John Lilly - Strategic Insights
John Lilly - Strategic Insights

 

The investments described below comprise Lateral Capital (LC), the Early Stage company investments of former Pillsbury Company CEO and long-time Procter & Gamble executive, John Lilly. Lateral Capital is a companion entity to John Lilly Strategic Insights, LLC (JLSI), the corporate and Early Stage advisory practice for John Lilly and Steve Gold.

These investments are “pooled” in groups of 15 as Lateral Capital I and II. This number was chosen with an eye toward industry research on Early Stage companies: 52% return less than their invested capital while 7% --- on average, 1 company in 15 – returns 10X or more. The rest of the companies return between 1X and 5X. http://www.kauffman.org/uploadedFiles/FactSheet/AngelAccessMarket101508FS.pdf This translates to an overall return of 2.6X, making Early Stage investing, a highly competitive investment class.


motion point

Advanced Programs, Inc. (API) is involved in the manufacture, testing and sale of custom-engineered computers, workstations and peripheral equipment which is certified under the TEMPEST regulations. TEMPEST is the US Government standard for limiting electromagnetic radiation emissions from electronic equipment in order to safeguard data integrity and prevent its unauthorized disclosure. Key API customers are government agencies including the Department of Defense and similar agencies in the US and other NATO countries.

In 2011, API had the strongest year in the company’s 11 year history, building on its acquisition of a very similar business in the UK from BAE Systems in 2007. This acquisition has strengthened API’s production capabilities and increased API’s sales by about 50%. The company continues to look for add-on acquisitions which can benefit from the company’s technology base and is developing both multi-domain and video systems for military customers. www.advprograms.com

Key Learning: We believe that API will be a very successful investment. However, we would probably not invest again in a business where the government is the only major customer. The fact that API is structured to only sell to US Government / NATO agencies means that it is unable to sell broadly to corporate customers. Moreover, government-only sales translate to wide swings in sales based on Federal budget priorities, making consistent growth and cash flow a challenge to deliver.

Introduction Source: Compass Advisors, a previous JLSI client in investment banking (New York).

Advanced Programs, Inc.
Columbia, MD

Initial Investment –March, 2002
Employees: 230


Centrak (CT) is a developer of wireless location-based tracking systems for high value assets. Initially, their idea was to provide mothers with an easy way to keep track of their children, using a simple directional monitor and a “fob” which could be tied to a shoelace. The idea made it to retail, including Best Buy, but with very little notice. Simply, the market was too small for a product which was not GPS based; aimed at a very “defensive” application.

Undaunted, the brothers behind Centrak morphed the company into a tracking system for high value / immediate need assets in hospitals – for example, crash carts or mobile MRI equipment. This market came along slowly as well until Centrak became a partner to GE Healthcare and other large distributrors. Since then, the multi-technology approach which Centrak began developing around the need to track children has become very close to the industry standard in health care. It is used today in about 20 hospitals, with an excellent pipeline. www.centrak.com

Key Learning: Lateral has a very small investment in this company; we wish we had more. The company’s management has been doggedly focused on making location management successful and in the last three years and they have made remarkable progress. The learning for Lateral is threefold:

  • We shouldn’t make “placeholder” investments unless we have the capital to continue supporting the company as the capital structure expands. This deal “got away from us” at a point when we didn’t have money to invest in the subsequent layers of the cap structure.
  • We should be careful about investing in businesses where the “3D’s” (Distribution, Distribution and Distribution) are not fully addressed, i.e. unless the distributor partner is in place at the point we invest.
  • We should be careful not to invest when the technology is “too new”. In just a few years, the technology Centrak needed has gone from “bleeding edge” to “off the shelf”, leaving their costs and improving their margins dramatically.
Introduction Source: Tom Gilley, an electronics industry banker/consultant at Compass Advisors (New York).

Centrak (CT)
Newtown, PA

Initial Investment – June 2002
Employees 26


motion point

MotionPoint (MPC) is the industry’s leading provider of website language management to companies, government entities and health care providers. With more than 500 clients including Amtrak, Best Buy, National Car Rental, CVS and Delta Airlines, sales have grown 10X since 2005.

MPC offers its’ clients a turnkey service which allows their English language websites to be made available as originally designed, but in any of 40 different languages – including Indonesian, Chinese and Japanese. Installation requires very limited IT resources from client companies and changes in the English language copy can be translated to alternate languages overnight. Covered by multiple granted Patents and applications, the MotionPoint process eliminates about 75% of the clients true cost in building and maintaining multi-lingual websites. MotionPoint was an Inc.500 Fastest Growing company beginning in 2008 and was #148 on Deloitte’s Technology Fast 500 for 2010. MotionPoint was also named Business of The Year in South Florida for 2010 and had continued to grow in 2011.www.motionpoint.com  

Key Learning: MPC is already an excellent investment, as we have already sold most of our position for a significant return. This is despite competitor attempts to copy MPC’s business model and ignore MPC’s patents. Our learning here has been very positive – emphasizing what we should do more of in the future:

  • Be sure the strategy is right. With our encouragement, the company evolved away from its original strategy – online brochures in multiple languages – to dynamic translation of websites. This process of “strategic evolution” has occurred in many of our companies and it has been a key part of the “path to progress” for each of them.
  • Make continuous contributions on new customer introductions. We have introduced MPC to 25+ potential clients. While few of them turned into customers, the insights gained helped the company to refine their selling message. B to B customer sales, as it turns out, have been the most difficult functional task for most of our invested companies to master.
  • Drive IP hard. Working through an affiliated investor (who is General Counsel for JLSI, our consulting company), Lateral helped the company to upgrade its patent counsel from local providers to one of the leading patent firms in the country: McDermott, Will & Emery in Washington. This change has led to several issued patents and multiple additional patents pending. We were also involved in developing several trademarks for the company.

