Issue 1 - April 2010
Greetings From the ESP Team
We are pleased to introduce you to the inaugural issue of a newsletter being launched to provide regular updates about developments at Early Stage Partners, in our portfolio companies, and in the segments of the economy in which we operate. Our business has grown significantly in breadth and depth over the last couple of years, and we thought you would appreciate receiving an update from us. We’re planning to send these missives quarterly and to make them informative and easy to read. We would be delighted to hear from you with comments about how we are doing
Early Stage Partners II, L.P.
We have successfully completed fundraising for our second fund, Early Stage Partners II, L.P (“ESP Fund II”). As many of you know, we were in the middle of raising this fund when the economic downturn hit, freezing financial markets and investment decisions. For us, this meant a break of nearly nine months between our second and latest closings. Notwithstanding the challenging conditions for raising a fund, we were successful in reaching 80% of our fundraising goal, and are now actively investing. Companies in our portfolio and news releases about them can be found on our Web site: http://www.esplp.com. We also have expanded our footprint, opening an office in Ann Arbor, Michigan.
In this issue, we are pleased to profile Jonathan Murray, who leads our IT investment sector.
Q: Jonathan, what types of IT investments is Early Stage Partners making?
A: Our investment focus for Fund II is mostly geographic, so we look at what we see in our core Midwestern region. We see many application software opportunities in industry vertical markets, where an entrepreneur or team of entrepreneurs has knowledge and experience of business processes in a particular industry and creates a software solution to serve unmet needs. More and more of these opportunities are developed as OnDemand or Software-as-a-Service (SaaS) applications, in which users access the application on the Internet, and there is relatively little installed software on the customer’s network.
An example of this type of company would be OnShift which provides a SaaS application for organizations with shift-based staffing. They have had good uptake in the nursing home industry, and are expanding into other industries. Staffing can be 60-70% of cost for nursing homes and other labor-intensive service companies. The OnShift solution provides improved management of overtime, among other benefits, and can result in quick, substantial savings.
Q: Are you seeing interesting opportunities from the Midwest’s academic institutions?
A: We are, and we spend a lot of time in particular with the Department of Computer Sciences at the University of Michigan, as well as a number of Ohio universities. For instance, Early Stage Partners led an investment in LineStream, a spinout of Cleveland State University, which has developed breakthrough manufacturing controls software. The Linestream technology—called Active Disturbance Rejection Control (ADRC)—is based on a lifetime’s work by Dr. Zhiqiang Gao, Associate Professor of Electrical and Computer Engineering, and the Director of the Center for Advanced Control Technologies at Cleveland State University.
ADRC is a software product that is based on an algorithm that controls—in real time—disturbances such as vibration in manufacturing processes. The LineStream technology dramatically reduces the incidence of manufacturing operations going outside of specified parameters. Production lines can remain operational for longer, and costly tuning, training, and system upgrades are reduced.
Q: Can Midwest technology companies really be competitive with companies in Silicon Valley, Boston, or other high tech meccas?
A: Absolutely. Take TOA Technologies, for instance. Early Stage Partners co-led the first institutional investment in TOA in 2005, and has subsequently continued to support the company. The founders of TOA could have chosen to put the company anywhere, but they chose Northeast Ohio for a variety of reasons, including their desire to work with ESP and our co-investor, Draper Triangle Ventures.
TOA has a SaaS software solution that is used by companies to manage field staffs that deliver a product or service to a consumer’s home—cable companies, for instance. The company has subsequently become a world-beater and is expanding its Midwest workforce. They serve dozens of companies in the United States and Europe, including name brands such as Cox Communications in the U.S., and ONO in Spain. This is a company to watch.
Q: There has been a lot in the news lately about the challenging economic climate, as well as about challenges in the venture capital industry, particularly exits.
A: No question; this is a tough climate, and early stage investing is a challenging endeavor. Nevertheless, leading-edge companies that provide real value to customers continue to perform well in any economic environment. TOA, for instance, had record sales in 2009, right in the middle of the worst of the economic downturn, because their software provides such dramatic productivity gains and cost savings, that companies couldn’t afford not to adopt it. OnShift, though earlier in its development, is gaining users at a rapid pace for similar reasons. LineStream is working with several large manufacturers and has a unique solution that promises to dramatically lower production costs.
Exits are challenging throughout the venture capital industry right now. They are certainly fewer and further between than a decade ago. But these things tend to go in cycles and the industry is due for an up cycle. Whether it can occur or when, nobody can predict, but quality companies like TOA, OnShift, and LineStream should always have exit value.
Q: Thank you, Jonathan.
Company Profile: TOA Technologies
When Early Stage Partners first met TOA Technologies founders Yuval Brisker and Irad Carmi in 2004, they were peddling an idea: OnDemand software that would replace a previous generation of mobile workforce management software based on client-server technology. Introduced to ESP by several prominent technology leaders in Cleveland, Yuval and Irad weren’t seeking venture capital at the time. They were planning to raise a round of angel capital, finish their product, and gain three customers. Then they would be back for venture capital investment, they said.
One year later they were back, having raised less angel capital than they intended, but nevertheless having finished their application and obtained three name-brand national customers. That was impressive enough to land them a first round of venture capital from Early Stage Partners and Draper Triangle Ventures.
In subsequent years, through relentless hard work, smart strategy, tenacious sales, and superior technology, TOA gained leading businesses as customers and partners in the U.S. and Europe. The Company now lists as customers Cox Communications, widely seen as the leading adopter of new technology in the U.S. cable industry; Virgin Media, a U.K. based cable provider; Deutsche Telekom, the world’s largest telecommunications company, and many more companies in the cable, telecommunications, furniture delivery, pest control, utilities, and waste management industries. TOA has also struck partnerships with PivotLink, a leading provider of analytics and reporting software for decision support; AmDocs, a leading provider of billing software to the telecommunications and cable industries; and Audatex, a leading vendor of claims software.
Along the way, TOA has been named to the Visionaries Quadrant in Field Service Management by Gartner Group, has won numerous awards, and obtained a second round of venture capital investment that was led by Intel Capital. In 2009, the Company had a record year for revenues and new contracts, and capped off the year by hiring the former CEO of Spanish cable company ONO, Richard Alden, as President of European operations.
From small beginnings can big things grow and, in today’s technology world, in unexpected places.
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The closing of ESP Fund II enabled us to add some very high quality people to our staff:
- Mike Bunker, who is leading Life Sciences investments
- Richard Stuebi, who is leading CleanTech investments, and
- Andrew McColm, who is managing our Michigan office.
Profiles of each can be found on our Web site at: http://www.esplp.com/our-people.aspx
For Limited Partners
The LP section of our Web site is now active. Investors in either Early Stage Partners I LP or Early Stage Partners II LP can access statements of account, quarterly reports, partnership documents, and other information there. For a user name and password, please e-mail Connie Weber at firstname.lastname@example.org.