When Trevor Price came back from a summer vacation, his Manhattan rooftop tomato garden had been destroyed by worms. There wasn’t a chance for homegrown tomatoes that summer and Price was pissed.
At about that time he got a call from a seed investor in a startup called Nature Technologies that sold high-frequency speakers that could scare deer away from people’s backyards. Price remembers thinking, “If people are as pissed off about their landscaping as I am about my tomato garden, then this is a great value proposition.” He joined the Pleasantville, N.Y.-based startup as CEO and brought in $4 million in venture investment soon after.
Nature Tech is one of a handful of companies that raise VC each quarter but defy the venture capital norm. It’s the type of startup that Sand Hill Road all but ignores. But as more dollars chase fewer innovations, hot tech sectors get bid up. Median pre-money valuations across all stages of tech have increased 72% to $16 million over the last two years, according to data from VentureOne.
One way to avoid getting caught up in an over-investment spree is to look for startups that defy easy categorization.
Ken Hooten, a managing partner at Concentric Equity Partners of Hinsdale, Ill., couldn’t be happier with his investment in Nature Tech. “Right now the company is scaling like crazy,” he says.
Hooten may be the perfect fit for the startup. He cut his teeth at Servicemaster (NYSE: SVM), a $3.6 billion company that provides domestic services like lawn care through its TruGreen and ChemLawn brands and pest control through Terminix. He founded Concentric, Servicemaster’s venture arm, and inked a partnership with Kleiner Perkins Caufield & Byers to get consumer brands off the ground.
Years of working at a big company focused on household services made Hooten sensitive to Nature Tech’s opportunity. It also made it easy for him to add value. Price, Nature Tech’s CEO, says Hooten has given him advice about everything from how to track the effectiveness of marketing and conversion ratios of sales leads to how to retain customers for life. “It didn’t make sense to go running around and talking to Sequoia, Draper Fisher, and those types of guys,” Price says. “We’re not building the next enterprise search engine.”
Hooten readily admits, “I know nothing about technology and don’t want to know anything about it. He got in on the Nature Tech deal when he saw how people who signed up for the deer-deterrent service stuck with it. You don’t have to understand tech when sales are up 150% year over year and customer churn is close to zero.
It’s hard to say how big the market for Nature Tech’s service is. Services such as Terminix and TruGreen ChemLawn each booked over $1 billion in revenue during 2005, though. And with some 30 million deer in the United States, the deer problem doesn’t look as though it will go away any time soon.
The sound of gunshots
Another recently funded company that appears to be one of a kind is ShotSpotter of Santa Clara, Calif. The startup uses a network of microphones and an audio algorithm to pinpoint the location of a gunshot. Its technology is used in cities across the United States to cut down on crime and help police quickly locate violent criminals. “Most people didn’t even know there was a market here until [ShotSpotter] came along,” says Gary Lauder, who invests in venture deals and venture funds on behalf of himself and family members.
Lauder seeded ShotSpotter and helped get the company off the ground after reading an article in The New York Times Magazine called “The Big, Bad, Fun Gun” about the .50-caliber sniper rifle, which can penetrate one-inch of steel from 200 yards. The story scared Lauder—especially the thought that someone could take pot shots from so far away and not be seen. The shooter would be long gone by the time police could pinpoint where the shot was fired.
When Lauder spotted ShotSpotter, it was little more than a group of technical people without much business wherewithal, he says. The innovation came out of SRI International, where ShotSpotter founder Robert Showen was working on understanding the geophysics of radar and seismographs. With a little money and direction, Lauder got the team together and brought in more investors. The company raised a second round totaling $9.4 million from six investors in April.
One of the people Lauder brought into the deal is Randy Hawks, a managing director of Claremont Creek Ventures of Oakland, Calif. Hawks, who launched Claremont’s inaugural $130 million fund last November, liked ShotSpotter because it was different. “There are so many boxes out there that do antivirus just a little better,” Hawks says. “We wanted to take a broader look at security and this is not the sort of thing you pitch to the CIO of a Fortune 1000 company.”
Claremont co-led the startup’s Series B round with City Light Capital. They were joined by the Band of Angels, Labrador Ventures, Lauder Partners and RNR Ventures. It was an easy deal to get done, says ShotSpotter CEO James Beldock. “This company saves lives,” he says. “Everybody likes that.”
Still, Beldock didn’t go in search of the usual Sand Hill Road investors because he didn’t think they’d understand or appreciate ShotSpotter’s sales cycle, which can take months or even years. It takes longer for the company to get a deal done because of government bureaucracy, but once a deal goes through it can be a stable revenue source for a long time.
Predator for average Joes
Understanding a startup’s customers can be the biggest problem for venture firms looking to move into different industries. It was certainly a hang up for Roger Lee, a general partner of Battery Ventures. When one of his associates, Brian O’Malley, brought an Unmanned Arial Vehicle (UAV) deal for him to consider, Lee blanched at the thought of having to sell into the Department of Defense.
Lee knew the market for pilot-less planes was big. The Pentagon alone is expected to spend $50 billion over the next 10 years on UAVs. The Predator, made by General Atomics, and the Global Hawk, made by Northrop Grumman, were used successesfully by the U.S. military in Iraq and Afghanistan. But Lee didn’t know if a startup could compete against huge defense contractors, let alone market smaller, cheaper UAVs to businesses.
He took a chance and put $7.6 million into UAV-maker The Insitu Group as part of a $23 million third round in May. He also took a seat on the Bingen, Wash.-based company’s board. Lee says he had to look past the fact that he was investing in something that looked like a souped-up model airplane.
At its heart, Insitu develops software and hardware, just like a typical VC-backed startup. “When you strip away the noise and focus on the basics, you can see it’s a great opportunity,” Lee says. “How many companies can you name that are growing 300% a year and doing it profitably?” Insitu booked sales of $25 million in 2005, up from $8 million in 2004. Customers are clearly not a problem.
Venture investors, for all their excitement over the tech-de-jour, have become timid about opportunities outside the norm. Competition to get into the trendiest startup is driving up valuations and driving out the potential for profits. Smart VCs will look for opportunities to zig while the Sand Hill herd zags and will keep their eyes open for startups like Nature Technologies, ShotSpotter and Insitu.