Introduction Source: Karl Maggard, a former P&G Sales Executive in Sarasota brought us into this investment.

MD Offices
Coconut Creek, FL

Active Investment
Initial Investment – June 2002
Employees: 140




Wise Foods (WF) is a regional producer of snack foods including potato chips, corn snacks and cheese “doodles”. Their “burned chips” (actually over-browned chips cooked in very hot oil) were the standard for great potato chips in the Northeast US, going back to the 1960’s. In fact, Wise® Foods was once the leading “chipper” in about 30 - 40% of the US. In the last 20 years, however, WF has been under huge pressure from Frito-Lay and has declined significantly. The business has been through changes in ownership and several rounds of management.

Lateral invested in this business as part of a “side car” group investing in a 2003 restaging of the company. The investment was made at a valuation lower than that which the private equity fund controlling the company had invested three years before. Until the last three years, the business has been “bumpy”, with a dramatic scale back in geography and changes in the distribution structure, a move to increase sales to national accounts (i.e. Wal-Mart), etc. More recently, the company is doing much better thanks to great work by the management team. As a result of their work, the controlling PE fund was able to re-finance the company in 2010 and pay the equity owners, including Lateral Capital, a dividend. www.wisesnacks.com

Key Learning: This investment will be a success, albeit over a much longer time frame than we expected. While a significant part of our capital has been returned already, this investment illustrates well why smaller food and beverage companies are not especially attractive as Early Stage investments. Simply put, there are so many issues to address --- raw material costs, distribution expenses and a highly consolidated retail trade --- that investments are unpredictably risky. In addition, investments in pure consumer marketing, like that which is being invested to slowly bring back the Wise® brand, is both expensive and long payout. More broadly, we would probably not invest again as such a small part of a larger investment. Despite extensive knowledge of the snack industry, we have been unable to influence the course of the business in ways that would drive the value of our investment.

Introduction Source: Christy Sadler, a Private Equity investor in New York, then at Palladium Capital.

Berwick, PA

Initial Investment – December 2003
Employees: 200


Mayan Pigments (MPI) is a developer of new-generation, environmentally friendly pigments. Incubated at the University of Texas at El Paso, MPI has developed an entirely new type of pigment material for coloring plastics, paints, fiber and concrete. Inspired by techniques used by the Mayan civilization 1200 years ago, the Mayacrom® line of pigments has excellent sunlight durability and delivers consistent color tone across different lighting conditions. MPI Pigments are made from low-cost clay-based materials and can be formulated with all-natural organic dyes. MPI products became available to the master-batch plastics industry in 2007 and is in use by several smaller end-users. MPI’s long-term plan was to brand the inclusion of Mayan Pigments through to consumers in a way similar to the “Intel® Inside” trademark. Covered by a very rarely granted Composition of Matter Patent. www.mayanpigments.com

Key Learning: Experience at Mayan teaches an important lesson: Investing in technology before it is fully developed into marketable products is a risky proposition. The issue for Mayan was that the product benefits we saw in the laboratory did not quickly “scale” to specific customer applications. Much more testing was required than we had budgeted for, putting a strain on the company at an early stage. If we had insisted the company have real customers before we invested, this issue might have been more obvious, allowing us to avoid the investment. Other learning:

  • Be careful about assuming there are “standard” products. While the Mayan technology is technologically brilliant and we had a national distribution arrangement with a global pigment supplier, we grossly underestimated the need, cost and difficulty of “tailoring” the product to thousands of individual customers. Each application for every customer was a development project unto itself and no two colors or applications were the same.
  • The appeal of “green” may be overstated. The Mayan product line can be made without heavy metals and with all natural organic vegetable dyes. And yet, when asked to pay a few cents extra per pound for our dye material, even the “greenest” manufacturers of bottles, toys, carpet, etc. lost interest in converting to our product.
  • Focus is essential. Despite many efforts to narrow the company’s focus to only a few of the thousands of uses for pigment material, Mayan has found it difficult to “say no” when potential customers come to the company. This is an embarrassment of riches, as someday, the Mayan technology will find a home. But for an Early Stage company, chasing “too many opportunities” has been a downside.

It is too early to say where this company will wind up, but we remain hopeful that a major customer breakthrough --- perhaps one which we have introduced to the company --- will produce significant, sustainable volume.

Introduction Source: Private investor group in Princeton, NJ.

Mayan Pigments (MPI)
El Paso, TX

Initial Investment – July 2005
Employees: 1


Trans-Alarm Security Systems (TASS) is the largest independent provider of UL-certified fire and security monitoring in Minnesota and quickly becoming a national provider to chain retail outlets. Customers are charged monthly monitoring fees and for installation and repair of increasingly complicated fire and security systems. From a central alarm station south of Minneapolis, the company began with a focus on protecting high-value, high-risk commercial facilities including banks, office complexes, high-rise buildings and special purpose operations like water treatment plants. Beginning in Summer, 2011, TA expanded to focus on national retailers – building on the experience of a new CEO.

