What Owners Need to Know About Venture Funding -John Burns

What Owners Need to Know About Venture Funding  - John Burns

Are you looking for ways to fund your company and you’re interested in venture funding? Perhaps you wonder what it is, and whether it would be a good fit for your business? Today we’re talking to John Burns of Maine Venture Fund to get all your pressing questions answered!

Rich:  Our next guest has 30 years of institutional investing experience. The last 12, as Maine Venture Funds managing director, where his responsibilities include the full range of venture capital investment activities. He has been directly involved with bringing risk capital to more than 40 Maine companies, and has led the fund through a number of successful exits. He is passionate about contributing to a resilient and sustainable Maine economy by supporting innovation, entrepreneurship, and sustainable corporate growth that contributes to opportunities for Maine people and an economy that works for all and preserves our history while embracing change. We’re looking forward to discovering what owners need to know about working with investors and venture funding with John Burns. John, welcome to the show.

John: Great. Rich, thanks. Great to be here. Thanks for the opportunity,

Yury: John, this is exciting. So let’s dive right in. Could you tell us, how did you find yourself investing in Maine businesses?

John: Oh sure. Well my background is, despite my jacket and I’m promoting our relationship with the Dartmouth’s Tuck school, we have used interns from the Tuck school for the last decade or more. But my background was in large cap stock and bond investing. So I got my MBA at Babson College and then found my way back to Portland and went to work for what was then Union Mutual, and was there through the demutualization when it became Unum. I worked in the investment division, as I said, doing large cap stocks and bonds portfolio management, research analysis. And then in 2000, and actually some of the numbers that I gave you, unfortunately which are a little outdated, I’ve been at the fund now for actually 20 years ,which is mind boggling for me.

And so a friend of mine told me that the fund was looking for its initial manager and I thought, well that’ll be really interesting to do and a way to give back to the state of Maine and use my skills and expertise and education. So I took the role thinking it’d be good for a couple of years. And it was, it’s been longer than that.

Yury: Can you speak a little bit about what does your role look like as the fund manager? What exactly do you do?

John: So the fund is, think of it as a pot of money that all of us as state of Maine taxpayers, think of it as a pot of money that we’ve all contributed to. So the state has dedicated a certain amount of money to that pot. There’s a mostly all volunteer private sector board of directors that has statutory responsibility for that fund. And they hire me and I hire my team, which is just a couple of really high quality individuals.

And so the board has a statutory authority to oversee the fund. They hire us and we do the day the day searching for investment, doing diligence on companies, going through the whole diligence process. And ultimately I’m recommending to the board that we invest in a company, negotiate the terms of investment, very often help those companies find other investors to come in alongside of us and investing in that company. And then once we make that investment and we work very hard to try to support that company in any way that we can to make them successful, add employees and create job opportunities for Maine people.

Rich: I have this, I have this vision in my head of that giant pot of money and just being Scrooge McDuck and just swimming through it, pots of gold.

John: Yeah, it’s not quite like that. It is a pot of money, most of it was actually at work in Maine companies. The way that the fund continues on is that if we’re lucky enough to have a financial return from that investment, then that comes back into the fund. And then we look for other great Maine companies in which to invest.

Rich: So is this all public money, or is it a mixture of public and private?

John: It is at this point, it is all public money that the statute does allow for the board to create what’s called a ‘side fund’, which could be private money. At this point it’s all public. We’ve had some federal dollars that we took advantage after the great recession. Some of that stimulus money was available to states, and some of that money got funneled through us from the ECD to put to work.

So yeah, the other monies can be co-mingled with the state money. And most of the state money has come from economic development bonds that get issued periodically. So the state may issue a $50 million bond, a good bit of it might go to Maine Technology Institute for their great MTF program or other initiatives. And then some of that might go to the Maine Venture Fund.

Rich: So you get this money from the state, from the taxpayers, and then you’re looking to invest in Maine businesses. Can you talk to us a little bit about what that looks like? How do you find these businesses? Do they come to you? Do you go to them? What is it that makes for that kind of relationship?

