Plymouth Ventures is a growth-stage venture capital firm out of Ann Arbor Michigan. They describe themselves as a regional growth-stage fund meaning they only invest in the Midwest. More specifically, what they call the “Great Lakes” – as far west as Madison, as far east as Pittsburgh and as far south as Cincinnati.
They also focus on a company’s stage more so than a vertical – investing in software, advanced manufacturing and materials, telecommunications and even medical devices. But the common theme of all their investments is the company’s stage – typically growth-stage companies as opposed to seed or early-stage.
We sat down with Jeff Barry, Partner at Plymouth Ventures, to talk about Plymouth and why he likes Midwestern entrepreneurs.
Cintrifuse: Could you give me an overview of Plymouth Ventures ?
Jeff Barry: Plymouth starts seriously looking at companies after they’ve done $1 million in 12 month trailing revenue but, in reality, our sweet spot is probably between $3 million and $8 million. That said, one of the reasons we’re at Cintrifuse is we like to see the good early-stage deals. Companies that might not be ready for us now but 12 to 18 months from now we want to know them and have a relationship with them so we can act quickly when they are ready for growth capital. That’s really the goal here.
We’re also not really fans of huge cash burns. Silicon Valley VCs may say it’s not a big enough opportunity if a company is not blowing through $500,000 a month. In the Midwest, we look at it a little bit differently – we really don’t like to see companies burning more than $350,000 a month in cash.
We have companies in our portfolio doing $10 to $25 million a year in revenue but they’ve only taken in $3 to $4 million in investment. That really says a company is scalable – if they haven’t taken in a ton of cash that’s usually quite a positive for us.
We prefer to fund catalysts for growth as opposed to funding cash burn. If a company is looking to build up their sales force or beef up their marketing or create a new product or new features, that’s really what we’re funding. So that’s the long and the short of it – a simplistic view toward what we’re doing.
I think where our strength really comes out, and it’s difficult to communicate because every VC fund says what I’m about to say, but our strength is really the impact we have on the company. We’ll typically come in, join the board and are very impactful which means we’re helping to move the board from an angely, clubby type board into a professional board.
If there’s a position that needs recruiting, we might source the recruit or manage the process and put three people in front of the CEO instead of the CEO managing the whole process. If an attorney needs to be procured, we might handle that. We typically handle the inflow of interest from other VC funds and we try to help the CEO so they can focus on operating the business.
The final decisions will always come from the CEO and the other C-level guys (related to recruiting) but we try to help them out as much as possible. We want to make our presence valuable and that means doing things so the C-level management team can focus on operating the business.
CF: You mentioned you’re looking to fund catalysts for growth. Can you go through some concrete examples of catalysts you funded and how the company got to that point?
JB: Sure, so a good example right now is a company we invested in that has the best software for visualizing physical security which means taking public and private feeds and then being able to track executives around the world, being able to see increases in criminal activity, terrorist activity, bad weather, being able to formulate evacuation plans. It really is best in breed to the point where it’s used by household names to run their security operations centers.
The platform is outstanding and we thought this platform could be used for a number of different things. One of them is protecting your supply chain. So they wanted to build a similar security operation that was supply chain specific.
We had a ready base of customers and it was going to cost money to develop that product. But we weren’t developing it from scratch and that was the beauty of the thing. They needed top-end developers they could dedicate to converting and adding on to the current platform. To us, that really increased the value of the company.
That was a pretty easy bet and I don’t like to use the word “bet” because it doesn’t really apply here.
CF: So I’m an entrepreneur and I’ve got a good company everything is going well but I want to get to the next stage. Are there certain things I should be looking for – what areas of my business should I be looking to catalyze?
JB: What we see being growth-stage investors, whether it’s hardware, telecoms, software or medical devices, most of the companies we invest in got to three, four, five million dollars in revenue with a CEO who’s a good sales person and one other sales person.
Now you’re never going to get to $20 million in revenue that way. So, more often than not, we’re funding the professionalization of the sales function. They’ve got a great product and that’s why they could sell it with a small team but they really need to become a professional sales organization to get past $20 million in revenue.
