Russ: Hi I’m Russ Capper and this is BusinessMakers USA coming to you today from Oklahoma City where my guest is Scott Meacham, the President and CEO of i2E; Scott, welcome to the show.
Scott: Glad to be here.
Russ: Tell us about i2E.
Scott: Well we’re what’s referred to as a venture development organization. We’re a not-for-profit that helps advise and invest in new high-growth startup companies in Oklahoma.
Russ: Now that’s kind of interesting. I’ve seen other states get focused on this area, everybody likes to see development; how long has this been going on?
Scott: We’re just about ready to enter our 20th year of doing this.
Russ: Wow, anything that lasts that long must have some success in its past, would that be accurate?
Scott: Yeah, I think if you look at the genesis of i2E Oklahoma has traditionally been a big oil and gas state which means we’ve been through a lot of booms and busts. We had a really big bust in the 80s and people started looking around saying well what can we do to diversify our economy. And the answer I think was to put more resources in starting and growing new businesses in Oklahoma and i2E grew out of that.
Russ: So how many businesses has i2E played a role in growing?
Scott: I think we’re up to 700 or 8oo so far, quite a few over that many years.
Russ: And how long have you been the President and CEO?
Scott: Almost 5 years.
Russ: Do you enjoy it?
Scott: I do. I tell people I’ve had a lot of really interesting jobs, but this is the best job I’ve ever had.
Russ: Well I noticed the background, your career, is just very diverse, it’s kind of in government, in private sector. Give us an overview of that too.
Scott: Well I was a kid who grew up and wanted to go practice law with his dad in the family law firm in Western Oklahoma so I prepared myself as a lawyer, got an MBA and a degree in finance while I was there. Did that for a few years and then I got elected to go move in and run the family bank in Elk City and I did that for about 12 years. My best friend from law school got elected governor and he recruited me to come in and be his finance guy basically, so I ran the Department of State Finance and was his Secretary of Finance and Revenue. Left that and got recruited by Crowe & Dunlevy, one of the bigger law firms in Oklahoma, to come run their Banking and Financial Institutions Practice group. And then eventually i2E came calling and it was just a chance for me to get back into doing something I felt made a bigger difference.
Russ: Real cool. So what kind of staff do you have? To check out some of these investment opportunities and startup companies is not necessarily and easy task.
Scott: No, it’s a lot of work. I was talking to some young guys today that are wanting to start a fund and I was telling them you guys don’t realize how much work it really is. It takes people to source deals, it takes people to evaluate deals, it takes people to put deals together but then you’re really just getting started. Because once you invest in them then you want to help make them be successful, so it takes people to manage your investments after you make the investments. We have a staff of 19 with offices in Oklahoma City and Tulsa.
Russ: You do then get involved like a traditional venture capital does after you make an investment; you want to help them out if you can.
Scott: Absolutely. We started with a model that was more of a passive investment model and we learned over time that sometimes you write people a check and they can’t hear you anymore and sometimes they don’t do the things that necessarily help you realize on your investment, so we’ve gotten much more actively involved in the last few years.
Russ: Do i2E people like yourself or your staff actually take board seats?
Scott: Yeah, we’ll take board seats, we will recruit executives to implant; we’ll recruit maybe an executive chair to put in. So it’s a combination of whatever it takes in the deal; we kind of work to put pieces together to make an investable deal.
Russ: Okay. What’s a typical portion of a company that you walk away with after the initial investment?
Scott: It really varies on the stage and how much money they’re raising. If you look at most companies somebody comes in with a good idea with no revenues their worth maybe $2 to $2.5 million. And so if you’re putting in a half million dollars you’re taking about 20% of the company. Whereas if it gets bigger with a higher valuation and maybe not as many dollars you’re not taking as much.
But typically what we try to manage is the life of investment of a company. We want to make sure that the entrepreneur has enough interest in the company so that they will go out – and we call it alignment of interest – they’ll go out and try to help us and help them, but get a good return on our investment. And so normally we look at the whole capital path of the company and try to figure it out the best we can, but we don’t ever want them to be too deluded so we want them to always be north of say 25 or30% of the company.
Russ: That’s smart, obviously. So that key part of valuation, you get involved in that too right up front, right?
Scott: Oh absolutely.
Russ: And how do you find that going in your position? It’s kind of a push/pull in most occasions that I’ve been in.
