Interview by JIM STOMMEN,

BB&T Contributing Editor

William Trainor

William Trainor is a co-founder and managing director of Cleveland-based Mutual Capital Partners, the general partner of Mutual Capital Partners Fund I and Mutual Capital Partners Fund II, growth-stage venture funds investing in post-revenue, liquidity-challenged, growth businesses generally located in the Midwest. Fund I raised $13 million, and Mutual Capital Partners reported in mid-February that it had raised $16 million thus far for Fund II, with the hope of eventually closing at $25 million.

Bill also was co-founder and managing director of Access Ventures, a venture capital fund focused on co-investing in early-stage companies with whom CT Partners, a retained executive search firm in Cleveland, had business or professional relationships.

Prior to starting Access Ventures in 2000, he was senior vice president and head of e-commerce investment banking at McDonald Investments in Cleveland, a business that was later acquired by KeyCorp.

BB&T: Your firm is located off the traditional beaten path for VCs that include medical technology among their focuses, but Cleveland and Ohio are forging quite a presence in the life sciences as a so-called “second tier“ region. What factors have helped that come about?

Trainor: The primary factors include the institutional presence we have here in Northeast Ohio of three really good healthcare organizations in the Cleveland Clinic, University Hospitals Health System and Summa Health System. Those three organizations have attracted a lot of very talented doctors, and those doctors have a lot of great ideas, and those ideas spawn other ideas. Cleveland, Ohio, definitely is not Silicon Valley, but it's an engineering-oriented, tinkering type of a town, so with medical devices in particular there always has been an affinity for creating unique and precise products, so med-tech fits very well into Cleveland's DNA. And the support of these major institutions, that has been a real catalyst.

BB&T: Many observers of the industry maintain that the Midwest is fertile ground for medical start-ups, in part because of the existence of skilled work forces that have been cast adrift by problems within the auto industry and other sectors. Does the existence, say, of a pool of engineers and experienced manufacturing employees offer a big plus for a start-up med-tech company?

Trainor: I don't think it hurts, but I'm not sure exactly how much it helps. A person who was a line operator of some machine for the aerospace or automotive aftermarket industry, I'm not sure how easily that transfers over into med-tech. Does it require some sort of capital expenditure by the company, including FDA approvals and things like that to be able to manufacture the product? I don't think such experience hurts, though. It's a lot easier to find those types of engineers and machine operators here in the Midwest than if you went elsewhere where there wasn't a tremendous background in such employment at all. Overall, it probably helps – I just don't know how much.

BB&T: I guess that leads to a question about education and training. One of the answers to taking advantage of a skilled labor pool is if the region's educational institutions are involved in programs that might have a medical manufacturing focus.

Trainor: That's spot-on. We have been doing a lot of work over the last three-four years with Lorain County Community College, which has a very vibrant leadership starting with the president, Dr. Roy Church, and extending all the way throughout his organization. It's very entrepreneurally focused. Lorain County probably is one of the “poster child“ counties for all of the Midwest in terms of how hard it was hit in the loss of automotive-type jobs, and they have done an amazing job in terms of retraining those former employees, providing complementary and additional skillsets.

The jury isn't back yet, but it's looking favorable – they have raised capital to sponsor an innovation fund, which has brought in additional dollars and support from other regional schools like Akron, Youngstown State, Cleveland State and even Case Western Reserve. They're building centers of excellence: with Akron, you have polymers and advanced materials, while Lorain County is focusing on electronic sensors, controls, electronics – areas that were preeminent on the automotive side for the past 30 years. They're just retraining and reshaping and refocusing that work force. We're seeing more practical innovation coming out of the community college and regional university ranks than we do out of the larger universities. Here in the Midwest, the entrepreneurial spirit is really being driven by the smaller, community-centered institutions.

I hope these programs are successful. The big question is whether they're going to be successful in terms of creating companies that are venture-backable. Lorain County Community College has been doing this for a while. I think they have made more than 50 investments out of their innovation fund, and they have a pretty large, 10% to 20%, type number of companies that can grow into, if they're not already there, venture-oriented companies. That's a pretty good percentage.

BB&T: Your investment focus is on Midwestern companies. A lot of the big VCs located on the East and West coasts claim to be “geographic agnostic“ in making their investment decisions. Are you involved with any of them on specific investments in your part of the country?