Trans-Alarm has grown in Minnesota by expanding with current customers and acquiring smaller providers which were consolidated into TASS’s existing monitoring infrastructure. Nine acquisitions have been completed to date, the largest of which are in Redwing, MN, western Wisconsin, Jackson Hole, WY and Omaha, NE. Additional “add-on” deals are expected as TASS expands into security services for big box retailers. TASS has been recognized nationally as one of the industry’s most advanced providers. www.transalarm.com

Learning To Date: This will likely be a very successful investment. While the growth of TASS was slowed by the recession, the goal of this investment was to learn about Recurring Monthly Revenue (RMR) businesses. Based on learning to date, this looks to be very attractive. Other insights:

  • People are everything. Lateral was helpful in attracting a new CEO to TASS from a much larger company. This was a big, expensive step for the company as we had to give up equity to attract him. But long-term, it will be the key to success for the investment.
  • Rollups are challenging. This business was built around the notion that there are hundreds of local alarm companies that could be bought and consolidated into Trans-Alarm. While this remains true, it has been both difficult and time consuming to negotiate deals with “local” owners. This has driven TASS to a “national” acquisition strategy, where the company has a much larger group of sellers to work with.
  • Every business is sensitive to the economy. Initially, we saw fire/security services as a business which would be relatively insensitive to downturns.  The thinking was that businesses would hang onto their alarm services, no matter what. This turned out to be only partially correct. While we lost relatively few contracts, TASS’s new system/upgrade installation business was hit hard and this has slowed our sales growth vs. plan.

Introduction Source: Arctic Capital (Minneapolis) is the organizing investor behind this business; managed by J.C. Kiser.

Trans-Alarm Security Systems (TASS)
Bloomington, MN

Initial Investment – Sept 2006
Employees: 26


Ready Credit Corporation (RCC) provides prepaid debit card services to the 28 million US households who do not have traditional bank accounts. RCC’s first patent has been allowed and others are pending. Ready Credit cards can be used to pay bills online or by phone, buy goods and services or as the basis to buy cell phones. Frequent customers can receive personalized cards and can have their paychecks deposited directly into their RCC accounts. www.readycard.com

Over the first 3 years of the investment, RCC tested distribution of Ready Credit® prepaid Debit Cards to consumers in three different ways:

  • NCR-built “reverse ATM machines” at high traffic retail locations. Instead of dispensing cash, these machines accept cash and return MasterCard® or Visa® branded Ready Credit prepaid cards to customers.
  • Direct response TV and in-bound calls for government transfer payments to introduce Ready Credit cards to consumers. This has been effective, although the issues of getting the Federal Reserve System to properly process payments to RCC accounts has been challenging.
  • Major transit agencies using Ready Credit cards to replace traditional fare collection for bus and subway systems. Testing began in the Los Angeles transit system in October, 2010 and has recently expanded to a major East Coast city.

Key Learning: While it is too early to tell if RCC will be a big success, this investment has taught us a key lesson: Early Stage companies need to evolve through several business strategies before they hit on a winning combination of product, target market and distribution channel. Despite an excellent CEO / business plan, it just wasn’t possible for RCC to define exactly which go-to-market approach would work best from day one; they have had to test their way to success.

Fortunately, this investment is led by a very experienced investor who knew this lesson well and raised enough money for the company to evolve smartly through different customer acquisition models without running out of cash. The good news is that if we can perfect one or more of their customer acquisition models, the company will be a prime, high value acquisition target. In July, 2010, a competing company (Green Dot, which gets its customers through displays in Wal-Mart) went public at 70X earnings.

Introduction Source: An experienced venture investor in Minneapolis, Erwin Kelen, brought us into this opportunity.

Ready Credit Corporation (RCC)
Minneapolis, MN

Initial Investment – November 2006
Employees: 9


Unity Works! Media (UWM) converts still photos and digital video content into highly sophisticated videos for use in on-line marketing. Focused initially on the auto industry, videos are produced for car dealers on a subscription basis; at $500 to $1000 per month per dealer.  Using highly sophisticated software technology, UWM recently passed the video production rate of 400,000 videos per month for 8,000 dealers.

Typically, the video “packages” produced by UWM are deployed instantly to dealer websites and hundreds of other online locations, where they help drive click-through rates and vehicle sales. UWM also prepares video emails of new and used cars for use by sales people directly with consumers. Auto Trader’s 800-person sales organization represents UnityWorks across the US. The company’s “dynamic video assembly” technology is covered by several patent applications. In early 2011, the company began expanding their core technology, including automated voice-overs, to other online applications, including High Engagement banner ads for auto dealers. In December, 2011, UWM began pilot testing of new car videos for the two largest US auto makers.www.unityworksmedia.com

Key Learning: We are confident that UnityWorks will be a significant success. This investment has taught us a lot about how to be effective in helping new companies to succeed. Key insights:

  • Being “on the Board” is not necessary. We have been effective at “influencing” the company without being on the Board. This means we have not had to worry about many typical issues Boards run into --- the conflicting perspectives of individual Board members, social dynamics between investors, etc. We simply tell the CEO/CFO what we think they should know to make the right decisions about the future of the company and then let them make the call.
  • Outsource the Three D’s. The company had a decision to make: Build its own sales organization to maximize gross margin versus outsourcing of sales to a third party as a way of moving faster. The conclusion --- to partner with Auto Trader --- was the right one in that it dramatically changed the growth trajectory. What are the “Three D’s”? Distribution, Distribution and, of course, Distribution.
  • Socialize the business in the financial community. While UWM has a very high profile among auto dealers including AutoNation and Penske, we have almost done “too good a job” of keeping the company’s operations from public view. We are starting this process now, but having good PR resources on board earlier would have made sense.