John: Right. So we try to stay as you know, because you’ve interviewed a lot of our colleagues in this ecosystem, if we can call it that. So we try to stay within networks throughout the economic development groups throughout Maine. So the local economic development districts, the Maine Technology Institute, Maine Angels, even banks. So all sorts of people that might impact with an early stage company that has the ability to scale and provide meaningful job growth, meaningful job opportunities for people, and ultimately a financial return to the investors.

So we try to keep our eyes and ears to the ground so that we can be proactive in reaching out to companies that might be a good fit for us. Sometimes they do come across the transom, sometimes they might be an introduction through MTI or through DECD or through FAME. And then what we’re really looking for is that company that has the ability to scale, which means to grow revenues pretty rapidly because they have something truly unique.

So we’re looking for companies that can scale, that can scale relatively rapidly. And as I said, have the kind of jobs that provide the kind of salaries and compensation that can support a family, support individuals, and create a good quality of life for employees and Maine people.

Yury: When you talk about scale do you have a particular type of businesses that tend to scale faster than others? Or are there any businesses that can’t even scale that just have certain limits, certain parameters and that’s where they stay?

John: Sure. Well I mean, to go to the extremes, which is always easy – the ones in the middle are always harder – but to go to extremes, a corner store that sells groceries and your coffee and those kinds of things, those are by definition really scalable businesses. You can make those into very nice profitable businesses for the owner or a few owners because they make a great product, they’ve got good marketing, they have a great large customer base that’s loyal and they know how to produce a profit on whatever they’re selling. So that’s not really a scalable business.

A scalable businesses is one that has a product or service that’s quite unique. And that doesn’t have to be sort of a patentable technology, although that would be great. In some cases it’s much better to just have a trade secret, something that this company knows how to do very, very well and that they sort of keeping themselves so they don’t have to share with the world through the patent process. But a product or service that one of the old saws and venture capitalists, something that’s 10 times faster or 10 times cheaper than the competition. You know, so that it’s order of magnitude different than what the competition is providing. So now you get into the market and customers flock to this thing because it has those qualities. And you know, it’s something that you can make once and sell many times.

So that’s why you see a lot of venture capital investing in software companies. And now that we have this technology, the computer technology, internet, what they call SaaS companies, which stands for ‘Software as a Service’, which you probably know, that’s a product that you can make. You basically make it available on the web and people download the application, they load it up and they start using your product. So you’ve made that thing once, your job is to keep that code fresh, keep it with good features and functionality so that your users love to continue to use the product and continue to download it and pay you that monthly fee.

So investors love a SaaS business model because that’s recurring revenue. You don’t have to remake a new widget every day to make another sale. So that’s a good business. It tends to be high margin. It takes a while for the revenues to get to the point where it’s covering all your costs, because you’re selling this product at $10 a month or $15 a month, so you got to have a lot of subscribers to get there. But SaaS businesses sort of the extreme on this end of a scalable business, if you can really get those revenues ramping up and customers coming on. As opposed to the corner store, which is providing your morning newspaper and coffee.

Rich: So some more questions around, like, what are the right businesses for you? Because this is taxpayer money. Do you have obligations when it comes to ROI? And are there also limits on what kind of company it is? Like in other words, do you have to invest in Maine based companies, and if they are Maine based companies, how is that defined? Like, can I work by myself and have a hundred remote workers that are all out of state or out of the country? Or are you really looking to invest in companies that are invested in Maine?

John: Yeah. Yeah. So clearly that’s becoming a little fuzzier, with distributed workforces and internet technology. So what we say is that when we invest in a company, we want to see that the preponderance of their operations are here in the state and that they have plans to grow operations and grow employment here in the state. Certainly, ultimately we want our companies to be national whatever industry they’re in so that they’re bringing these jobs back to Maine and bringing dollars back to Maine. So we understand that as companies grow, center of gravity may shift. But when we invest, they need to have sort of their center of operations here, most of their employment here and commit to growing jobs in Maine.

