurs in the state.

[Originally published in the St. Petersburg Times (now the Tampa Bay Times); not in online archive.]

Miami—at exactly 2:22 p.m., Scott Faris rushes to the podium. The pressure is on.

Within seconds, the chief operating officer of Ocean Optics in Dunedin is racing though color slides, spewing numbers, sweating under his gray wool suit.

He has 12 minutes to pitch the company to an audience of 44 venture capitalists, investors who lend money to relatively new companies, companies that often make traditional lenders nervous.

In return, the investors acquire shares in a growing business—shares they may eventually cash in for big bucks if the company goes public.

Faris got though his presentation just fine, telling the investors about his young company, which makes spectrometers, color-sensing devices that have a range of potential uses.

But there were 23 other business owners also making pitches at the recent annual Florida Venture Capital Conference in Miami, including two from Tampa: TRADE’ex, a software company, and Provider Solutions Corp., a provider of software and services to the health care industry.

Odds are that only two or three of the companies will be approached over the next few months by venture capitalists. But even if no one lends them money, the companies can be proud that they were chosen from more than 200 applicants.

Numbers like that reveal the intense competition for venture capital in Florida. And more of the companies are getting money. The state has long lagged behind the big, money-lending areas of New York, Boston and Southern California in venture capital investment, but it’s catching up fast.

Florida ranked fifth in the country last year in venture capital investments, receiving $415 million. That’s a big step from 1995, when the state ranked 17^th with $110 million. In 1996, total venture capital investments were $376 million.

Some of Florida’s gains can be attributed to the help of Enterprise Florida, the state’s public-private economic development group.

But more important, venture capitalists say, is that Florida is growing as a center for business, both in size and sophistication.

Seven years ago, the forum’s first year, “some speeches were so bad people were inclined to throw tomatoes,” said Jim Davidson, a venture capitalist with Tampa’s South Atlantic Venture Funds and chairman of this year’s conference.

Since then, competition to attend has increased, as has the interest from venture capitalists. The atmosphere has become unfailingly professional.

But while Florida’s efforts are growing, competition from other top states keeps getting tougher. Companies in California, first in the nation, got $4.5 billion in venture capital last year, a 109 percent increase over 1995. And companies in second-ranked Massachusetts received more than $1.2 billion, a 15 percent increase.

Meeting the Money

Some of the success in Florida stems from forums like the one in Miami, sponsored by private businesses and Enterprise Florida. In its seven years, the forum has helped 14 companies receive a total of $58 million. Last year, three companies got a total of $6.5 million after making presentations.

A venture capital forum for North Florida will be held for a fourth year in Jacksonville in March, with a dozen or so companies making presentations. Orlando will sponsor its third venture capital forum in October. Both of those conferences are smaller than Miami’s.

One downside: All the forums are organized by different groups, with no central clearinghouse for information. Still, Enterprise Florida has been a help.

The group publishes a Florida Venture Finance Directory that lists sources of venture capital and offers networking advice to young businesses.

And it has put together the Cypress Equity Fund, which has $35.5 million collected from Florida banks and pension funds, most of which had never done venture capital investing before.

The money is given to venture capital firms that dole it out to new companies, and then venture capital firms sometimes invest additional money. Since the fund began in December 1996, five Florida companies have received $93 million from Cypress-sp0onsored venture firms and their co-investors.

For businesses seeking investment money, comp0etition is intense. Last year, South Atlantic examined 800 businesses and decided to invest in just over 8 percent of them, which Davidson said is typical. Mike Morris, Ocean Optics’ president, visited 50 venture capitalists in the company’s early days before he found one willing to invest.

Maturity Brings Capital

So why does Florida lag behind some other states in venture capital deals? Some reasons:

Investors look for companies that have been around for a few years and have an acceptable balance sheet. Many growing companies in Florida are still too young to have that kind of track record.
“There’s money here to invest,” Davidson said. “What there is not, is money to invest in very early-stage and startup companies.”
Florida isn’t considered a center for high-tech development, the source of much new business growth.
“California is probably 25 years ahead of Florida,” Davidson said. “Florida has focused on tourism and agriculture, but not so much on high-growth industry.”
Venture capitalists look for experienced management, and many young Florida companies fall short in that department.
Investors are most interested in management teams that have successfully taken a company public. Most in Florida haven’t. But the situation is improving as businesses here become more sophisticated.
Most large venture capital firms are located out of state. While many of the smaller investors at the Miami conference were from Florida, only about a third of the giant venture firms with $50 million or more to invest have offices in the state.

