Some VCs Still Investing in Early-Stage Companies

While most VC firms focus on later stage firms, Goodman headed in the other direction toward early stage firms where there’s less competitive capital. It just made sense. 

“Many VC firms cannot put out lesser amounts efficiently and were driven up the food chain,” Goodman said. “We wanted to be in a place where competitive capital was less intense.” 

Looking back on the history of VC investing, Goodman sees early stage investors reaping the largest returns on their money – about 35 percent rate of return –, which is significantly higher than the returns from later-stage companies. Of course, the rate of risk is highr with young companies. 

Despite a soft economy, VCs are still looking to make deals. Goodman points to VC investing in 2000, which reached $105 billion, the third highest in history. Milestone Venture expects to do approximately four deals a year with the investment range of $250,000 - $1 million. Milestone focuses on early-stage, enterprise information technology companies in the Tri-state area (New York, New Jersey and Connecticut). 

Goodman, the grandson of the founder of Bergdorf Goodman, sees early-stage investing as intellectually challenging. He compares growing a company to raising a child where investors take great pride in nurturing it from early stage to an IPO. 

“It’s a lot of fun building a company,” Goodman said. “That’s why angels like to do it. There are great emotional and psychic awards.” 

Goodman estimates he’s done 115 deals at all stages in his 26-year VC career, and has demonstrated a keen eye for spotting promising young companies. For example, he invested in Staples when it was just one store and Apple Computer before it went public. 

He learned the ropes of the VC industry at Hambros Bank where he was CEO of the U.S. venture capital group for 17 years. In 1997, he began to moonlight in his own private capital business. By 1999, Goodman joined his two colleagues to form Milestone Venture in Manhattan. 

Goodman likes the active syndication model at the lower-end market. It’s common for several financing sources to invest in early-stage firms. Through Milestone, he’s done several deals with a wide range of partners, such as VCs, angels and other levels of private investors. 

Even though VCs and angels are looking for good deals, early-stage companies need to meet tough standards to draw investors. Goodman list several criteria most investors look for in early-stage companies: 

• Survived the economic peeks and valleys of the last three years;
• Have a market of at least three million and growing with established customers and products
• Form a strong management team;
• Show a negative cash flow of less than $100,000 per month.

Goodman anticipates seriously considering 75 deals out of the hundreds that might come across Milestone Venture’s radar screen. Milestone Venture attracts potential deals through its strong relationships with lawyers, accountants and other angels as well as attending venture fairs throughout the tri-state area. 

VC firms investing in solid young comprise are a small part of the VC market, but a viable one. 

“Many VCs moved away from the risk curve,” Goodman said. “But there’s the challenge of financing early-stage companies. Some investors want to raise their own children.” 

Milestone Venture welcomes inquiries at 212-223-7400 or milestonevp.com.