You know, good point, Rich. You know, more and more companies are finding talent wherever they can find the best talent.  Especially in programming and coding and that kind of thing. So if you have a great coder in New Mexico, then that’s the person you want to hire because that’s the best talent you can find. So we understand and work with our companies that way. So it’s a little bit fluid, but what we really want to make sure that there’s a Maine impact, and as long as possible.

And you know, we’ve had companies frankly that have been here for a long, long time. They may sell it to another company that they’ve had a successful exit, I call it, and that new owner may keep the company here for a while, but move sort of the center of operations to New York or wherever.

But the weight that that company has left behind has been in very many cases insignificant. And so certainly worth the fund’s investment in that company and time spent.


Yury: John, when we’re talking about investment options as a business owner, why would I want to choose the investment fund versus other funding options?


John: Yeah. Well, for most early stage high growth companies they’re not bankable, right? So most of these companies, because their ambition is to really scale and turn this into a 20, 50, a hundred million dollar revenue company or more. These are companies that have grand ambitions. So in the very early days, they’re investing heavily in their product and their marketing and building a team. So in the very, very early days, most of these companies are losing money on a monthly basis so they’re not bankable.


The banks want to say, “Well, what’s your debt service coverage?” And with all due respect to Machias Savings, I mean, you know, we want to get a company to the point where it’s your customer. We want a company to grow and be so successful and have that balance sheet so clean and their earnings so strong, that you are happy now to lend them capital. And that’s the way it should be. Venture capital is to take these early stage risks and help that company get to the point where they can go to a bank and say, “Okay, we’re now bankable. We now have cash flow that’s able to cover the debt service on our loan from you, Machias Savings”.


So yeah, this kind of capital is for those businesses that knows they’re going to have expenses greater than revenues for a while, while they get to that inflection point, when they can really start to grow and now revenues exceed expenses and they can grow the balance sheet. So it’s high risk capital for sure. It’s anybody that invests in a very early, early stage company and an equity investment has to be prepared to lose that money completely. So that’s key, and that’s in any disclosure statement when we invest in a company and the people that might be joining us in that investment round that’s in bold print and all of the documentation, “be prepared to lose this month because you very well may.”

Rich: When you invest in a company, if you were to invest in my company, what else do I get besides the money? Like, do I get stewardship? Do I get partnerships? Do I get connections? Is there more than just cash that Maine Venture Fund brings to the table?

John: Yeah. So as I said earlier, we have an 11 member board of directors, 10 of those people are private sector individuals with relevant experience in venture investing on one side of the other. Maybe they were a CEO of a startup company, or they’ve been a venture capitalist themselves. The 11th member is the DECD commissioner, Heather Johnson, or her designee, which is currently Charlotte Mace and her office.

So as I said earlier, when we are doing our research and analysis on a company, called ‘due diligence’. We’re diving in. My colleague, Joe Powers, and I will bring in a couple of our board members to work with us on that diligence team. If we ultimately make an investment, those private sector individuals with relevant experience will stay on as sort of mentors or advisors working on the staff to support that company in any way we can.

The other way directly that we help is one of the things we’ve learned over 20 some years managing this fund is that board governance is key to successful companies. Companies that hold themselves accountable to a mostly independent board of directors and keeps track of their metrics, measure themselves against their goals and milestones, does attribution analysis for why they’re hitting their goals or not, and has that board governance piece do better than companies that don’t have that in place.

So we insist when we invest that the company have a board of directors that stays as independent as possible, as many members on that board that are independent members ideally the chair of the board is not the CEO or founder. Sometimes in a very early stage company that’s the case, but we try to move quickly to a non-founder chair on the board.

And then we typically take an observer role to the board so that we can monitor closely and keep a closer tab on how things are going, so that when the inevitable challenge arises, we can try to help be part of the solution and address those challenges opportunity.

