Q&A: Tom Cox of Seneca Health Partners

March 27, 2007

CHICAGO - “ Tom Cox of Seneca Health Partners sat down with the Illinois Venture Capital Association to discuss his firm's investment strategy, deal flow and his take on the current VC climate.

Illinois Venture Capital Association: Please describe the investment strategy for Seneca Health Partners including industries, company stage and investment range.
Tom Cox:
Seneca Health Partners invests in commercially viable health care device/diagnostic, service and information technology companies based in the Midwest and Middle America. Commercially viable companies are those that are at or just past the point of market entry as evidenced by initial revenues, purchase orders or other evidence of commercial success.

We are quite broad in our definition of health care provided that our capital is primarily used for market penetration and marketing plan execution. Our goal is to work with companies that allow us to leverage our health care investing, operating and transactions experience along with our network of health care executives, providers, manufacturers and distributors.

Our investment range is typically between $500,000 and $2.5 million. We actively lead or participate in syndicates with other like-minded investors.

IVCA: Seneca Health Partners focuses on Midwest and Middle America-based companies. What is your motivation for focusing on this specific geographic area?
There are several reasons. First, we believe that while this particular geography is ripe with compelling investment opportunities and a history of entrepreneurial success, it has a relatively limited base of growth capital. That imbalance creates a more favorable investing environment.

Second, this geographic market is home to a number of highly successful health care organizations that have generated an exceptional pool of executive and technical talent. We believe the ability to invest in emerging firms run by alumni from Baxter, Abbott, UnitedHealthcare, Medtronic, Guidant and other leading health care companies further enhances our potential for good returns.

Finally, we are strong believers in the importance of being actively involved with our portfolio companies in a variety of ways. It is much easier to play that role when the companies are located here. This region also provides the greatest opportunity for us to leverage our network of resources to support the development of the funds our portfolio companies.

IVCA: How has deal flow been over the last year? How does the climate compare to 5 or 10 years ago?
Our deal flow has been quite robust. It has definitely helped to validate our core investment thesis: that the Midwest and Middle America is home to a high number of quality investment opportunities.

While I can't comment on the climate 10 years ago, the quality of deals has improved dramatically since the 1999 and 2000 time frame in part because of the increased market forces driving greater activity in the health care sector following the bursting of the dot-com bubble. One thing we have observed here in the Midwest is that both the quantity and quality of angel investing has improved significantly.

That phenomenon has helped generate an increasing number of emerging companies that are prepared for venture capital at the appropriate time.

The one constant is that deal flow is a function of basic marketing, hustle and continuous relationship development and management. We take a very analytical approach to our deal flow - “ reviewing sources, sizes, sectors and investment stages - “ so we can regularly hone our marketing message to attract the opportunities that most fit our strategy.

IVCA: What is your take on the current health of the venture capital and private equity industries?
In general, I think these industries are healthy. Still, they are both undergoing changes that will benefit some participants and hurt others. I have read that the number of venture firms declined in 2006 as compared to 2005 as a larger amount of capital is being concentrated in a smaller number of firms.

Those trends and the well-publicized level of liquidity in the private equity industry will continuously force firms to refine and reevaluate their investment approaches. Some firms will be able to evolve and some won't. Overall, however, the need for smart and dedicated growth capital - “ at least from the venture perspective - “ continues to be very strong.

IVCA: How does your venture capital practice integrate with your investment banking services?
The primary integration comes from the sharing of knowledge, insights and perspectives among the members of both practices within our firm. The transaction, due diligence and deal-development skills within the firm allow us to dedicate a greater base of resources to close new investments and to support our portfolio companies.

To avoid a conflict of interest, we are extremely careful about introducing the two sides of Seneca's business in the context of a common opportunity. However, my partners bring a depth of transactions, investing and operating experience that helps us identify promising opportunities, devise creative solutions and collectively make better investment decisions.

The Seneca business model also allows a smaller fund like Seneca Health Partners to draw upon a broader set of professionals and support resources.

IVCA: Your experience includes serving as an attorney, working for Baxter and managing private equity-backed biotechnology firms. How do you draw upon these experiences when making investment decisions?
I've found that those elements of my background have helped me quite a bit as a venture investor. The legal experience - “ particularly as a transactions attorney with a large law firm - “ has given me the ability to understand and manage the deal process and sift through the details involved in structuring, documenting and negotiating deals.

The Baxter experience provided me with a broad and deep appreciation for a number of dynamics related to the health care industry including reimbursement, regulatory affairs, the role of the physician and the challenges of new product and service adoption. It also gave me the opportunity to build a tremendous network of incredibly bright people.

The operating experience has proven to be the most complementary to being a venture investor. I can sit across the table from a CEO and tell him that I understand the challenges of building a team, collecting receivables or changing strategies. That seems to add a level of credibility that helps to make us a more attractive capital partner.

IVCA: How do you and your firm leverage organizations like the Illinois Venture Capital Association?
The IVCA has done a wonderful job of helping to strengthen the venture and private equity industry in Illinois. We look forward to using its resources to continuously improve the way we run our firm and fund. Perhaps more important, the venture industry (especially in the Midwest) is still highly driven by individual relationships.

We see the IVCA as helping us to create and strengthen relationships with other Illinois-affiliated investors that will help us find, close, nurture and exit better investments.

IVCA: What do you do for fun when you are not making venture capital investments?
Right now, I am the father of four teenagers. That is fun in its own, frightening way. I am a regular runner and I am entering my 23rd year of Rotisserie fantasy league baseball. If you see me staring intently at my computer terminal during the summer, I am most likely checking the latest scores and injury reports.