TRYING FOR LIFTOFF In alignment
In the startup world, investors look to make big bets on ideas with the potential to soar
There are startup companies and then there are startups that reach what Ned Renzi calls escape velocity.
It doesn’t happen often: About half of all new businesses flame out within four years, according to data analytics outfit Statistic Brain Research Institute of Los Angeles. And Mr. Renzi said about a third of startups just break even after five years.
But Mr. Renzi, founding partner at seed funding outfit Birchmere Ventures in the Strip District, is looking for the small number of startups that undergo torrid growth — exploding by a factor of 20 in five years to reach $100 million in revenue. It’s a steep climb. Among 30 companies in an investment portfolio, for example, only four or five might light up the sky, he said.
“It rarely happens, but when it does, you have magic,” said the 51-year-old Somerset County native. “These are metrics that could get you funded.”
This is a story about that startup rocket fuel — capital investment — that comes from individuals and outfits like Birchmere willing to bet against the odds for a chance on a big payday. Birchmere took such a chance with Larimer drone company Identified Technologies Corp., so the story is also about the value of personal relationships to succeed in Pittsburgh’s startup world.
The local supply of venture capital is growing, according to a report by North Side-based Innovation Works. Pittsburgharea venture capital firms invested $217.4 million into 35 deals in 2015, a 35 percent increase from 2014 and the fourth highest investment total since 2001.
Identified Technologies founder and CEO Dick Zhang, 23, downplays the role of venture funding, saying it’s the “sexiest kind of capital, but you could do as well or better with alternative funding mechanisms.” Besides, he added, “There has to be a business to grow before you can talk about funding.”
The business Mr. Zhang envisioned when he set up shop at AlphaLab Gear in East Liberty was selling commercial drones.
Think of an engineer walking a miles-long gas pipeline with a GoPro camera mounted on his hard hat, then think of a drone doing the same job by buzzing the pipeline, snapping pictures.
Before soliciting capital to fund the next big idea, there must be a product, something that “solves a compelling problem in a unique and better way,” Mr. Zhang said. Listening to the market is the way to do that, he said. “It’s listening to customers.”
Mr. Zhang believed he had just that product when he came to AlphaLab Gear’s offices in 2013. An ear for the market was among his skills.
Drones were hot as consumer interest in the devices rose with e-commerce giant Amazon’s announcement of its own plans for delivery drones. Mr. Zhang, a Princeton, N.J., native with a degree in engineering, began with a business plan to build and sell commercial drones.
Among the benefits offered at AlphaLab are talks by veteran entrepreneurs and investors, like Mr. Renzi, an AlphaLab board member. Mr. Zhang remembers Mr. Renzi’s talk about venture capital and the invitation to continue the discussion during office hours.
Mr. Zhang signed up for a 15or 20-minute session, then another. Something clicked.
What Mr. Zhang saw in Mr. Renzi was what he calls “philosophical alignment.”
“There was a level of trust that developed on an informal basis,” he said. “An investment is great, but none of it works until you have that higher relationship.”
Mr. Zhang valued Mr. Renzi’s willingness to listen because “it’s very easy for an investor to never listen.” That would’ve been a deal breaker.
An assessment was happening on the other side of the table, too. Does this person have a lot of horsepower, a high intellectual ceiling; can he learn things quickly and synthesize a solution, Mr. Renzi wondered in those early meetings with Mr. Zhang. Does this person have grit; can he get knocked down and get back up?
“I’m not a big fan of that first
“There was a level of trust that developed on an informal basis. An investment is great, but none of it works until you have that higher relationship.” — Dick Zhang, Identified Technologies founder
impression,” Mr. Renzi said. “But Dick would continue to undercommit and overdeliver.”
Mr. Zhang consistently exceeded growth metrics for revenue and numbers of new customers, Mr. Renzi said. Mr. Zhang also showed that he was coachable and that he could transform new information into ever faster growth for Identified.
Did Mr. Zhang meet Mr. Renzi’s expectations? He was “off the charts,” the investor said. Overperforming was part of the entrepreneur’s DNA.
They became friends. A mentoring relationship developed and, in April 2015, Mr. Renzi’s venture firm — which focuses on seed funding, the earliest funding for startups — led a funding round to raise $2 million for Identified.
Identified’s drones buzz big construction, highway and mining sites with updates, tracking progress of heavy equipment, much of which is leased. Energy companies also use the drones to inspect pipelines.
Startup companies often switch directions, tearing up business plans and replacing them with new ones. Mr. Zhang said he realized the higher value market for his company was in developing the software needed to analyze photographs taken by drones.
Identified altered its business model, with the shift “squarely driven by customers,” he said.
The startup’s corporate clients were attracted by the prospect of saving 70 to 90 percent on site-monitoring expenses, so picture analysis was key.
‘Escape velocity’
In addition to venture capital outfits and angel investors, startup companies can look to the Urban Redevelopment Authority of Pittsburgh and the federal government for funding, Innovation Works Chief Investment Officer Gary Glausser said.
Innovation Works, which provides seed capital and other support for new companies and sponsors AlphaLab Gear, made a $50,000 investment in Identified Technologies.
Achieving “escape velocity” requires creating a track record that convinces investors of the company’s earning potential, Mr. Glausser said.
“You need to make it to $100 million in five years to make it attractive to venture firms,” he said. “That signifies that it’s a large and growing market.”
Mr. Renzi, who now has a seat on Identified’s board, takes Mr. Zhang on periodic business trips to San Francisco, where Birchmere has an office, to introduce him to investors. Birchmere also paired Mr. Zhang with a CEO coach, a common practice at the firm that helps improve the chances for success.
The startup failures for Birchmere’s portfolio are too numerous to mention, Mr. Renzi said. But there are career-making success stories as well.
Birchmere was among the early investors in Cvent Inc., an event planner based in Tysons Corner, Va., that struggled after its founding in 1999. But the company became profitable in 2003 and by 2011 was growing 50 percent a year.
In 2013, Cvent conducted an initial public offering that raised $117.6 million and created market capitalization of more than $1 billion. Last year, the company was acquired by Vista Equity Partners for $1.65 billion.
Identified will need to raise bigger investments for its anticipated next funding round, called Series A, which are bigger deals than those done by Birchmere. By then, Mr. Zhang hopes to be a familiar face to the investment community.
And Identified may well be on the trajectory to achieve escape velocity: the company doesn’t disclose financials, but Birchmere led another funding round of $1.5 million in June 2016 as Identified’s revenue ballooned by 900 percent for 2016 and the number of customers grew by 325 percent when compared with 2015.
The number of people working at the firm reached 25 last year, more than double the number in 2015.
Will Identified be the next startup supernova, reaching $100 million in revenue by 2019?
“It can be more than $100 million, right?” Mr. Zhang said, smiling.