Venture capitalist foresees continued growth

By KRIS HUNDLEY

© St. Petersburg Times, published June 19, 2000

TAMPA -- W. Scott Miller has been a venture capitalist since 1991, putting institutional funds into about 30 start-up companies, all of which he describes as successful.

He said this experience has helped him separate potential winners from likely losers.

"They teach bank tellers to spot a counterfeit by showing them the real thing, over and over again," Miller said. "Then when they see a fake, they can identify it immediately. That's one of the things I've learned from my years in this business."

Miller, 36, had been an investment banker prior to joining South Atlantic Venture Partners, Tampa's first venture capital firm, in 1991. In 1997, he and partner W. Radford Lovett II formed Lovett Miller & Co., with offices in Tampa and Jacksonville. Today they manage $170-million in three funds; about $70-million of that total has been invested or committed to portfolio companies, with 12 deals completed in the past year.

Lovett Miller has raised its money from wealthy families and individuals, a university endowment and a couple of corporate profit-sharing plans. From the time the funds are created, Lovett Miller has six years to invest the money and another seven years to harvest returns. "We want investors who understand it's a very long-term business," said Miller, who declined to speculate on potential returns on his company's funds. "Their money can be locked up for anywhere from one to 10 years."

In his company's offices on the 26th floor of the AmSouth building, Miller talked with the St. Petersburg Times about the booming number of start-ups looking for cash, the corresponding growth in the number of venture capital firms and how his company decides where to put its money.

Q: How has the pool of potential investments changed over the past nine years?

A: The reduction in communication costs has allowed new technologies and new business models to evolve. For instance, there are a number of application service providers (ASPs) now which deliver software over the Internet, making it less costly for a company to purchase, maintain and upgrade software than in the past. That's a major sea change and it has created a significant number of entrepreneurial opportunities that did not exist five years ago. And we've invested in a number of ASPs, including Employease, PeopleClick.com and Novient.

Q: With so many new players in a brand new field, how do you select your investments?

A: You have to find the industry leaders and the acid test is who is winning the customers over. Ten years ago, you could look at a company's sales and profits and ascertain the leaders. But in this market, people can pop out of the woodwork and you can get sideswiped. That hasn't happened to us, but it means that a lot of our companies have to run faster than they anticipated.

A company also has to have the ability to attract and retain first-rate talent. Well-capitalized companies with good markets are taking the talent out of companies with less opportunity. Especially with the readjustment we're seeing in the stock market, if a company's stock is down and if the option strike price is high, a company is at risk of losing people.

Q: At what stage does Lovett Miller invest in a company?

A: When it's a post-beta site and they're actively selling their product or service. We want to understand where that product is on the customers' priority list and we want to know the duration and cost of the sales cycle. So we talk to a lot of their customers. Though we occasionally look at companies earlier -- some people come to us with business plans -- that's not our primary interest.

Q: What is the size of your investment?

A: Typically we're the first round of institutional capital and we tend to support the company through following rounds of financing, up to the initial public offering. Our investment starts at $2- to $4-million and can go up to $10-million over multiple rounds.

Q: How are deals structured? What do the portfolio companies give up, what do the investors get and how does Lovett Miller make its money?

A: We don't disclose details of our deals, but typically the venture fund gets an ownership interest in the company in the form of convertible preferred stock, which converts to common stock.

The managing partners, Lovett Miller, get a percent of profits when the fund is harvested. I'd say 99 percent of all venture capitalists get 20 to 25 percent. We also get an annual management fee based on the size of the fund to cover our overhead and expenses. That fee runs about 2 percent industry-wide and it's pretty standard that the management fee is credited against the profits. In other words, it's part of the 20 to 25 percent we get overall.

Q: Though many of the companies you've backed are high-tech, you've also invested in some out-of-favor sectors, particularly restaurants and health care. What's the criteria?

A: Ten of the 12 deals we did in the past year were technology, with the two exceptions being Gold Coast Restaurants Inc. and MARSMusic Inc., which was founded by Mark Begelman, the guy who built Office Depot.

With Gold Coast, it was a matter of coming across a very talented management team, guys from Apple South, in a market where the unit economics, in this case Johnny Leverock's Seafood Restaurants, are very attractive.

In general we're targeting companies that solve business problems in a reduced cost format while delivering better customer service. In health care, for instance, we've invested in Proxima Therapeutics Inc., a company (in Atlanta) with a device that delivers booster doses of radiation to brain and breast cancer patients at lower cost, more accurately and less traumatically. The technology was developed at Johns Hopkins University and we're co-investors with Johnson & Johnson.

Q: Does the growing number of competing venture capital firms put you under pressure to find potential investments faster?

A: This is a highly competitive market but it's also highly personalized. And with companies raising more money than ever, at times we're pure competitors with other investors; at other times, we cooperate. We have plenty of time to invest our funds because ultimately we're all graded on how well our investments do.

Our strategy is to offer our portfolio companies entree into financial, technical and marketing talent. We've got seven people in our organization, including two former chief information officers, and that gives us a deeper bench through which we can help our portfolio companies.

Q: You previously worked with Don Burton, founder of South Atlantic Venture Partners, who recently announced he was temporarily putting investments on hold because of inflated valuations. What is your opinion of the market, particularly for technology companies, whose stock has taken a severe hit since Burton made his decision?

A: Don has had a successful track record with four funds. So why would he risk that record if he feels the market is too high?

The public market adjustment in technology stocks makes things a little more sane. People may realize everything doesn't go to the moon. But I believe we're still in a significant expansionary period, based on the demographics of the baby boomers and their purchasing power. And I think we're good at assessing a company's prospects and its ability to generate capital gains. And we can afford to wait to take our portfolio companies public until the market is ready.

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