TAMPA — Steve Lux is a fan of the show Shark Tank for injecting a dose of reality into reality TV.
He should know. As a longtime venture capitalist who picks emerging businesses to back, Lux is akin to the one of the angel investors who sit on the Shark Tank panel listening to pitches from budding entrepreneurs.
What Shark Tank does best, he said, is rein in entrepreneur expectations. "They're spot on when they make comments about the expectations and (company) valuations with people who come on that show," he said. "Everybody thinks their own company is great."
These days, Lux, 56, is scouring Tampa Bay — and the Southeast — for investment opportunities for a new $40 million fund created by his firm, Stonehenge Growth Equity Partners. The company, a spinoff of national specialty finance company Stonehenge Capital, manages more than $677 million in venture capital, private equity and debt funds out of five regional offices.
From his company's homespun regional headquarters — a home converted to offices in Tampa's Hyde Park neighborhood — Lux recently sat down with the Times to talk about the challenges of cracking the Florida market, enthusiasm that his industry is entering a golden age and ties to the technology behind the iPhone 5S.
How did you end up in Tampa?
I came down here in 1998. I was in Dallas, Texas, and had worked for the predecessor of Bank One. I was in the capital markets group when we merged with First Chicago.
I was offered an opportunity from the First Chicago group to stay in Dallas, where I had been since 1981, to manage the office for the Southwest region. But the guys from Bank One Capital said: "We're going to spin off and start this fund in Florida. Wouldn't you rather get back into making investments in businesses as opposed to continuing to climb the corporate ladder?" That appealed to me.
This is your second major Stonehenge fund based in Tampa. What happened with the first one?
That began in '98. The last original investment in the fund was in the 2008-2009 period. It's wound down in terms of making new investments. It's still getting a return on the capital. We have five companies left.
What's different with the new fund?
The last fund we invested in, the mandate was we could only invest in Florida-based companies … and a certain percentage had to be invested in companies that had $1 (million) to $3 million in revenue. With the new fund, the drive was to look at historical performance and to be able to have a broader market that we could cover.
So what are the new parameters?
Florida and the Southeast. We plan to make 20 investments out of the new fund. Out of those, 16 will be in Florida and the Southeast. Out of the 16, probably 12 will be in Florida just based on where we see opportunities.
Did you expand your horizons because there weren't enough opportunities in Florida alone?
It's not so much that there weren't enough opportunities; it's that we wanted to be more opportunistic. We co-invested with others from different parts of the country. We had seen opportunities in the Southeast that we couldn't have invested in in the past because of the restrictions. We'll actively look at two markets in particular: Atlanta and Raleigh-Durham.
But our roots are in Florida. Our roots are in the Tampa Bay area. One of the reasons we were successful last time was the complete focus on Florida forced us to develop those relationships in a state that's very difficult to cover.
Why is Florida a challenge?
The tough thing about Florida is there isn't one center you could focus on to invest in. As opposed to Dallas or Atlanta or North Carolina that all have clear centers of influence. So we really had to focus on becoming part of the community, not only in Tampa but around the state, to find opportunities.
Have you made any new investments yet?
No. In the pipeline right now, we've got eight to 10 companies that we're considering. Out of those eight deals, six of them are in Florida. And out of the six … four are actually in the Tampa Bay area. We don't have any under terms yet. Most of them are what we call technology-enabled companies: businesses that use technology to solve a certain business problem.
It could be the intersection of health care and technology. It could be data processing, data payment processing companies. We've got two companies we're looking at … that are using technology to improve efficiencies in (energy management).
Your average investment is much smaller than typical industry investment?
We're looking at $1 (million) to $5 million (per investment). One to five is a real differentiator. A lot of funds have increased their size over the years so the average fund now may be $150 million to $250 million. There aren't a lot of those funds in Florida and the Southeast. So when there is an opportunity that becomes attractive, they fly in every quarter … and invest $10 million to $15 million in a company. In many cases, the dollar amount needed by that company may actually be much less than that. It may be $1 million to $5 million.
How do you recognize a strong, potential investment?
The team working on it, for one. The second is a recurring nature to the revenue.
(Third) if our due diligence shows that the product and service is actually being sold based on the product and service as opposed to pricing or as opposed to the Rolodex of the CEO.
(We look at) how quickly the buy decision is by the customer and (who) can sell it.
The first question is, "Okay, Mr. President. You've had $3 million in revenue and how much did you sell?" and they kind of braggadocian say, "I've sold it all." That's the wrong answer. That's probably a problem.
What's an example of an investment that paid off big?
AuthenTec (developer of a fingerprint authentication technology). A team that was with Harris Corp. developed that technology. It's a company and model that we had known and followed a couple of years.
We were one of the investors in the second round. In the third round (came) Sierra Ventures, the Menlo Park (Calif.)-based company (with) expertise in the semiconductor industry. In the fourth round, Carlyle (Group) was an investor …
We were very active even as a small investor through all the rounds. We had the trust of the CEO and the management team to keep the relationship.
The company went public. We sold our shares after the lock-up period, which is standard for us. Then nine, 10 months ago, the company was sold to Apple. It's the first and only publicly traded company that Apple has bought. And now their technology is the differentiator on the new phone (the iPhone 5S).
We were the flea in the hair on the tail of the dog.
How do you assure investors of solid returns 10 years out, given the uncertain economy and current climate in Washington?
We'll just assume we'll get through this awkward time we're going through with D.C. Even with this slower growth (though), the positive thing has been the interest rate environment. Companies have borrowed at rates we may or may not ever see again. They don't need to borrow now … . They're going to use some of their money to buy companies to accelerate their revenues. For us as a potential exit strategy (to cash out investments), that's great.
We've had two major downturns since 2000 … If we can get through without a major bump between now and 2020, we're going to see returns this industry hasn't realized since the late '90s.
Jeff Harrington can be reached at (727) 893-8242 or at [email protected]