Introduction Source: We were introduced to this by Chuck Gorman, an investment banker in Minneapolis at Cherry Tree Securities. John Lilly Strategic Insights, LLC, our consulting company, acts as an advisor to the company.

Unity Works
Bloomington, MN

Initial Investment – December 2006
Employees: 85


Advaxis is a publically held (NASDAQBB:ADXS) biotechnology company aimed at commercializing the use of a bioengineered bacterium, Listeria monocytogenes to activate the human immune system.  While there are a broad range of potential applications, the first target will be cancer.

Advaxis is built on more than 20 years of discovery by Yvonne Paterson, Ph.D., Professor of Microbiology at the University of Pennsylvania. Yvonne discovered that this unique microbe is capable of stimulating numerous aspects of the immune system simultaneously including immune mechanisms in the blood and bone marrow. Listeria has also been shown to alter tumor microenvironments so that human immune response works more effectively. In pre-clinical research, Advaxis’ Listeria technology has consistently demonstrated excellent therapeutic responses, including complete tumor regression in some cases.

Preliminary results in humans have shown this technology to be safe and the therapeutic outcomes are very encouraging with several terminally ill patients seeing meaningful increases in life span. In April, 2010, Advaxis initiated its first clinical trial: a randomized, single blind, placebo-controlled, Phase 2 clinical trial for the treatment of cervical intraepithelial neoplasia (CIN), commonly known as cervical dysplasia. CIN is the precursor condition to cervical cancer, which is diagnosed in 450,000 American women annually. Because of lower rates of PAP smears outside the US, CIN leads to millions of cases of cervical cancer around the world. To address this, Advaxis has begun pilot testing in India with severely compromised cervical cancer patients. While we are not insiders, we believe the results announced in late 2011 were very encouraging. The company has multiple patents issued and pending. www.advaxis.com

Key Learning: This investment offers our biggest upside opportunity, but the outcome is tied to both effectiveness outcomes and regulatory approvals. If the concept of an attenuated Listeria vector is successful in its first application, then it may also work in a variety of other cancers. Most likely applications are head and neck, prostate and breast cancer. However, if the early testing is unsuccessful, the company will struggle to raise new money for additional testing. The good news is that the company’s current stock price is already about twice Lateral’s cost, so we have some protection.

The big learning on Advaxis is that finding the next high potential health care technologies should not be “off limits” for Lateral. However, we should be very careful about how we choose them. These early insights have emerged:

  • Look for “offbeat” solutions that make common sense. In this case, our ability to transfer an understanding of Listeria from the food industry to health care was an insight others would not have easily accepted. We feel confident in the science here, based on pre-clinical human testing and the fact that Listeria is such a well-understood bacterium.
  • Invest only when the risk-reward ratio is really compelling. Lateral acquired some shares of Advaxis at very low prices as well as through loans and warrants. This has significantly “averaged down” our priced position.
  • Watch out for FDA approval. If this investment turns out to be less than the home-run we project, this will most likely be the issue.

Net, this investment is still a long shot but everything we have learned about the technology has been encouraging and we are invested at a price which will allow significant upside if any one of the applications turns out to be successful. As one perspective, translating the multiple of the leading public prostate cancer treatment to Advaxis would represent a 100X multiple on the current share price.

Introduction Source: We have known Tom Moore, the Advaxis CEO, for 30 nears, going back to his time at P&G.

Advaxis
Philadelphia, PA

Initial Investment – June 2008
Employees: 14

 

IMPORTANT DISCLAIMER
Advaxis is a publically held company and shares are available for sale on the open market.  However, neither Lateral Capital nor John Lilly are “insiders” and readers are cautioned to make investment decisions based on their own independent analysis of the company’s prospects.


MedMeme

Reeher Group (RG) has developed a suite of software-based marketing services to improve fundraising success at colleges and Universities. This addresses a major issue in fundraising for higher education: Universities spend an average of about $150.00 per graduate to “connect” with their alumni, but “lose money” on over 95% of these relationships – i.e. they get back a lot less in contributions each year than they invest.  

Sold as a SaaS (Software as a Service) product, the RG approach allows University development offices to segment their alumni by type and donor potential. In short, the Reeher Dashboard can predict with great accuracy who is most likely to give and how much. Over time, RG will add additional services to its proprietary donor tracking system, including tools aimed at parents of current students. RG currently has about 25 client universities and 1000 gift officers across the US, with 5MM alumni in its client database. www.reehergroup.net

Key Learning: Reeher’s solution is aimed at an industry where traditional marketing management tools have yet to penetrate. In this context, selling for-profit practices into a non-profit world has been more challenging than we expected. Among other things, the sales cycle has been longer, and the demand for experienced selling expertise has been much greater. This experience has taught us to be much more cautious about the rate of sales ramp up in SaaS businesses --- especially in non-profit markets. We believe we will be successful here, but it will take longer than expected to turn this into a significant success.

Introduction Source: Outbound call to the CEO based on an article about Reeher in a regional business publication.