What we often do is fund the recruitment of a sales VP. Once that person’s on board, the recruitment of five or six technical sales people and the development of the standard process and materials for those people to sell. That often takes a $2 million dollar plug right there. Almost every company we invest in needs to do that.
Unfortunately, it’s very difficult. You’re talking about a technical sales person who’s selling a $100,000 software package. The success rate on those is about 50%. I’d like to say that we know how to make it happen every time – I think we’re pretty good at it because we’ve been through it a number of times – but it’s not that easy.
CF: What do companies in the growth stage need to be doing to be successful?
JB: When I see a team in front of me that is very interesting, one that we want to continue to engage, they have a true confidence. There is entrepreneurial bravado and that’s different from true confidence.
They also have an interaction among themselves where you can tell they have been working together for a while and know what they’re doing. The opposite is when there’s a discomfort among the management team. That comes across too.
There’s also a positive and a negative to impatience in this growth stage. You’re supposed to be moving fast so if there is a certain level of patience that kind of worries me a little. I like to see measured and thoughtful impatience meaning this is something we need to act on.
Typically, at the growth stage, you have leadership that’s been through it before.
CF: So you’re talking about serial entrepreneurs?
JB: Yes, if they’ve been through a rapid growth phase that’s attractive. If they had a successful exit in the past, that’s very attractive.
Now the question what should they be focusing on in the growth stage: So what do they need to do more than anything to get from $5 million to $20 million dollars in revenue? It’s said over and over again but it’s true – surround yourself with great senior talent. People that can run with projects, run with business units, run with a new product and create value without having to be managed significantly.
The problem we see often in the transition from early stage to growth is the mercurial CEO who sees the organization as him and the people below him. The ones that are successful getting to $20 million in revenue have four or five C-level types, any one of which can probably sit at that CEO’s seat.
It’s difficult to do because typically at $4 million in revenue you can’t afford all those people. But as you’re growing to six, seven, eight, ten, twelve million dollars in revenue, you need to continually look at getting this team. If you get five people functioning at an extraordinarily high level, the company’s going to go and when you see it happening it’s obvious.
You also see it when it’s not happening meaning if you’re doing $8 million in revenue and the CEO is still worried about the accounting system, they’re not graduating. They’re not evolving because that CEO is still thinking like an early stage CEO.
If he or she is good, they need to graduate to the level where they have handed that type of activity off to someone else so they can think about strategic initiatives, big partnerships, how to really increase value as opposed to making sure payroll got calculated correctly.
CF: When you’re scouting out early stage companies, how do you look at a founder and know when they get to growth stage they’ll be good?
JB: For early stage there are some things like, and these are much more high-level concepts, creativity, energy, intelligence and, frankly, a bit of charisma. An entrepreneur at the head of an early-stage company needs to attract people to come in and work at under market compensation. People need to want to work for that person. The growth-stage CEO typically used to be an early-stage CEO but evolved into being a manager of growth.
In early-stage you’re creating something out of nothing and you need creativity, intelligence, energy and some charisma. It’s a different skill set but that person typically evolves into a growth-stage CEO. People like to say CEO’s are great at certain levels and might not be great at a different level. I typically like to see the early stage CEO make it through to a $20 million revenue grade and that evolves them as a professional.
CF: Is there a reason you keep your investments in the Midwest/Great Lakes region?
JB: We have pride around the impact we have on companies. Our philosophy is we want to be able to jump in the car and be anywhere within five hours. By having that ability, our relationship with the other board members and the C-level management is more than cursory.
I’m not talking about emergencies either, I’m talking about “Hey we’re interviewing a sales VP we’d really like to know your opinion of this person. We’re going to give them an offer in a week would you mind coming down and having lunch with them?” I want to be able to do that and if I have to get in a plane to do it, I probably won’t.
