Originally published in Business Digest, July 1998

Peters' Principal

by Julia Lynam

Greg Peters North Atlantic Capital Corp. came to Burlington in 1988, when Greg Peters (pictured) and David Coit were recruited to set up the Vermont Venture Capital Fund. The fund is one of three raised by the Portland, Maine-based venture capital firm. (Photo: Jeff Clarke)

A $60 million venture capital fund is looking for Vermont companies to invest in.

Applicants will have to go through a rigorous selection process, but the will to invest exists and so does the money. The fund is the third raised since 1988 by the North Atlantic Venture Capital Corp., based in Portland, Maine, and represented in Burlington by general partner Greg Peters of Shelburne.

With plans to invest in 25 companies throughout New England, Peters is looking for companies that want to accelerate growth, perhaps fund an acquisition strategy, launch a new technology or product line, fund a management buyout or a transfer of ownership to employees.

"We're looking for management teams with strong visions of what they're trying to accomplish," he says, "where our capital can help them to realize those visions. It's not necessary to be a high-tech company to be a good investment. What's important is a clear market opportunity where the company can fulfill a need in a defensible way, and a road map for reaching that goal that sees generating a return for the stake holders as an important factor."

About 700 venture capital concerns like Peters' nationwide have a total of approximately $50 billion of assets under management. They raise money from institutional investors such as banks, insurance or pension funds, and from wealthy individuals, and invest it in carefully chosen, growing companies. The rewards can be great but the risks are high.

"It has to be riskable capital," warns Peters, "and investors have to be qualified under federal guidelines." Individuals who wish to invest have to have a net worth of at least $1 million and an annual income greater than $200,000.

North Atlantic does more than just invest the funds. It establishes close working relationships with the companies, typically taking a seat on the boards, where one of the partners can act as a sounding board for strategy, introduce alternative funding sources and assist with future financing.

North Atlantic came to Burlington in 1988, when Peters and his founding partner David Coit were recruited to set up the Vermont Venture Capital Fund. Peters, originally from Wellesley, Mass., moved to Vermont in 1978 to manage the Rossignol Ski operation in Williston. He founded software company Vermont Micro Systems in 1980, but sold his stake in the firm within three years and entered the venture capital management world by joining the Boston office of Investments Orange Nassau, a large Dutch company. In 1987, with Coit, he co-founded North Atlantic Capital Corp.

At the time the Vermont Venture Capital Fund was established, South Burlington City Councilor William Cimonetti, a retired vice president of General Electric, was a special economic adviser to Gov. Madeleine Kunin, and one of his priorities was to encourage capital investment in Vermont companies.

Cimonetti pulled together a panel that included Burlington businessmen Ray Pecor and Nord Brue, to help set up a venture capital fund in Vermont. Legislation was enacted to provide tax incentives to encourage Vermonters to put their capital to work in the state. Once set up, the fund has operated as a private enterprise. First, however, they had to create a structure and select a managing general partner for the fund.

Among those interviewed for the job were Peters and Coit, who were already operating in the venture capital field. "They were a very good choice," says Cimonetti. "We selected Peters and Coit largely because of their experience and knowledge in this area, and the fortuitous coincidence that they were ahead of us in that they were already creating the first North Atlantic Venture Fund."

Peters and Coit were recently joined by a third general partner, Bud Coffrin, former CEO of the Green Mountain Bank in Rutland, who works out of the Portland, Maine, office.

North Atlantic's three funds invest in northern New England businesses. The Vermont Venture Capital Fund has $7.6 million invested in 17 companies, eight of them in Vermont; North Atlantic I has $17.2 million invested in 19 companies, including five of the eight Vermont companies; and the newly raised North Atlantic II expects to invest $60 million in up to 25 companies. Each fund has a 10-year life cycle, with the first few years spent assembling a portfolio of carefully selected companies. The job of the general partners is to select the right companies, then to help them grow to make sure the investors receive an adequate return on their money.

"Venture capital as an industry has to be competitive with the public stock market," says Peters. "Our compounded annual rate of return is about 13 to 15 percent over 10 to 15 years."

In the first four or five years of the funds' lifetime the partners select and invest in suitable companies. In the second part of the cycle, Peters explains, they concentrate on "driving the companies to maturity" -- until they go public, merge or are taken over, buy out their investors, or fail.

"Out of 10 companies we invest in," says Peters, "we generally see one or two very successful 'home runs,' one or two complete bombs where investors get very little back on the dollar, three or four where the return is double or triple the investment, and a few where we have to work very hard just to get investors' money back."

Seeking help doesn't come easily to many Vermonters. Investors and companies are more tuned in to venture capital in states like California, with its flourishing high-tech industries, than here in Vermont, says Peters. "Venture capital is well known and accepted in Silicon Valley," he says. "There it's not a question of if you bring it in, it's when. But in Vermont the loss of control is a real issue -- Vermonters want to be independent."

So why stay in Vermont, when the market is easier elsewhere? The answer's a familiar one: lifestyle and skiing. Son Andy, 17, is a competitive skier, studying at the Green Mountain Valley School in Waitsfield. Daughter Faith has just completed her freshman year at Middlebury College. Greg's wife, Diane, is working in a voluntary capacity to develop curriculum at Champlain Valley Union High School and the Green Mountain Valley School and chairing the Green Mountain Prevention Project, which helps youngsters to make good choices around drug and alcohol issues.