“Capital flows across state boundaries very easily, but it will not seek out small opportunities in Florida, because it’s too far away,” said Jonathan Cole, a lawyer at Edwards & Angell in Palm Beach and the conference’s program chairman.

It Starts With Smarts

If Florida is to keep growing as an investment center, venture capitalists say, businesses here need some help. That’s where the educational system comes in.

“When you look at Silicon Valley or Boston, one of the most obvious things they have and we lack is an interplay between a strong technological education system and the business community,” Cole said.

The University of South Florida hopes to address that need with its planned Center for Entrepreneurship and Global Management of Technology.

One of its goals is to create a degree program that will give students a grounding in both business and technology. A similar program has been in place for 15 years at the university’s engineering school and is working well. If USF’s center proves effective, other universities may follow suit.

The payoff for many venture capital investors comes when a company goes public, and many young companies in Florida are taking that route. A total of 55 Florida companies went public in 1996, and 41 went public in 1997.

And while many businesses have trouble getting investment money here, those that do are sending a smoke signal to venture capitalists across the country.

“We are going beyond the image of sun, fun and parties,” Lt. Governor Buddy MacKay said at the forum. “We are becoming one of the entrepreneurial centers.”

The Top 10 States for Venture Capital

California–$4.5 billion
Massachusetts–$1.2 billion
Texas–$808 million
New York–$433 million
Florida–$415 million
Illinois–$404 million
Colorado–$393 million
New Jersey–$360 million
Washington–$360 million
10. Pennsylvania–$340 million

Source: Coopers & Lybrand LLP Money Tree survey

Color of Success Hard to Visualize

If Mike Morris’ company is successful, it’s due at least as much to his persistence as his product.

The president of Ocean Optics in Dunedin started his business career making fish tank equipment with his wife. Their “factory” was a shed in the back yard. Their first year in business, they sold 125,000 water testers to pet stores. The bad news: They only got 40 cents each for them.

So Morris, who has degrees in biochemistry and marine science, left the fish business and got a $500,000 government grant to try to determine the ocean’s role in global warming.

The grant money ran out after two years, but in the course of his research, he began to develop sophisticated miniature spectrometers, color-sensing machines that he thought had enormous potential beyond the confines of the sea.

They might be used, for example, to pinpoint cancer tissue, find jaundice in babies, measure contamination in hamburgers or judge the quality of diamonds—applications that are being developed now.

Morris decided to launch a business, brought in a management team and put together a business plan.

Then it was time to make the rounds to venture capitalists. He encountered only blank stares and polite refusals when he tried to describe his product.

“The venture world was like, well, what is a spectrometer? They never figured out what the heck we were talking about,” he said.

He also struggled with banks before he found one willing to give him a commercial line of credit. And like many fledgling entrepreneurs, he asked for help from family, friends and colleagues, who put up a total of $400,000, enabling the company to get started.

Only after his products became successful and sales were doubling every year did venture capitalists begin to pay attention, and even then it was a hard sell. After making presentations to roughly 50 venture groups, he found just one willing to help: Calvert Social Ventures in Bethesda, MD, a firm that specializes in socially conscious ventures and liked the product’s medical applications.

The company invested in Ocean Optics without ever asking to see its business plan, leaving Morris happy but cynical about the objectivity of venture financing.

“Getting somebody to invest in a sales call,” he said. “Ultimately, everybody buys something for psychological reasons. The same is true for buying stock in a company.”

Ocean Optics had $6 million in sales last year and now employs 31 people at its Dunedin offices and Orlando plant. The company’s equipment already has a wide range of uses, from measuring pollution in oil effluent to helping control the color of mouthwash and ballpoint pen logos.

The company was the first to develop miniature spectrometers and still leads the field. It never got a patent, though—in the early days, Morris couldn’t afford one.

Now, in order ot expand and develop hamburger sensors and jaundice monitors that can be sold directly to consumers instead of to corporations or medical centers, Ocean Optics is making the rounds for venture capital again.

This time, with a more recognizable product and high-profile customers such as NASA, Dow and Shell Oil, Morris said he feels good about his company’s pitch for investment at the recent Florida Venture Capital Forum in Miami.

But he won’t know for months. In the meantime, he’ll keep knocking on doors.