Reeher Group (RG)
St. Paul, MN

Initial Investment – August 2008
Employees: 15


MedMeme

Retail Net Group (RNG) is a research and advisory firm serving large consumer goods manufacturing companies. RNG provides these companies with proprietary insights on the global retail market and the needs of specific retailers in real time; in 40 countries. RNG charges its customers on a subscription basis and provides customized services such as Share Group membership and seminars on a fee basis. Located in Waltham, MA, RNG was started by Dan O’Connor, who previously founded Management Ventures, which was sold to WPP Group in 2001. www.retailnetgroup.com

Key Learning: This investment has taught us that properly organized, the “information services” business can be very attractive. The key to success is the company’s ability to convert industry insight into “products” which feel like they are customized to each buyer. In this situation, the RNG service offering is already well accepted by about 50 clients who need to stay current on the “next big thing” in retail channels around the world. RNG has learned how to scale the delivery of their information product in a website, with customized reviews of retail trends in specific countries and in customer seminars for high level consumer products marketing and sales people. Going forward, we plan to look specifically for businesses built on this model.

Introduction Source: Previous work with the CEO, beginning in 1989.

Retail Net Group (RNG)
Cambridge, MA

Initial Investment – August 2008
Employees: 40


Opt-e scrip (OES) drug testing technology allows physicians to learn which of two chronic care pharmaceuticals work in individual patients. The technique helps physicians provide their patients with better health outcomes for a range of chronic conditions; initially including GERD, osteoarthritis and allergic rhinitis. It works by blind testing two different drugs for the same condition over a 4 to 6 week period in the same patient. Very sophisticated statistical comparisons tell the physician which product worked best with certainty above 90%.

OES tests were originally designed for use by HMO’s and insurance companies on the theory that comparison testing would encourage physicians to prescribe generics or therapeutic substitutes --- products which often work as well or better than more expensive branded drugs. It would also allow drug companies to learn early-on about benefits for new products, in comparison to currently available products. The technology is protected by 111 issued U.S. Patent claims. This year, after a decade of work, the company has finally secured its first multi-million dollar contract with a global pharma company. www.opt-e-scrip.com

Key Learning: We learned that Early Stage companies do not have the capacity to “change” the prescribing behavior of physicians, even when there was broad agreement that the OES test technique is valid, effective and can dramatically improve the cost and quality of health care. Despite multiple successful tests, authoritative journal articles and the tacit support of regulators, we have been unable to “break through” with this technique. We learned that:

  • Even large insurance companies struggle to drive change in physician prescribing behavior, despite the opportunity for better health outcomes or lower costs.
  • Physicians do not have a compelling interest in pushing the market towards the use of generic drugs, even when the cost savings are significant and the products are proven to perform equally. Their focus is successful patient care, followed by their own income and “ease of administration”.
  • Pharma companies are difficult to persuade that new technology can help prove the value of their products versus competition. Their primary “customer” is the FDA and they don’t want to do anything that would upset regulators.

Despite all these woes, we believe the OES technology may finally be coming into its own --- with a benefit we had not originally anticipated. While it is still early, OES may turn out to be an excellent tool for pre-testing of marketing claims for Rx pharmaceuticals. We will know more about his in 2012.

Introduction Source: The CEO of OES is a former P&G manager we have known since 1978.

Opt-e scrip (OES)
Bedminster, NJ

Initial Investment – March 2000
Employees: 1


PAST INVESTMENTS

Prism Medical Systems (PMS) produces wireless software technology for the health care industry. PMS’s Prism® software has a wide range of applications at the front end of Electronic Medical Records systems in all types of medical facilities. Prism hand-held devices would allow hospitals, long-term care institutions, home health care and medical staffing operations to bill for their services more accurately and with higher levels of reimbursement. Prism-enabled devices can process dictation from physicians, track patient diagnoses and enable e-prescribing across all formularies through Rx HUB. The structure of how records are kept can be customized for each user using PMS’s proprietary “dynamic form” system. After a significant strategic change in 2007, PMS began offering its Prism SE™ product to pharmacies and Long Term Care facilities in mid-2009.  

Key Learning: This is the largest investment in Lateral Capital I and it was unsuccessful. The learning has been very sobering and in retrospect, more obvious than it needed to be. Specifically:

  • Distribution muscle trumps product technology every time. This seems especially true in health care. While our patented handheld patient management software was judged superior to the technology offered by General Electric and Siemens, these companies had multi-layered distribution into every US health care facility. As a result, we could never get traction with customers. Going forward, we would not invest in another technology-driven health care product without a distributor or licensee in hand.
  • Patents in medical records systems are difficult to get. We were turned down by the Patent Office four times on the core Prism technology, despite having first class legal counsel. Next time out, we would spend the money in due diligence to get a patentability opinion first.
  • It is tough to sell change to physicians. Because Prism was led by an experienced, capable physician, we thought we could get other doctors to listen and act on the new ideas we were offering: “Designed by a physician for physicians.” We were completely wrong. We simply did not have the resources to overcome the industry’s entrenched habits in prescribing, record keeping or patient tracking.

This company was closed in December, 2010. Based on this experience, we would probably not invest in medical services again unless they are required to meet government mandates or provide obvious profitability advantages for everyone in the health care chain.

Introduction Source: Former P&G manager in New York.