Greg is an affable, enthusiastic man who embraces the companies his funds invest in -- constantly referring to them as "our" companies. "We're not just investing money," he says. "We're helping companies win."

It's not all been smooth sailing: The Vermont fund was heavily criticized in 1992 by Rep. Terry Bouricius of Burlington who accused it of turning down suitable Vermont businesses and failing to live up to its obligation to invest in the state. Bouricius also objected to North Atlantic Capital Corp.'s being paid a commission for managing the fund whether it made investments or not.

Peters recalls: "In 1989, '90 and '91 we did just one deal a year, three years in a row, in the whole of northern New England. There just wasn't anything to invest in, and it was the right decision. We had a tax credit to attract us to Vermont, but we were allowed to invest outside the state as well. One politician decided to argue about what the statute said -- we worked it out."

The criticism led to a legislative investigation of the fund, which called for several changes, including a change in the commission arrangements. "There were improvements made so that more Vermont businesses could be considered," Bouricius says. "In no sense do I feel that the fund was made to be a good thing, but the worst abuses were fixed and it was brought into line with the letter of the law."

Cimonetti maintains the original statute imposed no obligation for a particular amount to be invested in Vermont. "There was, however," he says, "a sense that because there was a state involvement, in forgiveness of taxes, that the state legitimately had some reason to ask what benefit was accruing to it.

"It was settled very satisfactorily," he continues, "and a substantial amount was invested in Vermont -- the greatest success among the Vermont firms being Casella Waste Management."

Peters claims Vermont Venture Capital Fund investments have benefited the economy of the state far beyond their face value: "Our little fund that invested $3 million in eight Vermont companies attracted another $90 million of private investment from outside the state," he claims, "as well as another $110 million in out-of-state bank financing.

"At their peak, our companies employed 900 people, and had a payroll of $10 million annually. State withholding taxes came to $250,000 a year. And, although $1.5 million of tax credits were allocated to encourage our investors, only $900,000 were ever claimed. In my opinion," he declares, "the return for the state has been outstanding."

He might also apply that adjective to the company that is the feather in the cap of the Vermont Venture Capital Fund.

Casella Waste Management has blossomed over the past 10 years in an increasingly regulated and consolidating market. Since 1987, the Rutland-based family company has expanded its operations into New Hampshire, New York, Maine and Pennsylvania, increasing its gross annual income from $10 million to $70 million in 1997, and successfully launching its stock on the NASDAQ market in October 1997.

CEO John Casella says the fund's $1.5 million investment in his company in 1992 opened the door to investment by other venture capitalists, and helped accelerate growth.

Initially, he was cautious: "As a private company, the notion of selling a portion of the company to raise capital took a bit of getting used to. Historically we'd been able to grow the business through debt rather than equity," he says.

Casella was poised to buy some waste disposal facilities, and with debt financing not readily available he decided to take the venture capital route. He found it to be "a very positive mechanism to grow a company and add shareholder value.

"Greg Peters brought a real sense of the strategic opportunity to the board," he continues. "The investment was there and the experience was there, but the management team was still free to make the decisions."

Another Rutland businessman, Peter Dawley, Westminster Cracker Co. CEO, comes from four generations of soup cracker makers. His family firm was sold to baking giant Pillsbury in 1968 and Dawley left the business in 1982. A few years later, however, he ended up in Vermont, "and a couple of friends persuaded me to make crackers again. I thought if we applied some marketing to it, we could build up a business that would be viable."

There was a constant need for capital, at first provided by individuals, but in the early 1990s, Dawley recalled, Peters came into the picture.

"We went through two rounds of financing with the Vermont Venture Capital Fund and it was a very positive experience," says Dawley. "I like Greg personally, in spite of him being a Harvard MBA -- he's been very helpful, and constructive when times were not so good," he recalls.

The $700,000 invested by the venture funds helped Westminster Crackers to grow substantially and pull itself into the black in 1996, doubling its profit in '97 and seeming set to do that again in 1998. "We've finally seen the light," says Dawley, "now we're going through a major expansion, moving to a new facility in Rutland, which will mean a 40 percent increase in production and a few more jobs. At the moment we're out of the need for equity," he continues, with a big grin in his voice. "We've got to the point where the banks like us!"

Vermont Micro Systems, which the fund invested in years after Peters divested his interest, was a sadder tale. The Winooski company's proprietary software was pirated by a larger company. "Our only recourse was litigation," says Peters. "Five years of court battles. We finally won damages, but not enough to compensate for the expense and for the theft of the company's future."

It was a hard learning experience for the management team and investors, who ultimately got back about 40 cents on the dollar from their investment in VMS.

Every company is different, but, says Peters: "In general in Vermont we've either worked our way out and got our money back, or made money."

He's excited about the new fund, which is not linked to Vermont tax credits. "We've already made investments in Maine and New York state," he says, "but this fund has yet to invest in Vermont. We have four more years of active investment and we're anxious to get Vermont companies into this. For me it's the highest priority."