Scott: It is and it’s kind of interesting because I find the more experienced the entrepreneur the less hard that negotiation is. The less experienced the entrepreneur is the harder it is to get them to understand the value of taking money and what it does to drive their company forward, so it makes those discussion a lot tougher.
Russ: Do you ever come away with the majority position in any of the companies?
Scott: Never; we’ve never been in a majority position.
Russ: Do you avoid that completely or it just hasn’t happened?
Scott: No, really we don’t want to be in a majority position. And part of our model is the way we manage and invest state funds, so we can only be half of a round. So there might be a situation where everybody who’s in all the rounds we participate cumulatively might have a company, but we’re never going to have more than half just ourselves.
Russ: And you coming in often attracts from venture capital firms or private equity firms and so forth.
Scott: Yes. It’s an odd model to say I run a venture capital fund but I can only do half of a deal, but it’s the nature of the state funds. The state wanted one independent validation that we were making good investment decisions, but secondly there wasn’t – in Oklahoma we had a lot of money in energy and a lot of money in real estate, but we didn’t have any money in venture. And so we wanted to prove that we were pulling in that venture capital. And I think we’re getting close to like 20 to 1 the amount of capital that we’ve pulled in.
Russ: So how are you graded? Does the state, does the governor look at your performance or how does that work?
Scott: We contract with OCAST, which is the state’s science and technology agency, and we have to provide them metrics and quarterly reports on how we’re performing. We measure a whole lot of things; job creation, amount of revenues generated by companies, patents; all of those kinds of things. I say at the end of the day it’s getting to be more and more about exits and what are you really doing. But certainly in the early stages it’s all about those metrics and now we’ve actually been doing it long enough that we’re starting to get some exits and get some of those kinds of outcomes also.
Russ: Have you had any IPOs?
Scott: We haven’t but I think if you look at kind of the world as a whole now we’re not seeing as many IPOs. We’re seeing more…
Russ: They’re not as popular.
Russ: Speaking of the world today, although 20 years you were at the early stage of this, but a lot of states, a lot of cities, a lot of markets these days have sort of awakened to this same thing that i2E does. And they’re these entities that are sort of coming together – I know they did it in Cincinnati, they’re trying to do it in Houston – where they bring in these fund to funds, and I would assume those are kind of competitors to you, but then again you might only be interested in entities that started here. Or do you actually try to recruit startups?
Scott: We have recruited. We actually have recruited several startups to Oklahoma, but our mission is only to invest in Oklahoma-based companies. So they have to agree to move here or enough of their operations here to meet our test. But oddly enough we don’t see a lot of competition out there and probably it’s because traditionally we haven’t had enough deal flow to support those. There’s been some different models that have tried but frankly the best model has been this direct investment model. But we have the luxury because we’re sate supported that we kind of have a longer time horizon than a lot of the funds have.
Russ: And if somebody’s watching right now, they have a hot startup, they’re in Tulsa and for some reason they don’t know about you yet – they probably all do anyway – so how do they find you, just the website?
Scott: Yeah, obviously through the website. I2E.org is our website and a lot of people find us that way. A lot of it is word of mouth; if you’re going to one of the deals with entrepreneurs, we have a million cups in both Oklahoma City and Tulsa, our people are generally there. Really what we try to do is look at as many deals as we can and talk to as many people as we can, find out who we can serve and then figure out a path forward.
Russ: Before I let you go we were just chatting before the interview and you’ve had two recent exits; tell us about those.
Scott: We did. We had two big exits within really the last year. And it kind of shows how our business model works because about 40% of what we do is life sciences and about 40% software IT. We’ve got a life sciences exit, a company called Selexys, with a new therapy for treating Sickle Cell Disorder; sold to Novartis for a deal potentially worth $665 million. And then a local business that we grew here from an Oklahoma concept to a company that’s got more than 150 people now called WeGoLook sold to Crawford and Company, which is the second largest claims processor in the country, and they kept the local management and are investing in growing the business here in Oklahoma.
Russ: That sounds like success for sure.
Scott: I think that is success.
Russ: Well Scott I really appreciate you sharing your story with us today too.
Scott: Thank you.
Russ: You bet. And that wraps up my discussion with Scott Meacham, the President and CEO of i2E. And this is BusinessMakers USA.
brought to you by