Prism Medical Systems (PMS)
Kingston, NY

Initial Investment – June 2002


MedMeme (MM) has developed a proprietary database of information on over 1.5 million medical researchers and key medical opinion leaders worldwide. Integrating data in the public domain from over 60,000 separate websites, MedMeme produces detailed profiles and objective rankings of the leading experts in virtually any field of medical research. These profiles and rankings are purchased by pharmaceutical companies who are constantly looking for leaders in specific disease areas to help them on product development and marketing projects. The data are also used for competitive intelligence and media planning purposes. MedMeme currently serves several of the major pharmaceutical companies with its products. Products are sold on a subscription basis. MM began operations in Q1 of 2005 and is headquartered in New York City.
 
Key Learning: While most of our capital was returned, this will not be a successful investment for reasons unrelated to the business concept. In fact, we continue to believe that information management in specialty fields like medical research remains a powerful place to invest. The key to success are both low cost off-shore data mining capabilities and very high quality customer service.

Introduction Source: Former P&G manager in New York.

MedMeme (MM)
New York, NY

Initial Investment – December 2005


MedMeme

Diabetes America (DA) was a 14 store chain of treatment clinics, primarily in Texas. These facilities offer continuous physician-led care to diabetics in a clinical setting. DA is broadly supported by large employers as an alternative to more expensive emergency room visits and because it helps their employees live full, productive lives despite their disease.

The cost effectiveness of the Diabetes America treatment program was highlighted in a 3 year longitudinal study conducted by Aetna on behalf of a number of health plan sponsors in DA’s Texas market. The results were very compelling:

  • Total medical and pharmacy costs were $224 per patient lower in Year 3 than in the control group of non-DA patients. Costs were $38 higher and medical costs were $262 lower, consistent with clinical guidelines for management of diabetes. Lower costs were attributed to 1) fewer inpatient days and 2) fewer ER visits.
  • Diabetic patients in the program had a better compliance with diabetic maintenance services: Retinal eye exams, HBA1c testing, LDL and Microalbumin screening were superior to non-DA patients. Most important, there were significantly fewer poorly managed diabetics (>7% HBA1c) in the DA group.

Net, these results confirmed DA’s internal studies and suggested that the value of Diabetes America approach to long-term diabetic care would be significant. As just one perspective: These results translate to a theoretical savings of over $5B to the Health Care costs for America’s 23MM diabetics.

Key Learning: This investment was aimed at building on an unfortunate trend in American health care: The exploding number of diabetics. This has worked well in that DA has taught us how to think about a wide range of other diabetes-focused investment opportunities. Medically, the company did very well and clinical outcomes were consistently excellent.

However, the company turned out to be way over-committed to expensive real estate and fixed Physician costs; two issues which resulted in bankruptcy. While we were in a preferred position alongside a much larger investor, all equity investors were wiped out. That said, learning was significant:  

  • Look to avoid investments which are so real estate dependent. Even in “rented” premises, the cost of leasehold improvements is a major issue for companies with ambitious expansion targets.
  • Be careful about investing where our position is such a small part of the capitalization. This investment would have produced a good return if Diabetes America had been able to expand nationally behind a public listing or sale to a large health care provider. But we had no control over the process or the timing as our position is a very small part of the equity.
  • Be sure the company has adequate “day to day” management skills. Management expertise with the real estate market and certain other “back room” issues at DA proved inadequate. Our due diligence focused on the medical / patent aspects of this business. We were “killed” by the company’s simple inability to manage accounting and employment issues

Introduction Source: New York-based colleague at an investment bank. Our investment was part of an interim fundraising effort for the company and was made in conjunction with Charleston Growth Partners, LLC.

Diabetes America (DA)
Houston, TX

Initial Investment – June 2008


LATERAL CAPITAL II – CURRENT INVESTMENTS

Lark Technology (LC) has developed sleep management hardware and software which turn smart phone devices into tools for addressing one of the world’s most important consumer health issues: lack of high quality sleep. Incubated at Stanford and the AOL Center in Palo Alto, this company has created or licensed an extraordinary range of sleep management tools. The Lark I device, now available nationally at Apple stores, tells users how long they slept, how many times they woke up and how their sleep habits are trending over time. Most important, the Bluetooth-enabled Lark wrist device wakes up one sleep partner with silent vibrations – allowing the other to stay asleep. www.lark.com  

Key Learning: So far, results are excellent. Management, led by CEO Julia Hu, has done a terrific job of designing and launching this product. The key issue now is the rate of consumer acceptance and whether Lark can keep up with the pace of competitive entries. That said, this is Lateral’s first foray into consumer electronics / smart phone accessories and there are bound to be several unexpected turns in the road.

Introduction Source: This company applied initially to the Band of Angels investment group in San Francisco and was introduced to us by former P&G colleague, Dr. Mark Schar.

Lark (LC)
Palo Alto, CA

Initial Investment – December 2010
Employees: 16


Advaxis (NASDAQBB:ADXS) is an investment of Lateral Capital I. We made a follow-on investment in this listeria-based cancer vaccine company for Lateral Capital II. This came in the form of a warrant purchase from another investor, giving us additional upside if the company is successful. www.advaxis.com

Key Learning: Publically available information on this company suggests no issues with their technology development program. We should know more about their studies of cervical cancer in India in early 2012. This will tell us whether the stock is on a trajectory to making the options valuable.

Introduction Source: Previous experience with the CEO, former P&G executive Tom Moore.

