You might call John Sider a matchmaker. As Director of Second Stage Capital at Ben Franklin Technology Partners of Central & Northern PA, he pairs companies that have grown beyond the organization’s reach with the capital they’ll need to go to the next level. That often means connecting them with the state’s growing network of angel investors, a diverse stable of venture capitalists, banks, or state and federal funding opportunities.
Based in Harrisburg, Sider covers a tremendous swath of the state, from Erie down through Altoona, Johnstown, State College, Harrisburg, Lancaster and York. It’s a territory defined by its small cities.
“There are some unique economic development opportunities and challenges with those small cities,” he muses. “We’re trying to support regional uplift as well.”
Keystone Edge chatted with Sider about the state’s shifting investing landscape, gaps in funding and the role Ben Franklin can play in cultivating Pennsylvania’s next big companies.
Keystone Edge: What is your role at Ben Franklin Technology Partners (BFTP)?
My responsibility is to develop close relationships with the companies in the Central and Northern portfolio that will be seeking outside capital in the coming months and years. This happens as they mature and they work their way through the Ben Franklin funding [opportunities] — we’ve invested as much as we can in them.
My job is to come alongside them at that point and help them raise the financing they need, whether that comes from angel investors, venture capitalists, banks or various federal and state government financing programs. The second role that I have is to try and make recommendations to my CEO on where the gaps in the financing marketplace are, and see if there are creative ways Ben Franklin can address them.
What is the typical profile of a company you’re working with?
With the dollars that [BFTP/CNP] can invest — between $350,000 and $500,000 over two to three years — and all of the advice and management support we provide, the end goal is a company with a proven technology. Can they demonstrate that the innovation works?
The second thing is looking for market signals that there are people interested in purchasing this innovation and using it in some commercial application. The best market signal is revenue. Usually our companies are just starting to win revenue, but we like to be able to at least have signals that the market wants their product or service.
And the third thing is that the management team is starting to solidify. There are still key hires to be made, but the management team is stable and there is definitely a CEO that makes sense for that company at that stage.
It’s not always possible for us to achieve all three of those things with the time and money that we have, but that’s what we’re shooting for. When you can offer those three things, that’s when you have the best chance to attract outside financing.
Gaps in funding is something people talk about a lot. You can have this great idea, but there are all these chasms that you have to leap over along the way to success, and they can get bigger and bigger as your company grows. Can you talk about those gaps, specifically in Pennsylvania and your region?
I think there are two main ones that we focus on and struggle with. A company that can achieve $1 to $2 million in revenue has an enormous amount of financing options open to them. That’s really when institutional venture capital — at least on the East Coast — tends to get interested. The market risk has been somewhat mitigated and their capital can be focused on achieving fast growth.
But when Ben Franklin funding is used up, we’re usually a long way from $1 to 2 million in revenue. So, what we’re typically trying to do for the high-growth companies is attract angel investors to try and fill that gap, because they tend to be willing to go in earlier — particularly if its an industry that they have expertise in.
I’d say the environment for angel investors is much better than it was even two to three years ago in Pennsylvania. I think that has everything to do with the improving economy.
The second piece, I’d say, is that in order to be bankable, a company needs positive and growing cash flow for two to three years. Obviously our companies are a long way from that, but there are activities that should be financeable through a debt structure, especially when the company is well-known and well-understood.
For instance, our companies tend to be high growth. They could get a large purchase order; a small company often doesn’t have a lot of cash to finance the purchase of inventory and enough employees to fulfill that order. So we ought to have some sort of short-term financing method. We’re working hard on that — we have great partnerships with our local economic development corporations (EDCs) that work with the Pennsylvania Industrial Development Authority, and we have a wonderful relationship with the PA Department of Community and Economic Development (DCED). So, we’re trying to get creative on how to make that happen.
I’ve heard leaders in the economic development field talk about trying to cultivate more angel investors because of the specific role they fill. Is part of that recruitment and education?
I think that’s a big part of it. One of the megatrends over the last ten to fifteen years has been angels coalescing into groups. It’s going from this individual activity to a group activity that has best practices, has formal and transparent processes, has a constructive feedback loop for the companies. This has been a very positive development for the market for angel investment.
And you can spread the risk.
Exactly. There are not many angel groups in the state that, by themselves, could do a million dollar financing round — that’s about the typical size of what a company is looking for to get them to the next milestone. But the PA Angel Network (PAN) and Jeff Snellenburg [the group’s president] have done missionary work over the last five years to build relationships between the different nodes of angel activity. Whether its BlueTree Allied Angels in Pittsburgh, Delaware Crossing Investor Group in Philadelphia, or the Lehigh Valley Angel Investors, he’s bringing all those people together.
The other trend that I’ve seen is micro venture capital funds where the limited partners are also the general partners. These are typically $10 to $15 million funds made up of exited executives or entrepreneurs that use their own capital. It’s usually four or five partners that have put the capital in and they’re actively seeking investments. They seem to be willing to look at companies a little bit earlier than some of the institutional VC funds, and I think that’s a positive.
Can you tell me a little about your background and how you got into this field?
I started my career as a banker. Back in those days in the mid ’90s, the economy was very good, so the banks were working hard to attract recruits. Part of the offer was that they would pay for an MBA — or at least a big part of it. So I worked at the bank during the day and went to Temple University’s Fox School of Business at night. From there, I went to a community development financial institution called Community First Fund — it helped startup businesses that were non-technology but focused on making an impact in low-income areas. When Governor Rendell was elected in 2003, I had a friend go work for him and she asked if I’d be interested in helping run the new venture capital programs the state was going to get involved in.
I did that for a while, and through that work I got to know Ben Franklin. After my work at DCED, I came to Ben Franklin and I’ve enjoyed it immensely. I think it’s probably one of the best jobs there is in Pennsylvania, so I’m thrilled to be here.