Since 2014, Ikove Capital Partners has utilized its global network to invest close to $70 million directly into 14 startups.
The venture development investment company keeps a low profile because a lot of what it does is proprietary. It invests at the founder level, focusing on commercializing technologies in partnership with Midwest research institutions, like Ohio State and the Air Force’s Wright Brothers Institute.
When the company is ready to be spun off, outside investors can co-invest through its Startup Nursery Fund. The SUN Fund is used during the concept and seed stages.
“We are a Columbus-based firm, but if you look at the cap tables of our companies, they usually come from 10-plus countries.,” says Flavio Lobato, Ikove’s Brazilian-born principal. “We have investors that come from Europe, Asia and the U.S.”
Ikove — a South American indigenous word meaning “first flash of life” — only launches about 1 to 2 percent of the intellectual property it looks at.
By the end of next year, however, Lobato expect 20-plus companies to be in the portfolio that already includes Nikola Labs, ParaGen Technologies and Cognovi Labs.
“As we begin to have exits in the next couple of years and the wealth is being created for the universities, for the inventors and for the other stakeholders, I think that process will begin to feed itself, and it’s going to be fantastic for the community,” he says.
From lab to market
Lobato co-founded the firm with Managing Partner John D’Orazio and Principal Rodolfo Bellesi, to fill a gap he considers a perfect storm of opportunity.
About $70 billion is invested each year in basic research through U.S. universities, with roughly 30 percent of that in the Midwest. However, less than 1 percent of that basic research is commercialized.
“A lot of innovation is happening, but very little capital is being committed to bring this innovation to market,” Lobato says.
At the same time, traditional venture capital — created to commercialize technologies, East Coast capital linking up with West Coast research — has moved upstream. The number of early-stage (meaning pre-Series A) rounds have been cut in half since 2014.
“When (VC) says early stage, they’re talking series A and beyond, and the new Series A is the old Series B,” he says. “Thirty percent of the money in venture today is invested in unicorns, whilst a decade ago, it was 1 percent.”
The Ikove founders focused on the Midwest because while it receives 30 percent of the funding for basic R&D, less than 3 percent of all venture dollars is invested in the region.
“Ikove is coming in and trying to bridge the gap between lab and market,” Lobato says.
It’s a challenge to find the bandwidth with technology commercialization, says D’Orazio, whose entrepreneurial and startup background includes being a venture development founder of 10-plus businesses.
“There are brilliant minds working on inventions in the lab and Ikove’s job is to really ask, ‘Who cares?’” he says. “We have to match into solving a market problem, and that really takes a depth of knowledge, hands-on nature and execution skill set.”
That’s why it was important for Ikove to build a top-notch team, which is now up to 25 people. They need to identify, vet and support the growth of their technologies.
Their SUN Fund investors also need to be willing to be patient, because Ikove is not in a rush to exit until the time is right, despite having bids for its companies.
“We have to really be diligent about who we work with — the relationships and the people that we partner with,” D’Orazio says. “You’re making a commitment for five to 20 years, and that relationship and that trust and that integrity is just so important.”
Breaking down the asset class
Technology commercialization is not new, but it’s an asset class that requires long-term capital, which needs to be invested in a portfolio with strong due diligence, Lobato says.
A Kauffman Foundation study found the difference between investment returns with heavy due diligence and no due diligence, is flat versus making four to five times your money, he says. “The biggest determinant of future returns is the initial and ongoing due diligence in the investment that you make.”
Lobato has been investing for decades, including managing more than $1.5 billion in hedge fund investments for institutional clients and leading a $7 billion alternative investment management firm.
“This is the only asset class that I know of that if you do it right, you can actually have exponential returns,” he says. “A lot of people talk about compounding returns — to me compounding returns is the eighth wonder in the world.”
If you had to choose between receiving a $1 million dollars and compounding that at 7 percent over 24 periods, or getting $1 and doubling it 24 times, most people would go with $1 million. However, Lobato says, you’d end up with about $4 million; doubling the $1 24 times will give you about $8 million.
And if compounding returns is the eighth wonder, founder’s equity is the ninth wonder, he adds. There’s a lot of risk, but the potential upside is huge.
“It’s really being able to come in early, de-risk as much as we can, but then having the ability of having exponential returns,” Lobato says. “In my 25-year career in Wall Street and alternatives, nothing has come close to that.”
D’Orazio doesn’t see the same upside in VC.
The minimum respectable return is 20 percent per year for the life of the fund, because you have to weigh the risk against public markets, private equity or other asset classes, he says. Over a 10-year fund life, which has extreme illiquidity, you have to hit 6x on the money, which is a big number.
“Most venture returns are not hitting this, because you have a chunk that’s going to fail, a chunk that’s going to go flat, and that small percentage that will drive the bulk of the return,” D’Orazio says. “You need at least two 30x returns on these companies to compensate and actually hit that 20 percent compound return.”