CHICAGO – Laura Pearl is a managing director and co-founder of the Ceres Venture Fund in Chicago. She sat down with the Illinois Venture Capital Association to discuss the need for funding women-led companies as well as the current funding climate in general.

Illinois Venture Capital Association: After your 20-plus years at Frontenac, what inspired you to go out and co-found the Ceres Venture Fund?
Laura Pearl: The motivation came from my views about the current state of the marketplace. I had recently done two sizeable growth financings and decided I would rather focus on growth deals going forward than on change of control transactions. In essence, I wanted invest with entrepreneurs rather than buy companies from them.

Separately, for various reasons I felt that a gap had developed in Chicago and the greater Midwest between small deals suitable for angel investing and venture deals that were at $5 million and more.

While there are many active groups in this area, many of them focus on buyouts and most of the others want to invest a minimum of $3 million in a company with many minimums much higher than that. It makes it hard for local companies that want to raise $500,000 to $2 million rounds. Many firms have had to rely on angel financing, which is not the steadiest source of funds.

When Sona and Donna approached me in the middle of 2005, they had envisioned Ceres as a technology-based firm focused on information technology and health-care investing. I felt that with my background in a somewhat less traditional area for venture financing (business services) I could add a third leg to their stool and round out the Ceres investment strategy.

There is very little venture capital dedicated to companies in the business services area. Still, there are a lot of those companies in this area and many of them are led by women. The Ceres focus was expanded somewhat to encompass the areas we think are most exciting based on our view of current industry conditions.

IVCA: An additional focus of the firm is on women entrepreneurs. Please explain the business rationale behind this focus.
LP: Women are starting and running businesses in increasing numbers. I think this trend has been overlooked in the venture capital community as a whole. However, much of venture capital raising is still done on a network basis. Women often have less of a network in the highly male-dominated, capital-raising areas such as venture capital, private equity and investment banking.

All three of us have been used to being the only woman in the room. We thought it would be great to offer women entrepreneurs an alternative to the traditional firms. Because of the Ceres demographic profile, we felt we could offer women entrepreneurs a different type of financial partner. While it is by no means an exclusive focus for Ceres, I would estimate that women-led companies represent approximately half of our deal flow.

We don’t think there has ever been a team as experienced in venture capital or private equity as we are that actively seeks to finance women-led businesses. While there have been other funds formed that target women-led companies, some of them were non-profits and others were formed by people who didn’t have venture capital experience. We do hold our investment candidates to high standards. We are interested in backing companies with real scope and potential.

IVCA: Do you consider this your primary distinction?
LP: It helps to distinguish our firm on a national level and with the limited partner community. Locally, I think we have become fairly well known in the six months we have been active here because we are filling a gap in the local investment climate. I think we have been well received by the local entrepreneurial community. We have seen very strong local deal flow from companies helmed by both men and women.

IVCA: What is your investment range per company?
LP: We can look at deals as small as $250,000 and as large as $5 million when we participate with co-investors. In general, we like to reserve at least half of our commitment to an individual company for follow-on investing. We usually like to keep at least half of our powder dry. That can vary based on the type of companies we are funding.

A medical device firm or a firm with substantial product development needs may take longer until the firm becomes cash-flow positive. The companies that I’m taking a look at in the business services area can reach cash-flow break-even at an earlier time. As a result, we may see one or maybe two rounds of financing for those companies. We provide the first institutional round of financing for companies. There are few firms targeting this stage at smaller deal-size levels.

We often follow angel financing rounds. These rounds can sometimes be quite substantial in the low- to mid-seven figures.

IVCA: Do you have a local or national geographic scope?
LP: While I would say we get national deal flow from women-led companies, we have a strong regional bias toward investing in the Midwest. We feel competitive conditions are more favorable in the Midwest and it’s much easier for us to stay close to these rapid-growth companies. We like to stay within an hour’s plane ride. Our network contacts are also stronger in this area and we can bring our connections to the benefit of the management teams.

IVCA: Representing both Ceres and Frontenac over the years, how have you leveraged the IVCA?
LP: I was the co-chair of the IVCA’s Institutional Investors Committee up until late 2005 and am still involved on the board and committee levels. This committee is involved in outreach to the area limited partner community. We have hosted a series of dinners that were attended by various GPs and LPs.

The first dinner was for the foundation and endowment community, which is probably the most active and sophisticated group of investors in this category. We put on a second dinner for the public pension fund constituency, which includes a number of very active participants as well as some large funds that haven’t yet expanded their investment mandates to include private equity and venture capital.

Though we attempted to do something similar for the corporate pension fund community as well, we found it much harder to get those folks on the calendar. Greater participation by this group (both corporations and corporate pension funds) in the asset class would be a real strength. That is one area where I think Chicago lags in comparison to other areas. While some of the very top corporations are active investors, many are not participants at all (particularly on the venture capital side).

IVCA: How has the IVCA helped the community at large?
LP: When I was at Frontenac, we were audited by the Illinois Department of Revenue and assessed a replacement tax that we felt was unfair. There were a number of funds in town that had been similarly targeted. We felt the negative repercussions of this tax on local firms and their investors could be substantial. We enlisted the IVCA’s help.

I joined some of the officers of the IVCA on some lobbying trips to meet with the officials of the Illinois Department of Revenue to help them understand why having such a tax would be very harmful to the firms that were operating here. That would put us at a competitive disadvantage with firms in other states. As you know, these efforts were very successful and a good legislative solution came out of this process.

IVCA: Having worked in the industry since the 1980s, please talk about where you think private equity is in general and where you think the industry is going.
LP: It seems as though most of the headlines are going to the mega funds (particularly in the buyout area). I think the smaller number of mega funds and their forming of investment syndicates has reduced the competition at the largest deal size levels. While I know a lot of people expressed fears a few years ago as these mega funds were being formed, they seem to be performing well.

I think the middle market is much more crowded. I am amazed at the mega VC funds (such as the $2.5 billion fund raised by NEA). It will be interesting to see how this capital will be employed. Some have referred to this effort as a “VC index fund”. VC-backed IPOs continue to be at low historical levels. Perhaps giant VC funds can take the place of the public markets at least until companies become sufficiently profitable to meet the new post-Sarbanes-Oxley IPO hurdles.

I think one of the more troubling trends affects the desirability of the Midwest as a place to invest for global and national limited partners. It seems as though geographic diversification has been redefined on a global basis. As a result, there is less of a push for a Midwest presence on the part of many investors and even a prohibition on investing outside a few limited markets in venture capital. While I think that’s a terrible perspective, it is definitely present in some quarters.

IVCA: What do you like to do when you’re not working?
LP: My two children and their activities keep me very busy. I also love to travel and frequently drag my kids with me to far-flung locales. They retaliate by dragging me to watermarks. I also like to read, cook, bicycle and I am an avid theatregoer.