So, you know, I think a part of the answer to your question is we lean in a lot more heavily I think than other investors who might take a much more activist role, insist on that governance, and insist on transparency and good financial reporting, accountability to all stakeholders. So we’re really looking at well-governed, transparent companies that hold themselves to a high standard. And that’s sort of the overarching thing that we do to help our companies. Obviously we try to help them in a myriad of other ways.

I’m working now with a company to bring a new sort of e-commerce skills to the company, how do we upgrade their website they’re using as a sales tool and promoting their product better through social media.

Yury: John, everything that you said sounds phenomenal, from offering financial opportunities to grow in businesses internally, proper logistics, innovation, marketing, all of that. So as a listener and a potential individual who may want to get in front of your group, what steps should I take to be considered as that option for you guys?

John: Yeah. So we have consciously decided not to have a sort of a formal application process because many companies are not really appropriate for venture capital, essentially this high risk high return capital, right? Because you really need that high growth model. So we encourage anybody that’s even as remotely interested in learning about this, or maybe thinking about this kind of capital, to contact us. And I will say that perhaps unlike many other venture traditional venture capital funds, we try to return every call or outreach that we get as part of our mission in educating entrepreneurs and small business owners in the state about what it means to take on venture capital or high risk capital, or early angel capital.

So we encourage people to reach out. We have a monthly email newsletter. We try to be out there as much as we can and sometimes we’ll reach out. So it really starts with a conversation with me or with my colleague, Joe Powers, to try and understand what the business owner or founder, or entrepreneur is looking for, what their goals are. If it’s not the kind of company that’s a fit for us, then we will do whatever we can to steer them to Maine technology Institute or FAME or a bank, or whatever. So we try to hand them off to someone else who can help them.

Rich: John, that actually kind of teases into my next question, which is if I feel that maybe I’m not the right fit for Maine Venture Funds, how do I find an investment group that might be a better fit for me? Is there some marketplace somewhere, or do I go to the Maine SBDC or SCORE and have them recommend something to me? What would you say to that?

John: Yeah, well, lot of it depends, right? So it depends on what stage your company is at and what kinds of capital you’re looking for. We’re really lucky in Maine as many states do in many areas, to have a very vibrant organized angel capital group, the Maine Angels. And I think you’ve spoken to someone at Maine Angels before. So Maine Angels is great and they have a Vanguard affiliate called the Banker Angel Fund. And now I think actually they’ve created the Dirigo Fund, which is a sort of a sidecar fund to the Maine Angels, which is really helpful in the ecosystem. So we may hand them off to Maine Angels. You know, FAME has got a number of great programs. So it really depends on what the company is looking for.

Portland SCORE is really phenomenal great leadership there. So oftentimes if a company is just really trying to understand what all my options are, we’ll say, “Look, go check out SCORE”. Also the SPDC, as you mentioned, has great counselors who can give good advice or help somebody build a financial model.

If someone isn’t appropriate for venture capital and knows that’s what they need. Unfortunately, there’s not a directory that you can flip through and look in your industry and your state and say, ah, here’s the five. So it takes a little bit of digging, on the internet there are some great resources now, CB Insights, Crunchbase. So a lot of those platforms, PitchBook, those platforms will allow you to do a little bit of screening. You know, here’s the stage of my company, here’s my sector, what VC funds are active in this area.

And so people can do a little bit of research and we strongly recommend that if a company does make the analysis that they are ready for VC and want to start looking for venture capital investors, you’ve got to do a lot of research before you reach out, and understand what that venture capitalist is looking for. What’s their thesis, what kind of industries are they looking at, what stage of companies do they look at? So, you know, traditional venture capital funds, they have a thesis, they have a model, they know the kind of companies and industries that they’re looking for. So if you don’t fit, don’t bother them. So find those that are focused on your sector that are focused on your stage, that invest the amounts of capital that you’re looking for.

