Sixteen-year-old Chrysalis Ventures saw the recent worldwide financial crisis as an opportunity to invest in Middle America.
While some venture firms spent the crisis hoarding their cash, or investing more in existing portfolio companies, the Louisville, Ky., firm made seven new investments in the Midwest and South last year. That included a $4 million co-investment in CerviLenz Inc. in Chagrin Falls, Ohio, and leading a $10 million round for Foundation Radiology Group in Pittsburgh, Pa.
“We were one of the most active venture firms for new investments in the entire country,” said Koleman Karleski, managing director for the Louisville firm’s healthcare practice. “We thought it was a terrific time to place some new bets.”
Chrysalis raised $175 million in 2008 — just before the financial crisis began. The firm manages about $400 million in assets and has invested in 65 healthcare and technology companies since its start in 1993. Chrysalis is no slouch on returns. One of its 2008 exits — HealthMedia in Ann Arbor, Mich., which was sold to Johnson & Johnson (NYSE: JNJ) for an undisclosed amount — returned $18 for every $1 his firm invested, Karleski said.
The firm likes to make an early-stage investment between $3 million and $5 million in a young business, and then “build up to a $10 [million] to $15 million investment over the life of our relationship with that company,” Karleski said.
Chrysalis recently named Wendy Jarchow as director of business development for the Upper Midwest, which is Ohio, Michigan and Western Pennsylvania. Jarchow will work in the firm’s Cleveland office. She replaces Chris Sklarin, who went to work for Northeast Ohio biomedical company developer BioEnterprise early this year. Karleski explains his firm’s model for flushing out exciting healthcare technologies.
Q. What types of healthcare companies is Chrysalis looking to invest in?
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A. The two areas that we find most attractive right now are productivity-enhancement and consumerism c0mpanies. We’ve made investments in both types over the last couple of months.
The so-called healthcare reform package that just passed through Congress really was about access to the system. If we do get another 30 [million] or 40 million people accessing the system over the next five or six years, how do we deal with that?
Costs have been out of control for a long time, but none of the reform legislation was focused on genuine cost-controls. So a lot of the companies that we invest in are focused on productivity enhancements, meaning they’re either working to lower costs or deliver higher value-per-clinical-dollar spent.
We’re also interested in consumerism. We’re all paying more money out of our own pockets for healthcare through high deductibles and health spending accounts. Healthcare costs are being shifted from employers to individuals. Over time, individuals will have to become healthcare consumers.
They’ll have to get the information to consume healthcare services appropriately. They’ll need access to different kinds of services that they’re willing to pay out-of-pocket for. We need to give them the technology to do this.
Q. Where does the Cleveland office fit into Chrysalis?
A. The middle part of the country is under-ventured, but it’s full of the kinds of assets you need to build great, young businesses. One of the things a venture capital firm tries to do is make itself local to the entrepreneurs and the technology creators.
Wendy will be on the ground in Northern Ohio, Western Pennsylvania and Ann Arbor, Mich., meeting the folks at the universities who have interesting technologies, meeting people who are spinning out of major corporations and thinking about new business ideas. We want to be involved early on, helping catalyze those efforts.
Q. Some venture firms credit the Ohio Capital Fund — a fund-of-funds that invests Ohio Third Frontier dollars in promising companies — for drawing them to Ohio. Is that true for Chrysalis?
A. Only to the extent that those initiatives have catalyzed more entrepreneurial development in Northern Ohio. Northeast Ohio venture developer JumpStart and others are terrific organizations at helping individuals with interesting ideas begin to think about how to pull the assets and resources together to turn themselves into real businesses.
For a firm like Chrysalis, which is looking to make larger institutional investments in these young companies, we benefit greatly from the fact that states like Ohio, Pennsylvania and Michigan have been willing to invest heavily in entrepreneurial ecosystems that spawn the best ideas and new, exciting entrepreneurs.
Q. How does Chrysalis see itself as a resource for entrepreneurs?
A. A lot of young companies stall after they receive their initial financing — from the founders’ credit cards, friends and family, or an economic development grant — and then take a major step, like develop a product or bring on board the first customer.
Our job — and Wendy’s job, in particular — is to get out early on and help those entrepreneurs understand that there is smart, active, interested capital available to them. We explain that we bring not only capital, but the resources and networking experience to help entrepreneurs make the tricky journey between starting a business and realizing success as a mature company some years down the road.