Advaxis
Philadelphia, PA

Initial Investment – April 2011
Employees: 14


once
Once Innovations, Inc. (OI)
Plymouth, MN

Initial Investment – March 2011
Employees: 9

ONCE Innovations, Inc. (OI) is the technology development company of Zdenko Grajcar, a veteran engineer in the LED industry. The company has a simple strategy: out-license proprietary LED design technology to global manufacturers in the general illumination market and use this income stream to build a branded product line in agricultural lighting. ONCE’s first product is a lamp for use in poultry barns, of which there are 130,000 in the US and perhaps 500,000 world-wide. Using patent pending AgriShift™ technology, ONCE lamps cut electrical usage by 60-80% while significantly reducing chicken/turkey mortality and improving feed conversion. Interestingly, the largest market for ONCE technology may be acquaculture, led by production of shrimp in Asia.  www.onceinnovations.com

Key Learning: ONCE is off to a great start, despite re-learning an old lesson: changing management habits in agriculture takes much longer than you would hope, even when you have a broadly superior product that saves money. Second half of 2011 was successful for sales to the poultry industry and the company is in discussion with several of the largest LED manufacturers who want to license ONCE technology.

Introduction Source: Lateral’s initial investment in ONCE is part of a unique Royalty Finance agreement negotiated by John Lilly Strategic Insights, LLC on behalf of Twin Cities Angels, LLC. We have since made a second direct investment; JLSI acts as an Advisor to the company.


Victrio, Inc. (VT) is a provider of software-based security services for banks. The Company has developed a proprietary voiceprint-based fraud detection and prevention solution to address the estimated $16B fraud problem at banking institutions and telecommunication carriers. Victrio uses the unique characteristics of the human voice to identify and track “fraudsters” – criminals who call to request refunds, service changes, etc. Victrio monitors calls into and out of large financial service providers and compares the voice print in real time to the voiceprints of known fraudsters in its database. These professional repeat fraudsters are believed to cause 75% of fraud activity. Because human voices are unique, Victrio can achieve unprecedented levels of accuracy and very low false positive rates. Even if the criminal buys a fresh batch of stolen identities or gets a new Internet address, Victrio can stop them immediately upon “hearing” them.

Because of the centralized nature of the fraudster database, the Victrio system is delivered as a Software as-a-Service (SaaS) over secure network links. This makes the service very efficient and profitable to provide. Importantly, the Company’s technology and vision was architected by experts in the speech industry. Previously employed by BeVocal, a leading supplier of speech enabled solutions to mobile carriers, the founders are literally “world experts” in this area. BeVocal was acquired by Nuance for $185MM in 2007. www.victrio.com

Key Learning: Response from customers has been very encouraging, with Victrio software “catching” fraudsters literally every day. The Company has maintained its technological edge and has recently taken a VC investment to expand sales and marketing at a significant step up in valuation.

Introduction Source: This investment came from an introduction by Seraph, an Atlanta-based professional angel fund led by Tuff Yen.

Victrio, Inc, (VT)
Santa Clara, CA

Initial Investment – August 2011
Employees: 9


Aperia Technologies, LLC (AT) has developed The Halo Automatic Tire Inflator, a device that utilizes rotational motion to maintain optimal tire pressure – increasing miles per gallon, extending tire life, and reducing blowouts. Data from the DOT’s Federal Motor Carrier Safety Administration (FMCSA) suggests that improper tire inflation, which is commonplace in the commercial trucking industry, increases commercial trucking fleets’ fuel and tire related expenses by $1260 – per truck, per year. In additional to the bottom line savings, a solution to tire under-inflation will produce less driver downtime, fewer delayed deliveries and decreased injuries and fatalities due to blowouts. Aperia’s solution also has the capability to displace millions of tons of CO2 emissions and keep millions of tires out of landfills. There are over 15 million heavy trucks and trailers in the US, and over 100 million globally that suffering from under-inflation, representing a $40 billion total market opportunity.  

The Halo pump technology allows the automatic tire inflator system to offset all naturally occurring leakage. A single Halo inflator serves both tires of a dual wheel set, mounting directly to the exterior rim. The result is a one-size-fits-all device that can mount to any wheel of any truck, requiring no change to their existing maintenance practices. The patent-pending technology has been developed through truck-mounted proof-of-concept. At $120 per inflator, a full tractor-trailer combination unit can be equipped for less than $1000 – delivering a payback period about one year. The Halo’s form-factor and ease-of-installation open a range of distribution channels, including direct sales, distribution partnerships, and aftermarket retail sales. A passenger tire inflation device is also possible.

Aperia has been operating for one year with a lean culture, funded by the founders’ own funds and convertible debt, and bringing them to a functional field-tested unit with a strong network of industry partners and supporters. We are part of an investment to fund the remainder of product development, build out its supply chain and bolster its patent portfolio. In Q1 of 2012, Aperia will seek to bring in $1.5M to fund its manufacturing ramp & pilot program, to ready the technology for market entry in Q1 of 2013. The product is in test with a large regional trucker and several ORM’s have already expressed interest in the technology.www.aperiatech.com

Key Learning:  Everything we can learn about Aperia is that it is the best solution to a problem that all trucking companies know they have. The issue facing Aperia is finding early customers who can “vet” their device, making it required gear for their fleet. We have already introduced Aperia to a likely partner candidate – one of the top five US haulers – with the hope of speeding up market acceptance.

