As denizens of Silicon Valley, we know we can be more than a little myopic when it comes to venture capital. The following feature is the first in an occasional series that will explore VC as it is practiced in other locales, particularly those that one wouldn’t typically associate with venture. Our first effort takes a look at Philadelphia’s Main Line, an area in western Philly where most of the city’s VCs reside. Where should we go next? Please send suggestions to Joanna.Glasner@Thomson.com. —Ed.
Philadelphia—a city with the dubious distinction of being “an easy drive” from both New York and Washington, D.C.—has never allowed proximity to diminish its sense of identity.
New York may have cheesecake and the Empire State Building, and D.C. its White House and Washington Monument. In-between, Pennsylvania’s City of Brotherly Love remains famous for a cracked bell and a steak sandwich locals order doused in Cheez Whiz.
Hollywood, on the rare occasions when it sets its sights on Philadelphia, has ignored the region’s comparatively sophisticated business community in favor of more colorful cinematic imagery: the “Yo Adrian” bellow of Sylvester Stallone’s Rocky, the old money elitism of Katharine Hepburn’s The Philadelphia Story, and the seedy urban blight of Brad Pitt’s Seven.
Driving west from downtown Philadelphia along the string of posh suburbs known as the Main Line, however, it’s the region’s corporate side that stands out. Rowhouses give way to manicured lawns, and office parks proliferate, dominated by pharmaceuticals, technology and financial services.
Take a detour to the leafy town of Radnor, and you’re in private equity country. Amid the concentration of corporate centers, golf courses and—further off the traffic-congested roads, places where jacketed equestrians still go fox-hunting—beats the heart of the region’s venture capital scene. Since the 1980s, more than a dozen firms have set up headquarters within a few miles of Radnor’s center, including DFJ Element (the cleantech arm of Draper Fisher Jurvetson), New Spring Capital and TL Ventures.
What’s the attraction? For starters, that’s where the startups are, thanks to the nearness of local universities, led by the University of Pennsylvania and its Wharton School of Business. Philadelphia alone has five medical schools, providing talent-starved employers a skilled workforce with expertise in pharmaceuticals and health care. Add in a substantial base of techies and financial services professionals, and it becomes clear why VCs are drawn to this mid-Atlantic region.
Philadelphia-area companies raised $352 million in venture capital in the first quarter of this year, led by a $119 million venture commitment to King of Prussia, Penn.-based EUSA Pharma, according to Thomson Financial (publisher of VCJ). For local VCs, the supply of venture-worthy deals is more than they can handle alone. While Philly has a concentration of local funds, the region overall is actually a net importer of venture capital, says Skip Maner, a managing principal at Inverness Capital Partners, an IT investment firm.
Poached eggs and Series A
But Radnor’s not just the epicenter of Philly’s VC headquarters. If you’re hungry, it’s also not a bad place for breakfast.
Philadelphia has an advantage over Boston because it’s closer to New York and D.C., plus a shorter flight to the West Coast.”
Michael DeRosa, Managing Director, DFJ Element
For the connected Philadelphia venture capitalist, two breakfast venues stand out, says Michael DeRosa, a managing director at DFJ Element. They are the Radnor Hotel and Minella’s Diner, both on Lancaster Avenue, the Radnor area’s main commercial strip.
Of the two, the Radnor Hotel has the more storied history. It was in the dining room of this 171-room hotel that Warren V. “Pete” Musser, co-founder and then-CEO of life science and IT investment firm Safeguard Scientifics, held court over breakfast in the 1980s, when the region’s venture industry was in its infancy. With Musser at its helm, Safeguard spearheaded five venture funds, some in partnership with the state of Pennsylvania, over that period: EnerTech Capital, PA Early Stage Partners, SCP Private Equity Partners, Safeguard International Fund and TL Ventures.
The food at the Radnor Hotel can’t surpass the deal making, but it’s pretty good, too. And the hotel’s location—a quick jaunt from the local commuter train and multiple highways—is even better.
Musser wasn’t one for menu variety. He favored two breakfast items, cereal and poached eggs, recalls Dean Miller, a partner at PA Early Stage. Such healthful choices help explain why the nearly 80-year-old Musser still maintains multiple board seats and continues to run his 6-year-old private equity and consulting firm, The Musser Group.
When venture capitalists aren’t sipping morning coffee at the Radnor Hotel, there’s a good chance they’re caffeinating themselves a mile-and-a-half down the road at Minella’s Diner, which has been serving breakfast for more than three decades. (Its owners rebuilt and expanded the 24-hour-diner a few years ago.) At 8:30 a.m. on a Friday, parking is hard to find.
Minella’s is a plain but cheery contrast to the posh environs of the Radnor Hotel. Booths line the walls of two spacious dining rooms, one bordered by a stretch of counter and stools. Weekdays, the early morning crowd is a noisy mix, dominated by working suburbanites fueling up on heaping platefuls. The food is nothing fancy and certainly isn’t priced to make a discernable dent in a VC’s expense account. (The Main Line Special—with two pancakes, two eggs, sausage links and two bacon slices costs—goes for $7.25.) But it’s tasty and served up in an unrushed but efficient manner that seems appropriate for early morning deal making.
It’s here that I met with eight area VCs and entrepreneurs to discuss the local venture scene and do a bit of networking over the most important meal of the day.
Few of those present follow Musser’s Spartan tastes. Scrambled eggs, pancakes and bacon are plentiful. I ordered a side of “scrapple” to remind myself that we are in my home town, and not some nondescript urban sprawl of D.C. or New York.
I later visited a scrapple maker’s website to remind myself why the square, grayish-brown sausage product has never caught on outside the area. An ingredients list that includes pork livers, hearts and tongue can’t be helpful. After one forkful of scrapple, I redirected my taste buds to a nicely browned Belgian waffle that I was prescient enough to order on a separate plate.