Trainor: We have been involved, but in a limited way. It's really more a function of the stage of companies that are coming out of the Midwest, and in particular our fund. We raised our first fund in 2005, and as those companies have grown, several have started to attract nationwide attention. We just co-invested with a number of venture funds from all over the country in our Hemosphere portfolio company up in Minneapolis. OrthoHelix, when we raised the Series C round with them, we had venture capital funds from all over the country interested in that company. If the opportunities are good, there definitely is interest from coastal investors, but to call them up with a $100,000 in revenues, two-person software company probably isn't going to get the job done.

With the healthcare institutions we have here, just with their sheer size and the clinical trials they're involved in, it absolutely makes sense for life science-focused venture funds to spend some time here, And if you're in the area, you might as well check out some of the investment opportunities here. That definitely is a newer trend, and I give the whole Cleveland Clinic organization credit. They have helped create a lot of medical device, healthcare-oriented awareness for this region, and everyone is benefitting from that.

BB&T: The falloff in venture funding overall has been precipitous, and that certainly has applied to medical technology. Yet here you are announcing a second fund for which you have raised $16 million thus far. Does that reflect an overall improvement in the VC funding picture, or is your firm still among the exceptions to the general rule?

Trainor: I would have to say that we're probably a little bit of an exception, and it's not that we're unique or better; it's just more of the composition of who our investors are. We have about 150 investors between our two funds, and all of them are angel investors. They have been with us for a number of years, they have invested side by side with us, they have had access to our portfolio companies and they see the positive trajectory that the portfolio has. So we were able to go out and raise a fund above the size of our first fund and do it in a fairly quick time, three months, so we're very pleased with how it all pulled together.

From what I've heard about some other funds, they're not even thinking about fundraising right now, and I have to imagine that that's a reflection of who their partners are. Institutional investors are waiting for liquidity; they have a shorter time frame on returns. The time-to-market aspect may affect them differently than it does individuals.

I think all investors are going to have to take a different approach to venture capital. If you go back 30 years, companies weren't created in five years – it took a lot longer, even the best companies such as Apple and Microsoft and Silicon Graphics, it took a lot of time for them to grow and build. We got very spoiled in the late 1990s when a lot of these companies would shoot up. The average holding period has increased from four years to over eight years now. What does that mean for the venture capital investing model? You do one of two things: you either change the model to a longer-term approach, or you invest in fewer companies. You have to be a better stock-picker, if you will, to find those companies that have a chance of gaining some measure of liquidity in less than eight years. With the overall metrics today, I just don't believe we're ever going to go back to a time where so many companies are able to exit in five years or less. That was just a complete anomaly in the venture ecosystem.

BB&T: What do you look for in selecting firms in which to invest? How do you describe your investing philosophy? Are you looking mainly for great ideas, or does a good management team carry the day in your eyes?

Trainor: We are big believers that for these businesses to win, the foundation of a good idea has to be there. They have to have a good idea, good product, good potential customer base, sound intellectual property. In terms of good management, 99% of the time the people that are starting up businesses aren't the people who are going to be taking them to the exit. They may still be involved, on the one end as shareholders still and on the other as shareholders and probably as active participants at the management and board level, but it's very, very rare in our experience to find an entrepreneur that can round-trip a business. If you can find those people, it's great, and you want to invest as many times as you can with them, because they really do habitually generate better returns than others. But a first-time entrepreneur who has never round-tripped a business, has never seen a company from the very beginning up to the point where they're generating substantial profit and interest from strategic buyers would be a rarity indeed. We look at companies where they have the original ingredients and foundation, and then with capital and some assistance by unlimited partners and the wide variety of geographies and industries they come from, if we can put those ingredients together, we're pretty confident we can attract the right kind of managers to come in and complement the team.

BB&T: Speaking of great ideas, maybe the most dominant theme in today's discussions about the medical-products industry seems to be how a variety of factors – financing and regulatory hurdles certainly among them – are negatively influencing innovation. What is your view of the looming “innovation gap“?

