Private Equity Profile Q&A: Advanced Diamond Technologies President Neil Kane

Private Equity Profile Q&A: Advanced Diamond Technologies President Neil Kane

February 11, 2009

CHICAGO - “ In 2008, we profiled Romeoville, Ill.-based Advanced Diamond Technologies (ADT), which has raised $4 million from LaSalle Investment Management and IllinoisVENTURES. We recently caught up with ADT President Neil Kane to get his company's progress report since the deal.

Illinois Venture Capital Association: Advanced Diamond Technologies has raised $4 million in venture capital financing. Please tell us how the company has invested those proceeds.
Neil Kane: We've raised $4 million over 4.5 years. We've invested it in building our infrastructure to manufacture our products in a commercial setting. We manufacture all our diamond at our factory in Romeoville, which has the capacity for us to grow to several times our existing size.

Since our last raise in Sept. 2008, we've started to invest more heavily in sales and marketing now that our award-winning products are available in the market. Our product revenues, which are distinct from government contracts, grew 400 percent from 2007 to 2008. We hope for the same if not better in 2009.

IVCA: How has the company navigated through these rocky economic times?
NK: We are an incredibly cost-conscious company about how we spend money. That frugality has served us well as we developed our products and built our infrastructure.

We've also been successful in pursuing and securing government grants and contracts that have absorbed much of our overhead and funded a lot of our product development and risk mitigation. My personal goal was to receive as much from government contracts as we obtained from investors. So far, the good news is that we've succeeded in that goal.

IVCA: Your primary venture investors are IllinoisVENTURES and Bob Geras of LaSalle Investment Management. How did you initially connect with those investors?
NK: I've known Bob for many years. I initially met him as an angel investor during the dot-com boom. I was an entrepreneur-in-residence with IllinoisVENTURES.

IVCA: In addition to capital, what are the strategic advantages of working with those investors?
NK: Bob has led us to many new investors. He has been really helpful in that regard. I regularly seek him out for advice and counsel. IllinoisVENTURES provided a lot of overhead support to us in our embryonic stage at a time when we couldn't afford our own space.

IVCA: How have you applied your experience as an entrepreneur-in-residence with IllinoisVENTURES to your role as president of ADT?
NK: Actually, the positions overlapped. When I was entrepreneur-in-residence at IllinoisVENTURES, one of the start-ups I worked on in a part-time capacity was ADT. The others were Riverglass, Smart Spark Energy Systems and Semprius.

When my tenure with IllinoisVENTURES ended, I joined ADT in a full-time role as president. As its co-founder, it was a natural progression. Though no start-up is ever easy, going through the start-up phase with several companies has benefitted me at ADT because I know the potholes that lurk ahead and how to avoid them.

IVCA: What are your thoughts in general about entrepreneur-in-residence programs? What impact can such programs have specifically in Illinois?
NK: I'm sure you're not surprised, but I'm strongly in favor of them. The key to succeeding as the entrepreneur-in-residence is the funding behind you. That's why they are typically associated with VC firms. To understand the potential impact an entrepreneur-in-residence program can have on Illinois, it's important to understand the process.

The entrepreneur-in-residence goes out and creates companies. Using the network and resources of a VC firm, they scour markets, look for unmet needs, mine universities for great research and bring the ingredients together. This includes seed capital to get businesses started.

It's imperative that the businesses have capable start-up management. To me, this is a smart way to start companies. It's a different investing model than opportunistically investing in businesses as they come along. Illinois would benefit a lot from more of it, but it requires seed capital and experienced management.

IVCA: From the beginning, ADT has used government contracts to fund new product development. Please tell us how the company has strategically combined that capital with what was raised in the private sector.
NK: We've used government contracts and grants to fund much of our product development. For example, in bringing our R&D 100 award-winning mechanical seals to market, we were awarded more than $1.1 million from the National Science Foundation (NSF) through their Small Business Innovation Research (SBIR) program.

We have already received $650,000 from the NSF's Small Business Technology Transfer (STTR) program to develop our all-diamond probes (NaDiaProbes). We hope to receive further funding in 2010. We have several Defense Advanced Research Projects Agency (DARPA) projects and a $4.8 million U.S. Department of Defense Threat Reduction Agency (DTRA) project to develop E. coli sensors.

Government funding is great, but it's not easy to get. It has to be used for the specific purpose of the contract. Also, you are prohibited from spending government money on certain critical things like patents and marketing. I believe you need both sources of funding to make a business venture a success.

Government money provides leverage to your investors that is especially critical in this funding environment. That said, you can't build your business on government money alone.

IVCA: Do you anticipate raising more venture capital for ADT? If so, when and how much?
NK: Against every benchmark I have of peer companies, we're doing very well. We brought products to market in about four years. We are tracking to break even in five to six years. We could exit in about Seven years from our first financing.

For a nanotech and materials company, that's very good. Since we're not a Web 2.0 or solar company, we've never found it particularly easy to raise money. We do intend to start raising money again in the second quarter of 2009 on the backs of several strategic alliances and marketplace milestones. I'd like to raise about $2 million. That would take us to profitability.

At this point, we have so many opportunities in front of us in things like biomedical devices and water purification that I could easily absorb as much money as we can raise and grow even faster by pursuing new initiatives. I should point out that we're not too large yet for angels.

We are poised to announce a distribution agreement for our NaDiaProbes with one of the largest players in the industry. We're about to announce a joint development and supply agreement with a biomedical device manufacture that's using our diamond as an anti-thrombogenic (to inhibit blood clotting) coating for heart assist devices. Our diamond should be in phased array radar systems for the military by the end of 2009.

We're starting our big biosensor project, too. We will ultimately make portable, reusable sensors for detecting the presence of pathogens in water. This will have enormous potential for both military and civilian uses. We'll start raising money again once the deals are done and I can talk about them publicly.

IVCA: When do you anticipate reaching profitability?
NK: Our plan was to break even in the fourth quarter of 2009, but given the economy, it will most likely be in 2010.

IVCA: What are the advantages of raising capital from investors in your own backyard?
NK: Local investors are always preferable in that they can see, feel and touch what you are doing. Also, they are accessible when needed. Investors are also inclined to invest in companies they can observe and monitor easily.

We're just hitting our stride and represent a great opportunity for investors in the region who - “ in addition to getting a great return on their investment - “ want to support the local economy through the jobs we are creating. Our success also validates the technology transfer model at Argonne National Laboratory. This - œdouble benefit-  should compel investors to look locally for deals rather than outside the region.