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Region entices NYC investor

Rochester Business Journal
November 16, 2012

Brian Model is betting on Rochester.
The New York City-based managing director of Stonehenge Growth Capital LLC predicts his firm's investments in three local companies will have helped produce $15 million to $20 million in revenue and created 160 to 170 jobs by the end of 2012.
Model is not done yet. Stonehenge, a recipient of $5 million from the state's Innovate NY program for seed and early-stage capital, plans to invest that money in eight to 12 companies over the next three to four years.
"Out of those, it wouldn't surprise me for there to be half of them in Rochester," Model said.
A native of New Jersey, Model has noties to Rochester other than his investments in Lumetrics Inc., iCardiac Technologies Inc. and eHealth Technologies, formerly known as eHealth Global Technologies Inc. Stonehenge, which spun out of Bank One Corp. in 1999, has invested a total of $3.5 million in these firms. The companies had less than $2 million in combined revenue when Stonehenge made its investments.
Model, who was earning his MBA at Columbia University when he began his relationship with Stonehenge, was given the task of helping the firm meet its requirement to invest two-thirds of its capital outside New York City. Approximately one-quarter of the money was expected to go to early-stage companies.
"I had a real interest and passion of working in these earlier-stage companies and I said, 'I'll do it,' and I worked with Stonehenge to learn more about how to do a deal, but I started coming upstate," Model said.
Stonehenge operates eight state target funds.
"If you want to find the best deals and if you want to help businesses grow, you've got to become part of the community," Model said. "You can't just fly in and say, 'I'm here to do a deal,' where all of a sudden you become 'that guy from the city who's going to steal my company.'
"You have to build trust, you have to know the investors, who have to know who the right people are to work with. ... That's been real important to us, and Rochester has become the center of that for me in Upstate New York."

Investing in Rochester
Stonehenge is attracted to companies at the intersection of health care and information technology.
Lumetrics, the first business to get an influx of capital from Stonehenge here, has received some $600,000. It is known for its OptiGauge system, designed to reduce production time and enhance quality for manufacturers of medical devices, optics and industrial materials. The business in July acquired assets of the former New Mexico-based WaveFront Sciences Co. LLC from Abbott Laboratories, whose products are used in ophthalmology.
"Lumetrics' technology was licensed out of Kodak, and John Hart, who is the CEO, was formerly with Bausch & Lomb," said Model, a director at Lumetrics. "You add those two things together and you've got Rochester's industrial history at your fingertips."
Stonehenge invested in Lumetrics in December 2005 and is a shareholder. Trillium Group LLC's investment in Lumetrics was a plus for Model.
Next came iCardiac Technologies, which in May 2006 signed an exclusive license agreement with the University of Rochester Medical Center to commercialize technology to determine cardiac toxicity of drugs.
"We focus on business-driven entrepreneurs," Model said. "It's very hard for me to get excited about backing an entrepreneur who's in a lab coat. I don't want to invest in science projects; I want to invest in businesses that are using technology to solve business problems."
The background and experience of iCardiac Technologies CEO Mikael Totterman and Alex Zapesochny, president and chief operating officer, coupled with the technology caught Model's interest.
"ICardiac was pre-revenue at the time we invested," said Model, an observer on iCardiac's board. "We typically don't do that. But they had a major pharmaceutical company as an early partner, and that also helped us get over that risk."
ICardiac Technologies got close to $800,000 from Stonehenge starting in October 2006. It used the funds to hire its first group of employees and build its technology to make it workable and robust, Zapesochny said.
"They invested in us really pre-revenue and pre-employees," he added. "At that point there were three unpaid individuals running around when they made the investment. They really took a calculated risk on us. We hadn't proven anything at that point.
"That's hard, to get venture capitalists to put in money at that point. But Brian, in particular, and other folks who invested really dug into the technology, dug into the issues, spent a lot of time with us to make sure we had thought this through to their satisfaction."
EHealth, on the other hand, had come along much farther. Michael Margiotta, chairman and CEO, who started the company seven years ago, had funded it along with his business partner, Ken Rosenfeld, and family and friends until 2010.
"I heard of some absolute horror stories (about) bringing on venture capital funds, and (I'm) very, very happy with the relationship, very happily surprised," Margiotta said. "They've been really good partners. They keep us focused and driven; they've been able to raise the bar for us."
Stonehenge poured $1.9 million into eHealth, a provider of medical record retrieval and diagnostic image exchange services for half of the nation's top 100 hospitals and leading health information exchanges. The company used the money to expand its sales force and flesh out its management team.
"They were a slightly later-stage company (and) frankly, I was more mature. It was my third investment in the town; I felt more comfortable in the community," Model said. "We took a much stronger leadership role."
Not only that, but Model, a director at eHealth, steered another venture capital firm toward the company. New York City's Milestone Venture Partners has invested some $2 million in eHealth, said Richard Dumler, a Milestone partner.
"(Stonehenge's presence) did make a difference, because we had a ready-made partner. We would never have probably seen the opportunity if it hadn't been for Stonehenge, because Brian covers Rochester much more carefully than we do," Dumler said. "We usually don't see Rochester proposals. ... It's not an area we go to frequently."

