SmartForest Ventures (Hugh Mackworth and Debi Coleman) seizes opportunities in Portland

Hugh Mackworth, a local angel investor, co-founded SmartForest Ventures in 1999. He and co-founder Debi Coleman couple their seed-stage venture capital fund with active coaching in a business accelerator to help position fast-growth, high-tech companies, preferably based in the Portland area. The dozens of limited partners who invested in the fund include IBM Corp. and Madrona Venture Group.

By:
Robert Goldfield
The Business Journal of Portland

Contrary to many other venture capital firms, SmartForest made several investments in 2002. Mackworth recently talked to The Business Journal about SmartForest’s approach and the current environment for venture investments.

Business Journal: Can you summarize the investments SmartForest has made in the past year?

We’re very pleased to have invested in three new companies—myHealthBank, Natural Messaging and iMove—all here in downtown Portland. We also re-invested in each of our four other companies (Finatus, Upright Systems, TechTracker and Teseda). Surprisingly in today’s environment, all our companies are still going, and most are doing very well.

BJ: That number of investments seems high in contrast to many other VCs. What were the reasons for that?

For our size, that level of investing is a lot compared to the venture industry right now. Today, the industry is paying more attention to existing companies than to new deals; in addition, many have lost their nerve or passion for creating new companies. At SFV, we’ve been steadily doing just under one new deal a quarter (seven over two years). Back when we started in 2000, that was considered very slow; now it’s considered very fast. We actually would like to increase it to about five a year. We’ve had to turn down a couple of good companies, when we could not find an appropriate co-investor. We may need to opportunistically broaden our scope a little bit, looking at deals outside of Portland (but in our areas of expertise), or at later-stage deals.

Back in 1999, when planning SFV, we assumed that the enormous bubble of activity then occurring would pass, and that as an early-stage investor, we would have to invest in companies that would have to succeed for the long-run, not just be a quick flip into the public markets. So we weren’t surprised by the fact of the crash—just by its speed and magnitude. Most 2000 funds were raised assuming an active investment period of one to two years; we assumed four years, and now it may extend to five.

BJ: How does SmartForest differ from other VCs in terms of size of investment and stage of growth at which it invests?

Although it’s out of favor right now, we’re still an early-stage investor; in the long run, we feel that’s still the best way to succeed. Our internal policy calls for us to do up to $500,000 as a seed investment, mostly by ourselves, or $1 million to $2 million as part of a first round with a co-investor, then up to $5 million total over the life of the company. We’re a little more reluctant to do a seed deal by ourselves, as the follow-on investors are still hard to come by.

The biggest differentiator is our geographic focus on Portland. We have a strong belief in this region’s ability to create great new companies. Our goal is to be one of the reasons our venture friends from the Bay Area or Seattle are eager to invest here: because they have a local co-investor they can count on.

BJ: In terms of quantity and quality, how has deal flow seemed this year at SmartForest?

The total number of business plans in our target area (high-tech, early stage, Portland-area companies) has declined dramatically, but really, the number of quality proposals within that group hasn’t changed much. There’s a phrase in the Bay Area now: "The tourists have gone home," meaning that people starting companies now aren’t looking for easy riches, but they have a compelling technology or market and psychologically, as entrepreneurs, they’re driven to succeed. I think we’re seeing the same phenomenon here and I think that’s a very healthy transition.

BJ: SmartForest has taken an approach of offering incubator space and executive advice to its portfolio companies. How has that paid off for you so far?

The incubator aspect of SFV has always been a little misunderstood. We don’t do it because it saves money for the portfolio company, but because it lets us work closely with them.

My partner, Debi Coleman, and I both come from an operating background, and providing operating guidance and help is a key part of our strategy.

BJ: Do you anticipate much of a recovery in 2003 in the pace or size of investments that VCs will make?

We certainly expect and hope so; again not so much in the number of deals, but in their willingness to look at new companies outside their existing portfolios.