Raleigh investment firm Lookout Capital has revised its investment strategy in order to play to what it sees as its strengths.
Roughly 18 months after expanding its target investments to include startups, Lookout has pulled the plug on doing any more such deals, although it will continue to nurture the startups in its portfolio. At the same time, Lookout has shifted its approach of investing in later-stage companies to more of a private equity model.
"This is really a natural next step in the evolution of Lookout," said operating partner Michael O'Donnell.
Lookout has invested in later-stage companies in the past, but now it's focusing exclusively on more advanced businesses across a wide swath of industry sectors. Its sweet spot is companies with revenue of $5 million to $25 million with positive cash flow from operations.
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It also wants to take a bigger ownership stake than it has typically taken. It's looking to acquire at minimum a "major stake," if not a controlling interest or 100 percent ownership, said co-founder and managing director Merrette Moore.
And, like a private equity firm, Lookout won't be shy about exerting its influence.
"In almost every case, there would be a significant influx of Lookout-related people on the management team," Moore said. "The idea is, we will put our stamp on it with our people in there."
Lookout's pullback from startup investments is undeniably bad news for local entrepreneurs, who often complain the Triangle has a dearth of investment firms willing to make seed investments. But Lookout executives say startup valuations are getting overheated and that it's investment model is more suited to fewer, larger investments.
Formed in 2010, Lookout has invested more than $15 million in seven companies. Of those, five are headquartered in North Carolina and a sixth has significant operations in the state.
"To be candid, they are in various states of well-being," Moore said. "But they're all very much alive and ticking. ... As an overall portfolio, I feel pretty good about where we're at."
In the end, investment firms such as Lookout don't make money - or lose money - until a portfolio company is sold, goes public or shuts down.
Lookout, which has a staff of 10 full-time and part-time employees, has more than 70 investors today - up from about 30 when it started.
The investors commit anywhere from $5,000 to $20,000 a year for five years for the right - but not the obligation - to invest in deals that Lookout brings to the table. The more they commit, the more they can invest.
Its unorthodox funding structure, combined with the growth of the investor base, was a factor in the move to make larger investments in fewer companies.
"We did five deals in 15 months, which with our model is a pretty hectic pace," said Moore. "When we do a deal, we have to go to our entire investor base each time to raise money individually for these deals."
Another factor is that two of the companies where Lookout has exerted the most influence are doing especially well.
"The investors (said) look what's happening," Moore said. "When you guys get very involved was a company, it just seems like good things happen. So that's another reason to do another type of investing where you're more hands-on."
One of those companies is Race 13.1, a Raleigh company that produces half-marathon races that are 13.1 miles long. It is led by John Kane, who also is an operating partner at Lookout. In addition, Lookout officials constitute a majority of the board of directors and were instrumental in recruiting a senior member of the company's management team.
Given its new investment strategy, Lookout is now willing to invest in states throughout the Southeast. But Lookout officials say relocating out-of-state companies they invest in is a distinct possibility.
"With advances in technology, it is very easy to have a dispersed team," said operating partner Robert Williams. "So it could be that the headquarters is moved here, which is a positive thing for this area because it would mean additional jobs, particularly as we grow."