Expecting returns
Milestone and Stonehenge are bullish on their local investments.
"We're pleased; (eHealth) has grown nicely since we invested and still continues to grow nicely, so we look forward to a successful outcome," Dumler said.
EHealth is on a growth trajectory. The firm, which does not disclose revenues, has come close to doubling revenue year after year with a 590 percent growth rate since 2008, Margiotta said.
At the end of 2010, the year Stonehenge made its investment, the company had 32 employees, and it expects to close this year with roughly 105. It is in talks with investors to obtain more funds, and Margiotta said its current stable of venture capital firms has committed to investing more in the next round.
"So that's a very good sign for new investment ..., if your current VCs are willing to invest," he said.
ICardiac Technologies also has had success, expanding from no employees when Stonehenge came in to more than 60. Revenue, kept private, reportedly has grown more than 50 percent each year over the last three years.
Though Model said returns on his investments in these companies would be different based on their individual growth paths, he sees opportunities to return up to five times the capital invested.
"If I put in $1 and I get $5 back, we're going to be real happy about that across the board," Model said. "We feel that each of the companies that are here in the community have very large markets that they can address and they are also operating in very interesting industry spaces today."
Stonehenge's Florida-based managing director, Steven Lux, who is involved in the company's Rochester investments, voices optimism as well.
"They've got talented management teams that have enjoyed success in their career at some point. They have developed, they've gone out, they've looked at the market, they've found where the paying points are, they've found that it's not a commodity type of product or services that they're offering," Lux said. "The growth potential for them to grow, to get to that $30 (million), $40 (million), $50 million revenue level, in all cases is very achievable."

Upstate potential
Model is on the lookout for more prospects. On a visit to Rochester in October he had a meeting with an undisclosed local firm, and he said there are companies in the pipeline. His plans for the Innovate NY funds are clear.
"We're going to focus that investment exclusively at the intersection of health care and IT, so we're actively looking for other iCardiacs and eHealth Globals in Rochester and across Upstate New York," Model said. "Most of that activity will be in Upstate New York; most of my activity is centered around Rochester."
He recently was appointed president of the 90-member Upstate Venture Association of New York Inc. In that role Model plans not only to increase membership by 25 percent but also to promote success stories, help businesses connect with downstate investors and educate entrepreneurs on issues like raising capital.
Though Stonehenge has made strides here, the fact remains that Rochester and other upstate cities are not on the radar of big-city venture capitalists. Model admitted it is a challenge because of a mismatch between the types of companies in Upstate New York and the types of companies investors in New York City are interested in. Most investors like to invest close to home, he said.
Model hopes his firm's activity will continue to generate interest.
"Stonehenge has invested about $13 million in 12 companies in New York State, including four in (New York City) since 1999," Model said. "With that $13 million investment there has been over $100 million of other investment that has come into those companies.
"Now, I'm not going to claim that all of that additional money is because we were there. My point is that when an investor is willing to invest in a community like this, other investors see that activity as a reason to come and co-invest."

11/16/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email

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