Q&A With Dave Tolmie of The Edgewater Funds

Q&A With Dave Tolmie of The Edgewater Funds

October 23, 2006

Illinois Venture Capital Association: It seems that virtually every partner with The Edgewater Funds has served as a CEO or senior level executive. How does the firm use this attribute to differentiate from the market?

Dave Tolmie: Most of our partners have significant operating experience. We have been CEOs, COOs or presidents in multiple instances before joining Edgewater. We believe this experience makes us better partners for the management teams running our portfolio companies.

When we talk to prospective companies, we get feedback that it is very reassuring that we have had the responsibility to generate sales and make payrolls. We know how to deal with the ups and downs of business, and we are probably better prepared to be their partner compared to those with purely a financial background.

We think that this is an important contributor to the value-added partnership we have with our portfolio companies.

IVCN: What lessons and insight did you derive from your experiences at Yesmail and Ballys?
DT: You don't really know what it is like to be a CEO of a company until you have been in that position. Every company that we back has to have a great CEO, and so we benefit from having had the experiences of what is going through his or her mind when they are running that portfolio company.

Much of my operating experience has been in the area of services - both consumer and business services. A lot of those experiences have been sales force and marketing driven. So, functionally, I bring a different background as well as an overall organizational prospective. I bring that CEO-level experience so that when you get down the road, you can share the experiences of successes and some failures with your portfolio company's CEO.

IVCN: Describe Edgewater's investment focus and the types of companies it backs.
DT: The companies we invest in are lower-middle-market, growth-oriented companies. They are all profitable companies, which is a requirement.   We invest across a broad range of industries and want to be able to add value to each of our portfolio companies through our experiences and network of relationships. We do not take risk on the viability of a business and don'twant to take that early-stage venture capital risk.

Likewise, we are not in the highly financially-engineered leverage buyout market. We do not compete with other private equity firms in an auction environment.  So we invest in companies with revenue between $5 million and $25 million that are growing and have great management. We invest in industries we believe that through our experience and our networking relationships we can add value

IVCN: Is there a particular investment range or amount you allocate per portfolio company?
DT: Our investment size can vary and it depends on the situation.  We will do buyouts as well as non-control or minority investments. We would target generally between $15 million and $30 millionequity  per investment. That may be an initial investment or that may include funding for add-on acquisitions to a platform portfolio company.

IVCN: In addition to business services, what sectors does Edgewater specialize in and avoid?
DT: Overall we do a lot of business services, government services and financial services deals. Additionally, we have invested in IT services and consumer-oriented companies. We have also done some healthcare services deals. What we avoid are companies that are not yet profitable, and companies that have a high degree of technical or other risks.  We don't do real estate deals. We avoid situations where we have limited visibility of the future.

IVCN: Is there a geographic preference?
DT: We invest across the country.  We source almost all of our investments through relationships nationwide, but we have a number of investments that are in the Chicago area and the Midwest. We probably have a little higher concentration in the Midwest but we do have investments across the U.S. We do not invest in companies that are based outside of North America even though some of our portfolio companies have customers outside of North America.

IVCN: What are your feelings towards the private equity industry in general?DT:There is obviously an unprecedented amount of capital that has been raised in the private equity industry and we are also seeing competition from hedge funds. I see that mutual funds are starting to put money into private equity as well. The supply of capital and the aggressive debt markets are bidding up the prices in competitive situations. That makes it more difficult to invest in companies with attractive valuations. It puts a high premium on sourcing investment opportunities outside of a broad auction environment which is where we focus almost all of our deal sourcing activity.

IVCN: What do you think of the private equity in Illinois and how do you leverage organizations like the IVCA?
DT:I think that the early stage venture capital community in Chicago has been behind the coasts and currently continues to be. I hope that there could be some great home run investments that would bring a greater success rate to the earlier-stage spectrums of our industry.  We do have some great firms here in Chicago.

In the middle market, we have a number of quality funds that are putting significant dollars to work. This part of the country has a number of companies where investment opportunities are well targeted.

At the top end of the industry, in terms of large buyout funds, we have a couple of the best known firms in the country with Madison Dearborn and GTCR. Those firms are doing an outstanding job and have developed track records that would rival anybody's in the country.

I think we have a healthy and growing industry in Chicago. The more we get to know the firms within the industry in Chicago, the more opportunities we will have to refer people and refer investments to each other. I frequently do that with people who I've gotten to know from my involvement in the community, including people I've gotten to know through the IVCA. So I will call a Bret Maxwell or a Keith Bank, or any number of people when an investment opportunity doesn't necessarily work for us because of its stage or size.

IVCN: What do you do for fun when you're not investing?
DT: This is a 24X7 job in a lot of ways. I have a family, three great kids and I focus on spending my free time with them. I am involved in a number of civic organizations. I am on the board at the Field Museum and the Chicagoland Entrepreneurial Center, in addition to my involvement with the IVCA. I am active in my church and am very involved in a school in Tanzania which has been started and funded by my family. To add to the fun, earlier this year completed my first triathlon.