I mean, don’t go to the big ones in Silicon Valley if you want a $2 million investment, because their minimum check is $10 million. So don’t bother. Find a micro VC – sometimes they’re called that – that will write it half a million dollar check or a million dollar check. So it behooves the company to do a lot of research, whether Maine Angels is your primary target or a FAME personal guaranteed loan is your primary target or whatever, do the homework you need to do.  And we’re happy to direct people on, as I said. So if you want to call us and say, “I think I’m venture capital ready, but I’m not sure. And how do I know?” You know, we’re happy to help.

Rich: Yury, I think I know the next section of our website we need to build out is this missing directory of funding for Maine companies.

John: Well, actually I say that now around here, I could put my hands on it quickly. It would be great. Susan Morris, who’s very active.

Rich: Oh, yeah. We love Susan.

John: You know Susan?

Rich: Oh yeah.

John: So actually they put this together, which is unbelievable, it’s quite comprehensive. So there’s a paper directory, I think you can get this online as well. It’s called a Guide to Resources for Maine Entrepreneurs.  And DECD also has a great sort of repository of contacts and people that can be of help. And and again, as you mentioned Rich, SBDC and SCORE are great places to start. They have all this info as well.

I will say the other resource in Maine – you know, Maine is not thick with venture capital firms – we’re lucky also to have CEI in the state, which is a nonprofit, a CDFI, but they do have a venture capital subsidiary as well called Coastal Ventures, which is completing their fourth fund and is now out beginning to raise their fifth fund. Although, difficult time to be raising capital. But I think they’ll ultimately be successful and be back aggressively in the market with a new fund.

Yury: John, you mentioned the size of the checks and that different funds have kind of like a different spread of what they would even consider investing. But what’s that spread for you guys, what’s the smallest, what’s the biggest that you’ve invested in?

John: Yeah, thanks for that question. So our typical entry point with a company is maybe $200000 to $250,000 check. And we try not to get much more than three quarters of a million dollars in any one portfolio company. So we need to spread the risk among the portfolio of companies. So that’s sort of, the range is a quarter million to three quarters of a million. But we want to start at the lower end because ultimately these companies as they scaled, they needed additional amounts of this high risk equity capital until they were ultimately bankable and have other sources of capital available. So we want to save, they call it ‘dry powder’. So we want to save some money for those subsequent rounds both to protect our investment and to participate for unsuccessful companies.

One of the things in Maine, because it’s a pretty thin venture capital market sort of institutional investor market, we will very often negotiate the terms of investment with a company. So set the terms of investment and then agree to commit a certain amount of money against those terms. So very often a company let’s just for example, say a company is trying to raise $1 million. We may do our due diligence and think this is a great opportunity and decide to invest. We get board approval for that investment. So we’ll tell the company we will invest in your company under these terms that we’ve negotiated and now agreed with you. And we’ll invest $200,000 on those terms. But the company’s got to raise at least a million and then we’ll close when we get that level of commitment.

So then we will help the company network with other investors, perhaps find those appropriate investors in maybe the Boston market, maybe Coastal Ventures is interested. Maine Angels might be interested, etcetera bank or Angel Fund. So we’ll help the company’s network, though It’s up to them to really get those commitments themselves. We’re not going to what they call ‘syndicated’. You know, we won’t go out and find those investors and bring them in. So we often will lead around meaning we’ve negotiated those terms, even though we’re not putting 50% or more of the capital into that round. And I think that’s a real service for Maine companies, and I think that’s worked well. And many companies have appreciated that because it’s a lot easier, especially if you’re approaching angel investors to go to them and say, here are the terms under which you will invest. Maine Venture Fund is committed X amount against this round, won’t you please invest”, you know so that model tends to work pretty well.

Rich: John, you have talked a lot about what you’re looking for in a company that you want to consider investing in. Are there any red flags that would keep you from investing in a company?

John: Sure, a number of them. And maybe this was another venture capital side you’re betting on the jockey, not the horse, right? So sometimes, and I think this is born out in my 20 years doing this you know, I really good management team can do really, really well with it, a great, a good product, but not a 10x product. Because they know how to pivot, they know how to read the market, they’re in touch with our customers. They know what the customer wants, so they can adapt the product or service to really fine tune and get what they call ‘product market fit’, which is a destination. I mean, it’s a journey, not a destination.

