IVCA Profile Q&A: Robert L. Fealy, Managing Director of Duchossois Technology Part-ners, Recipient of the 2010 Richard J. Daley Medal

IVCA Profile Q&A: Robert L. Fealy, Managing Director of Duchossois Technology Part-ners, Recipient of the 2010 Richard J. Daley Medal

November 10, 2010

In the days leading up to the awards event, the IVCA will profile all the honorees. Robert L. Fealy sat down for the following interview.

IVCA: Congratulations on the award of the Richard J. Daley Medal. As a founding board member of the IVCA, how important is this organization for the overall venture capital and private equity community?

Robert L. Fealy: While there are many organizations in the Chicagoland region dedicated to technology and business growth, IVCA sits in a unique position. Our membership encompasses both venture capital firms devoted to starting and growing new businesses, and private equity firms targeting value creation in existing companies. Our membership also includes service providers to these investor firms. As such, IVCA truly represents a cross-section of all interests that support economic and job development, which is crucial to maintaining our community as an attractive and desirable place to live and work.

IVCA: In what area do you believe IVCA is most effective?

Fealy: The IVCA has been particularly effective representing the investor community in state and local legislative affairs. Maura O'Hara and Penny Cate have done a great job organizing small group meetings between IVCA members and key legislators during which issues important to our members can be discussed in an open and forthright environment. Many times we find that our legislators do not fully appreciate the impact that certain legislation and regulations will have on economic development and the investment climate here in our state.

IVCA: The technology industry is an ever-evolving enterprise, seemingly with new developments every week. What characteristics is your firm currently looking for in regards to new technology investments?

Fealy: The pace of technology development certainly has affected our thinking over the last few years. For example, in the early 2000 period, we did a number of semiconductor deals, but the immense capital requirements to get a chip company to volume, coupled with the shortened time period to make money on the chip, reduces the attractiveness of this space. However, we continue to be interested in network and physical security technologies, digital media distribution and management, and business process ROI applications in various vertical markets, like retail and healthcare. We look at lots of opportunities outside these areas, because we frequently see the application of a technology in markets beyond those being targeted by the company seeking the investment. For example, we invested in AVESO, which designs flexible display cards used in high volume applications like one-time password tokens for network access. We also saw that we could apply this technology to physical security applications as well.

IVCA: What element of technology do you think has improved the overall way of life in society and what future elements of that technology do you think will improve it even further?

Fealy: In my opinion, advances in medicine have had the most profound impact on our way of life. However, closely following, and an enabler of these medical advances, is the digital revolution. Virtually everything we interact with today has been - œdigitalized-  and, in relatively short order, entire new classes of products and services have been created. Sometimes we forget that less than a decade ago dial-up was the predominant way for most of us to connect to the Internet. Clearly, innovation and technological change have accelerated at a dizzying pace.

IVCA: What changes do you see in the venture capital/private equity industries that everyone needs to be aware of? How do you think these changes will effect the overall industry?

Fealy: Regarding the venture capital market, I would say it has become more difficult to estimate the - œprize,-  that is, the exit value we can expect when we successfully build a company. The absence of a robust IPO and choppy M&A market and has caused us to think harder about how liquidity can be achieved and, even more importantly, how long it will take to reach critical mass to even be in a position to achieve an exit. With only a slowly recovering economy, it is hard to see much change in this situation any time soon. This obviously impacts the return on investment, but the only good news is that investment returns from most other asset classes have underperformed for quite a while.

On the private equity side, I believe the unfolding story is that expected returns will have a difficult time achieving historical levels due to a tight financing market and low organic growth rates in many markets. I haven't seen purchase price multiples drop to fully reflect these factors so, other than rolling up businesses to achieve more size and scale, the levers needed to create value just aren't available. I realize there are exceptions, of course.

IVCA: One of your many involvements at Duchossois is in Churchill Downs, Inc. What do you see as the future of the horse racing industry and what direction do they need to diversify to remain competitive?

Fealy: Well, first of all, it isn't really a - œhorse racing-  business any longer. It is a banking, technology and gaming play. Over 90 percent of the revenues come from on-line and off-track betting sources, and so the name of the game is moving vast amounts of information, as well as money, accurately, securely and with minimal latency. The racetracks, horses and jockeys put on the - œshow-  and provide content for the betting platform. On-line gaming on horse racing is the only legally permissible Internet gaming in the U.S. Churchill has invested heavily in this space and is the leader in this e-gaming space Of course, the Kentucky Derby adds a great deal of sizzle to the equation.

IVCA: What are the main advantages for Duchossois Technology Partners being based in the Midwest?

Fealy: There is a great deal of investment activity in the Midwest. Eric Lefkofsky recently commented that Chicago is missing an ego, and I agree. Other areas - œmay have the name, but we have the game.-  My DTEC partners, Rohit Seth in Austin, and Dan Phelps in Silicon Valley, would agree with me that the Chicago area has a very robust tech and investment community, but it's not in the nature of us Midwesterners to toot our own horns. We have a large number of great technology companies in financial services, electronics, healthcare and IT sectors, but they are spread out across the area, so we don't have true - œtech corridors-  like Austin, Boston or the Valley. However, these larger firms, many of whom themselves invest in emerging technologies, provide an excellent base of prospective customers for start-up companies, although I do believe we at IVCA, the Chamber of Commerce and other organizations have an opportunity to do even more to connect these established firms with young companies.

IVCA: Finally, what characteristics do you find in the State of Illinois that are unique to the rest of the national or international investment communities?

When you couple this with the exceptional universities in the region, we clearly have the talent pool, the infrastructure and the vibrant corporate community to drive new business development. Through our direct investment activities and our fund-of-funds operation, we have invested in dozens of start-ups in the Chicagoland area and Midwest generally, and we haven't seen any slowdown in the number of investment opportunities. In fact, it's interesting that the Excelerate! start-up boot camp drew over 300 applications last summer, from which 10 were chosen to participate. I understand virtually all of these companies have or will receive angel or institutional investments to pursue their business plans.

Having said that, the State of Illinois must find an answer to its budgetary issues for obvious reasons. Secondly, because it is widely accepted that jobs are created by small businesses and start-ups, the state must take a more active role to encourage business development. The IVCA has put forth a number of recommendations in this regard and continues to champion the causes of venture capital and private equity investing in Illinois.