We also just like Midwest entrepreneurs. You know they’re not going for the billion dollar exit. They’re measured as opposed to being binary – either getting a billion dollar exit or nothing. Midwest founders will go for a good $60 to $120 million exit. They build companies from a logical perspective as opposed to shooting for the stars.
What you have in places like Indianapolis and Cincinnati are thoughtful entrepreneurs that aren’t going for grand slams but they’re going for the double or the triple. In a growth-stage fund, you want a triple every single time as opposed to one company out of ten that returns 12 times our money.
CF: Do you think being so measured hurts us on the national stage?
JB: I don’t think so, my feeling is that 5 years ago the coasts looked at investing in the Midwest as kind of a sign of “reaching”. Now it’s a sign of being proactive. Now it’s considered good strategy for the coastal funds to be investing in places outside of the coasts.
Something has attracted outside capital to Midwest technology. I’m not going to pretend to say that I know exactly what it is, I’m just saying it is happening. I don’t think these companies are hurting themselves by taking a more measured approach. And it probably is helping them.
Things are just done differently here from the coasts and I’m not going to say one way is better than the other. I don’t think one way is better than the other, it’s just a different approach. I think they both work and I think it’s better that they both exist.
CF: Where do you see the Midwest tech scene 5 to 10 years from now?
JB: It’s really hard to tell. If you asked me what my view on VC and tech in the Midwest was 5 years ago, I would have said it’s pretty dismal but I will tell you right now, good deals in Michigan get funded. I couldn’t say that 5 years ago.
I can tell you the mentality around entrepreneurship has also totally changed. In Michigan 5 years ago, if you said you were an entrepreneur, someone might have responded, “I’m sorry you’re unemployed.” It was considered a negative. It’s not that way anymore. Now if you say you’re an entrepreneur, people will say you’re so fortunate and lucky to be able to that.
The fact that the mentality has changed so much in 5 years makes it very difficult to say what it will be like 5 to 10 years from now. All I can say is I’m pretty optimistic.
CF: What do you see as the most beneficial vertical for Midwest tech companies?
JB: We’ve always thought it was the high tech aspect of manufacturing. I’ll give you an example – one of our more successful companies from our first fund was a manufacturer of pumps for water desalination plants. They looked at alternative energy and the energy crises of 2008 and 2009 and built turbo chargers that basically use the water flow in the pump in desalination plants to create their own energy.
Makes a lot of sense and seems pretty obvious but they had the most efficient turbo chargers so they took an old economy manufacturing process and turned it into a new technology. That’s cool.
We don’t see a lot of advanced manufacturing deals but we should. The Great Lakes region is a manufacturing hub and we should think about ways to get high tech products out of manufacturing. That’s where I think we have the competitive advantage.
But I’ll tell you, we see a lot of great software. That’s not what the Midwest is known for but we seem to be doing it pretty well. But, to answer your question, adding tech to manufacturing and seeing what type of products come out of it. That’s where I think our expertise should lie. I’m not saying that’s what we’re seeing necessarily in practice though.
Along those same lines, adding IoT into manufacturing should be huge. Essentially having sensors and connectors that tell us when a machine is about to break down before it does. That’s a very simple way of looking at IoT for manufacturing but I think that’s going to be revolutionary in the Midwest over the next 5 to 10 years.
CF: What makes Cincinnati interesting?
JB: To me, the entrepreneurs I’ve met down here are thoughtful, serious, no-bullshit entrepreneurs. They fit with what we expect out of Midwestern tech entrepreneurs and I think that’s what you’re selling here.
The long and the short of it is, developing a tech scene here in Cincinnati starts with being able to show people serious entrepreneurs and I think you have that. That’s the main thing.
I would call it an emerging tech market. Why am I spending time here? Because I want us to be well known in this ecosystem so that when a good deal needs to be funded we’re thought of within the first five minutes of the discussion.
We’re not raising a fund for a couple of years so that’s not why we’re here. We’re looking at Cincinnati as a necessary location for deal flow. What we’ve seen here so far continues to interest us.
Featured Image Credit: Chris Thompson