Whereas other management teams might be just headstrong. This is my product, I love the product, this works, I know this works. And they’re not listening to the customer. So you can have a great product, but the team just doesn’t execute. So we try to look for really good people that have, ideally, they’ve sort of done something like this before. But certainly they know this industry and they have great networks in the industry and they know how this industry works. So they know how to tap into that.

Entrepreneurs and founders who surround themselves with the best people. They can find, not people that they can control or oversee, but the best people that they can find that challenge them and drive them and give them access to the things that they need. Management teams that are willing to have a board of directors oversee them. And essentially one of the roles of a board is to fire the CEO if they’re not doing their job. So a CEO who’s confident enough in his abilities and is willing to take on that challenge of keeping a board of directors satisfied with his or her performance. So a lot of it is about the team and that individual. So we really try to dig into that part of the business.

Another red flag is a company that’s really not done a good job of funding their early stages. So sometimes we’ll see a company that has what I called ugly balance sheet. They’ve patched together a variety of different loans, all with different terms, different maturities, different people who have liens on different things, and they’re not really set up.

So two things can happen there; either we can say we’re just not going to be able to fit into the framework that you’ve created, the scaffolding is too weak. But alternatively, we can say, well, we’re really interested in you as a team, we’re interested in the product or service. We think this is great. But part of our diligence and part of our agreement before we come in is a lot of these things have to change. So some of these agreements will have to be redone. And, you know, sometimes that works. Sometimes that’s the way it has to happen.

Yury: John, this is a great. These are valuable insight and I’m sure a lot of our listeners are gaining great information. And I’m sure it’s going to invigorate their drive to reach out to venture funds like yours and their growth. And speaking about growth, we have this question on the show that we ask all of the guests, and here it comes. If you could change one thing to improve the business ecosystem in the state of Maine, what would it be?

John: Well first before I directly answer that question, I will give a plug. As you know, the governor has established an Economic Recovery Committee for these times. And one of my board members serves on that committee, that committee is serious about I’m hearing from Maine businesses, Maine entrepreneurs, anybody interested in how Maine economy will get back on its, on its feet. The two leaders of that committee are Josh Broder, the CEO of Tilson Technologies and Loretta Chance, the president of Thomas College. So please, I think there’s a link on the DECD website to put ideas and thoughts about how the economic recovery might put together some proposals for the governor and her cabinet. So I really encourage people to take active part in that process because, you know, nobody has the as the magic bullet here and it’s going to take a concerted effort to get, you know, the Maine’s economy, the us economy to get all of us back on our feet and stay safe at the same time.

So I wish there were one magic thing, Yury, but I’m not sure there is. I think resilience is important. I think empathy is important. I think people need to do what they can to support themselves and support others at this time. Yes, obviously, the whole racial inequality has been brought once again square in front of our face, but there seems to be some real momentum this time to not only acknowledge that, but to do something about it. So I think that’ll be part of it, too.

You know, we’ve got a great immigrant community in Maine. We don’t have a lot of citizens of color in the state, but that doesn’t mean that we don’t need to be proactively doing things we can to lift everybody up. And I think part of our recovery is lifting everybody up. You know, we’ve got great workforce in Maine. If we can get everybody productively, employed, and actively involved in and working in Maine and helping one another, then I think we stand a better chance

Yury: Being productive, being inclusive and being forward thinking, that’s a powerful message, John. Thank you.

Rich: John, this has been great. I’m sure people want to dig in and learn a little bit more about Maine Venture Fund and you, and maybe make a connection. Where can we send them online?

John: Mainventurefund.com.

Rich: Awesome. John, I appreciate it. This has been very enlightening and appreciate you swinging by and sharing your expertise with us.

John: Yeah. Yury and Rich, I really appreciate the opportunity. Great talking to you guys.