Between bites I was relieved to learn that Philadelphia venture capitalists are intent on backing businesses following something more like the broadly scalable cheesesteak sandwich model than that of the obscure scrapple.
The reason to be in Philadelphia is that it’s a surprisingly diverse blue collar city. Unlike other cities, it hasn’t been plowed over and rebuilt. There’s real value in that.
Vincenzo La Ruffa, Vice President, Susquehanna Growth Equity
Over the past five years, life sciences companies have accounted for about half of all venture investment in the Philadelphia area. The high proportion of funding doled out to pharmaceutical and biotechnology startups is all about location, says Miller. More than three-fourths of the nation’s pharmaceutical workforce is within a 50-mile radius of Minella’s.
In addition to startups, the region is home to potential acquirers, including Merck and Johnson & Johnson in nearby New Jersey.
Area venture investors are hard pressed to point to a blockbuster IPO or outsized local acquisition in the sector in the past couple of years. The two venture-backed companies that brought some of the best returns came of age in the 1990s: Cephalon, a publicly traded pharmaceutical company with a current market cap above $5 billion, and Centocor, a pioneering developer of monoclonal antibody technology acquired by Johnson & Johnson in 1999. Cephalon’s backers included Philly-based PIDC Penn Venture Fund and Philadelphia Ventures, while Centocor raised money from funds outside the area.
More recently, VCs generated ROI from the IPOs of Auxilium Pharmaceuticals, a developer of treatments for urologic diseases, and Immunicon, which develops technologies for diagnosing cancer. Exton, Penn.-based Morphotek, a venture-backed developer of therapeutic antibodies, was acquired in March by Japanese pharmaceutical company Eisai for $325 million.
Of late, several local startups have drawn large late stage funding rounds. Ception Therapeutics, which develops anti-inflammatory drugs, raised $63 million in expansion stage funding in February. Neuronetics, which develops technology to treat psychiatric disorders through magnetic pulses to the brain, raised $35 million in late stage funding last August. And TetraLogic Pharmaceuticals, which develops drugs for HIV and cancer, raised $36 million in expansion funding last June.
As the block of scrapple cooled on my plate, I contemplated the irony of a health science investment hub being located in the midst of a region renowned for its unhealthy eating habits. Perhaps it’s not surprising that one of the better-known local VC-backed success stories is NutriSystem, a provider of weight loss services and diet foods that has seen its stock price soar from less than $1 to above $60 in the past four years.
While the largest portion of venture funds flowing into Philly goes to life sciences, information technology ranks a respectable second. Over the past five years, IT startups have pulled in 28% of the VC invested in the region. As in most metropolises, the IT investment scene was more active during the dot-com bubble, during which Philadelphia VCs saw their share of outsize returns and abrupt crashes. The region even beat out Silicon Valley to claim the top-gaining IPO of 1999: Internet Capital Group, a holding company for business-to-business e-commerce ventures. ICG once sported a market cap of more than $50 billion. Today, it’s valued at $450 million.
In the last few years, startups have mushroomed once more around Philadelphia, with a heavy concentration around the Main Line and a strong focus on financial services. Exits have been slow to pick up, though a few have made it out recently. Wayne-based MEDecision, a developer of software for managed care providers, went public in December, but its shares have shed about half their value. Traffic.com, a venture-backed provider of personalized traffic that went public last year, was acquired by NAVTEQ, a digital map developer, for about $179 million in November.
We’re located where all the customers of the technology are, so we’re focused on bringing the technology to market.”
Skip Maner, Managing Principal, Inverness Capital Partners
More recently, Conshohocken, Penn.-based ECount, a provider of prepaid rewards cards, was acquired by Citigroup for an undisclosed amount in March. (The VCs who invested $11 million in ECount since 2001 said they enjoyed a very profitable outcome.)
Philadelphia investors are quick to credit proximity to Wall Street, the nation’s capital and Big Pharma as a draw for acquirers.
But proximity isn’t just useful in finding acquirers, notes Maner. It’s also about being close to the customers that startups are trying to reach. While Silicon Valley holds the lead in developing groundbreaking technologies, Maner says, entrepreneurs find themselves traveling east to find the companies that will actually buy their products.
“It’s all about technology there,” he says. “Here we’re located where all the customers of the technology are, so we’re focused on bringing the technology to market.”
Cost of living is another factor. A house in a desirable Philadelphia neighborhood sells for about a third the price of a home in Silicon Valley, says DFJ’s DeRosa. Rents are also proportionally lower—so much so that the migration of cost-squeezed New Yorkers into Philadelphia has given the City of Brotherly Love a new nickname: “The Sixth Borough.”
And for VCs, who have become increasingly mobile, Philly is a great launching pad. “Philadelphia has an advantage over Boston because it’s closer to New York and D.C., plus a shorter flight to the West Coast,” says DeRosa. “You’re an hour closer to everywhere than Boston is.”
But while admittedly location is a draw, Philadelphians are also sensitive to being known merely for being close to someplace else.
“The reason to be in Philadelphia is that it’s a surprisingly diverse blue collar city,” says Vincenzo La Ruffa, a vice president at Susquehanna Growth Equity who travels to New York City at least twice a week for meetings. “It’s just old enough to be an old city. Unlike other cities, it hasn’t been plowed over and rebuilt. There’s real value in that.”
As our server re-appears to clear the dishes, I’m inclined to agree. By mid-morning, according to my original plans, I was supposed be repacked and halfway to my next appointment in New York City. Instead, I decide to delay it an extra day. Maybe I’ll stop in for another Belgian waffle before I leave. But this time, hold the scrapple.