Trainor: I definitely believe there is an innovation gap. Is it as pronounced here in the Midwest as it may be elsewhere? I don't know. We're kind of coming into our own right now on the innovation front, so in my generation what we see here in the Midwest is basically innovation on the upswing as it pertains to the types of industries that we're discussing. We have seen no decline whatsoever – in fact there has been a steady increase, even in the economic downturn of the last couple of years, in the number of business plans submitted to us. So it's difficult for me to comment on an innovation gap when we are seeing more and more innovative things coming out. Now, I don't know that they're all venture capital-worthy – some are innovative but they don't address large markets, or they cost too much for the benefit that they produce. But for the most part I have been pretty pleased with innovation right now. I do think on the coasts they see so many people rush into “me too“ scenarios – a music site or a social network site gets funding and all of a sudden there are a hundred others. We don't really have that here in Northeast Ohio. There aren't a hundred social networking sites; there are a couple. There aren't 5,000 orthopedic implant companies; there are a couple dozen. So I think everything is tempered a little bit. Maybe that's because we don't have as much of an angel financing community or as much of a venture community in general, but the stuff we see tends to be fairly innovative. Then it just comes down to the other questions: Is it venture innovative? Is the management teams and ownership willing to structure their business in a way to take on outside investors? There are thousands of different variables at that point. I hear about the innovation gap and read about it, but the raw data that we are collecting here in the Midwest says otherwise.

BB&T: The FDA appears to be making some headway in remaking itself. How do that and other larger legislative issues play with those who would invest in the medical device industry?

Trainor: I think they definitely need to make some changes. When you look at the big public companies – the Strykers, the Johnsons & Johnsons – they generate a substantial amount of profit from their medical-device businesses, and that's great. But some of the taxes that are going to be phased in here in the next few years on medical device sales regardless of profit, or profit at all, is a challenge. While I'm all for appropriate review and testing of products before approval, that really makes it challenging for new opportunities to come to bear. The up-front costs of generating FDA approval have become higher, and then once they have been approved, the insurance costs are higher now as well. One of our portfolio CEOs in the medical-device space said for a company that's generating $1 million in revenues, they might be spending as much as $100,000 in insurance just because of the unproven nature of their product. That's a lot of money in one year for liability coverage because they're mandated by hospitals and various government entities. To continue to foster innovation, you can't layer on regulations, fees, taxes – all that stuff. It seems like the medical device and pharma companies are bearing the brunt of trying to fix the healthcare system through taxes and regulation, and that definitely will stifle innovation.

BB&T: Do you see exit opportunities for some of your portfolio companies yet, or is that still well down the road?

Trainor: We do. We had terms sheets within the last 18 months to purchase three of our portfolio companies, so there definitely is interest out there. For various reasons, it didn't make sense for any of the three to move forward. Whether it was that they weren't far enough along in the growth cycle or they were still growing too rapidly to even consider it or there were other opportunities than cashing out. I'm pleased with the portfolio we have. It has been a great run with them, and I think for good companies that have good products, there are always interested buyers. You've proven that you're not a start-up anymore, that you're a growing, viable concern, you're a real business.

BB&T: On the exit front, the window on the IPO market seems to have opened a bit after being nailed shut for two years. For VCs overall, do you see going public playing a larger role in the near term, or is acquisition still the most likely outcome, especially given the way the big players are pulling out their checkbooks?

Trainor: Here in the Midwest, I think we've gotten used to not paying a lot of attention to the IPO market. The last true IPO of an Ohio company was quite a while ago, and it had nothing to do with private equity. I don't know the situation in Michigan, Indiana and other similar states, but I have to think it's pretty similar – we just don't see many IPOs. Most of the companies around here, their financing and growth plans aren't contingent on that type of event. Here in the Midwest, we don't have that many companies that are venture-backed that get to that stage before someone comes in and buys them out.

BB&T: Luckily as a VC, you know that you have buyers out there who are writing checks for companies at a record pace.

Trainor: You're absolutely right. We kind of model everything on the basis of ending up with some sort of a trade sale.

BB&T: Is there a question you wish I had asked but haven't?

Trainor: I like that question. Having just raised a fund, I have had a lot of people ask me some iteration of that. The question I would ask myself is: “Why are you doing this?“ I mean, we've raised $16 million and we hope to get to $20-$25 million, but it definitely isn't about the money; you're definitely not going to retire and buy an island somewhere raising funds of that size. For me, I do it because I believe in entrepreneurialism. I believe in the opportunity, I do believe the Midwest is fertile territory for making investments, I do believe that even with a small fund, we can make change. If there are enough of us out there and we all keep at it, good things will happen.