The dearth of early-stage capital available to fund young technology companies in the Philadelphia region is nothing new.
It was a source of concern for entrepreneurs and economic-development types in the late '80s, when I moved here. Hand-wringing resumed early last decade after the bursting of the technology-stock bubble. And since the financial crisis-induced recession, anxiety has grown that the region has seriously slipped as a center for venture capital.
That's why it was encouraging to hear that NextStage Capital, of Audubon, Montgomery County, apparently is raising a second fund to invest in early-stage software companies. Pennsylvania's Commonwealth Financing Authority approved a $1.5 million investment in NextStage Capital II L.P., which the state said would be a $25 million fund.
It comes on the heels of First Round Capital, which has an office in West Conshohocken, raising $135 million for its third fund in May geared toward early-stage investments. In addition, Bala Cynwyd's Osage University Partners closed on a $100 million fund focused on start-ups in March 2011.
I know it's hard to cheer heartily for pools of capital. But that money eventually does get cycled into tech firms that are early in their development, with small amounts of revenue and typically unprofitable.
NextStage managing partner Rob Adams declined to discuss the new fund, citing legal restrictions in effect when any firm is in fund-raising mode. But he was happy to discuss the strategy that built the first portfolio of 15 companies, all of which are located in New Jersey, metropolitan New York, or Pennsylvania, from Philadelphia to Pittsburgh.
Outside of investing in information technology firms, NextStage has no "theme," Adams said. Rather, it deliberately diversified, putting an average of $500,000 into software and software-related firms in the media, health-care, financial-services, event-management, network-security, retail, and business-process management fields.
Early-stage investing carries with it all sorts of risks, Adams said; what helps minimize them is choosing firms with the right management team. That's what I expect just about any venture capitalist to say, but Adams went on to describe how critical it is.
"In this area, business opportunities change meaningfully over time," Adams said. "It takes skill and discipline and an emotional unattachment to say, ‘This is not working like we thought it would,' and then execute a 90-degree turn to pursue a better opportunity."
He would not use the overexposed word pivot, preferring agility to describe the nimbleness needed by tech entrepreneurs to shed their original ideas in favor of alternatives.
"Some entrepreneurs are so emotionally wed [to their plan] that they continue to bang their heads against the wall until there is no more money," Adams said.
Pennsylvania's commitment to NextStage II comes from the $60 million New PA Venture Capital Investment Program created during the Rendell administration. In 2008, NextStage received $4 million for its first fund, begun in 2006 and totaling $25 million. In all, the state said, it has now committed $50.4 million to various venture firms that in turn invest in technology-based businesses.
Another investor in NextStage II is the New Jersey Economic Development Authority, which approved a $2 million investment in March.
While no NextStage portfolio company has gone public, five of the 15 have been acquired: •HxTechnologies Inc., a Philadelphia health-information exchange, was bought by Wayne's MEDecision Inc. in 2009. •Dayak, a Fairless Hills online employment marketplace, was acquired by Utah's RecruitHire in 2009. •Malvern's AnySource Media was acquired by DivX Inc., of San Diego, in 2009. •Moda Technology Partners, a Wayne quality-assurance software maker, was bought by chemical giant Lonza Group A.G. in 2010. •Orbius, a Malvern-based social-media platform, was bought by King of Prussia's Beyond.com Inc. in 2010.