Introduction Source: Band of Angels (San Francisco) in a transaction led by long-time P&G colleague and Stanford faculty member, Dr. Mark Schar.

Aperia Technologies, LLC (AT)
San Francisco, CA

Initial Investment – August 2011
Employees: 5


Schedulicity is the leading online appointment scheduling solution for small businesses. At present, it is aimed at professional hair and beauty stylists who use Schedulicity to fill in “holes” in their schedules. For example, a hair stylist who has a cancellation might use Schedulicity to offer first time clients a “cut and style” appointment at half price, if they can come in “today at 9:00 am.” This is also tied to the business website and Facebook page with a “schedule now” button. More than 6,000,000 appointments have already been booked through Schedulicity – an appointment is booked every five seconds – in more than 1,900 cities across the U.S. and Canada. Users pay a simple monthly fee to use the service: $19.00 / month for one person and $39.00 / month for multiple people in the same office.

With few competitors, Schedulicity will eventually expand to 40 different service categories. Competitors at the same price point (GenBook and Appointment Plus) are limited to specific single markets. Others have had little if any traction. With an estimated target market of 30 million local service professionals (U.S. only), “local services” looks like a multi-trillion dollar market, representing approximately 50% of the local economy. www.schedulicity.com

Key Learning: We made an investment in Schedulicity as part of the “last money in” to Series A. This is much later than we would normally target, and we wish we had met them earlier. That said, we believe this company has extraordinary potential as a take-out candidate by one of the large Telco’s.

Introduction Source: Direct meeting with the company through the 2011 DEMO Conference in Santa Clara, CA.

Schedulicity
Bozeman, MT

Initial Investment – October 2011
Employees 20


Fundly is a fundraising software provider to non-profits, political and affinity organizations. Basically, they make it easy for 501c(3) organizations to solicit, collect, track and account for contributions made by their members or supporters. It is the largest online social fundraising platform in the United States. Individuals and organizations raising funds for non-profits, charities, politics, schools, clubs, teams, groups, and others, have raised over $230 million using Fundly’s social fundraising platform. Clients range from American Red Cross chapters to Habitat for Humanity and Barbra Boxer for Senate. Fundly empowers anyone and any cause to tap into the individual giving marketplace and raise money online for a cause they care about. They do this by:

  • Making it easy for anyone to get started fundraising online via sites such as Facebook and Twitter with no IT set-up and no configuration work.
  • Helping supporters to reach out to their friends and other connections with branded tools, including e-mail and social networking.
  • Supporting volunteer fundraising with incentives and accountability by making fundraising progress accessible and easy to understand

Fundly makes its money by charging a range of fees, but principally by collecting 4 to 9% of the money raised. Fundly is the successor to Blue Swarm, which started in 1998 as a way for Senatorial, Gubernatorial and Presidential candidates to raise small amounts of money from large numbers of donors. The company is run by a former Oracle manager and counts among its investors and Board Members the well-known HBS Professor, Clayton Christensen. www.fundly.com

Key Learning: While it is too early to tell how Fundly will progress, it is clearly the leader in their market. More important, it is led by a values-driven CEO who is broadly embraced by the non-profit community. One strategy which is probably not in the future of Fundly: Broad international expansion. Interestingly, the notion of broad-based charitable contributions seems to be a uniquely American “habit”.

Introduction Source: This investment was negotiated, delivered and purchased through Seraph Partners V, L.P. in Atlanta (Tuff Yen).

Fundly
Palo Alto, CA

Initial Investment – September 2011
Employeees: 12


Ready Credit (RC) is our investment in Debit Cards, focused currently on distribution through transit agencies. We made a second follow-up investment; the last before the company is to be sold.

Key Learning: RC has been a fascinating study in the need to be flexible about which strategy will actually work to build a company. Thankfully, the CEO here and the Board have shown extraordinary patience and fortitude. Our guess is that this will conclude with the successful sale of the company. www.readycard.com

Introduction Source: An experienced venture investor in Minneapolis, Erwin Kelen, brought us into this opportunity.

Ready Credit (RC)
Minneapolis, MN

Initial Investment – January 2012
Employees: 9


MedCity Media (MCM) does original reporting on LifeScience innovations of interest to industry insiders – physicians, investors, entrepreneurs and large med tech companies. Med City is built around a “local market” model, starting with Cleveland and Minneapolis/St. Paul, and is in the process of expanding to other market centers for medical innovation – Research Triangle, Boston and San Francisco.

In the past year, the company has tripled its revenue and grown its online audience by 70 percent to about 10,000 readers. They have a larger online audience than most of their peers, such as FierceMedicalDevices.com, ModernHealthcare.com and MassDevice.com. Our investment will be used to bring on more writing talent, to double online audience again, increase advertising revenue and expand geographic coverage. www.medcitynews.com

Key Learning: It is too early to tell how this business will evolve. However, the fact that they have three sources of revenue (advertising, events and custom publishing) suggests that they actually “get” the modern publishing business model: Write once, Sell ten times. Moreover, the list of subscribers here should have value since they are “high influence” readers.  The key issue will be the writing quality and the depth of real news reporting. This can’t be just a “curation” service; it has to uncover and distribute real news.

Introduction Source: Outbound call to the company.

MedCity Media (MCM)
Cleveland, OH

Initial Investment – February 2012
Employees: 6



 

 

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