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What is the capital raising and investment portfolio strategy for the first Opportunity Zone Fund to deploy capital to business ventures?
Len Mills is CEO of Verte OZ, a venture capital Opportunity Zone fund launched in September 2019 that invests in high-growth disruptive businesses. Natalie Elder is Verte’s head of investor relations.
Click the play button below to listen to my conversation with Len and Natalie.
- The characteristics that make the Verte OZ Fund unique among Opportunity Zone funds.
- Verte OZ’s local partnership strategy.
- Capital raising for early-stage investments, and the implications of the working capital safe harbor being extended in the final regulations by up to 62 months.
- A portfolio growth strategy of adding new companies and increasing positions in existing companies.
- The balancing act of raising capital and deploying capital, while staying in compliance with the required timeframes. The challenges posed by the 180-day investment window on the investor side, and the asset test and safe harbors on the fund side.
- Verte’s portfolio of investments to date.
- How Verte’s unique fund structure is able to cater to investors who want to make a specified investment.
- The main difference between an OZ venture capital fund and a traditional venture capital fund.
- Verte’s portfolio strategy going forward.
Featured on This Episode
- Leonard Mills on LinkedIn
- Natalie Elder on LinkedIn
- Verte OZ
- Len’s first interview on the Opportunity Zones Podcast (Episode #61)
- Galen Robotics
- Native American Ventures
- Smith OZ Electric Vehicles
- Fortress Media Storage
Industry Spotlight: Verte OZ
Launched in September 2019 by Len Mills, the Verte OZ Fund focuses on high-growth, disruptive businesses in sectors with enormous upside potential, including logistics, biotech, and the carbon economy.
Learn more about Verte OZ:
About the Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Welcome to the Opportunity Zones podcast. I’m your host, Jimmy Atkinson. Joining me on the show today are Len Mills and Natalie Elder from Verte OZ. Len is Verte’s CEO and he joined me on the podcast late last year, shortly after he launched his Opportunity Zone Fund, the Verte OZ Fund, which makes investments in small businesses. And Natalie is Head of Investor Relations and Outreach at Verte.
Len and Natalie join us today from the Verte office in College Park, Maryland. Len and Natalie, welcome to the show.
Natalie: Thank you, Jimmy. Thank you for having us.
Len: Thank you, Jimmy.
Jimmy: Yeah. Great to have you.
Len: Thanks for having me back.
Jimmy: Absolutely. Len, great to have both of you back. So for those who did not listen to my first conversation with Len Mills, and I would encourage you to go back and listen if you haven’t, it’s Episode number 61 of the Opportunity Zones Podcast. But for those who did not listen, Len, can you briefly discuss what the Verte OZ Fund does and how it’s unique?
Len: Sure, Jimmy. And you characterized it very well. So we only invest in small companies, venture capital-oriented companies. We are unique in the sense that we are one of the few funds that is taking that approach relative to a real estate investment approach. As you know, the legislation and the tax laws allow for both real estate and operating businesses. We have chosen the tact of investing in operating businesses which makes us unique.
The aspect of that which also makes us somewhat unique is that the rules around investing in operating businesses did not get finalized or not even proposed until mid-2019. And then they were finalized and including some additional information related to operating businesses only in December. So this is unlike the real estate funds, the operating business funds including ours are relatively new to the game compared to the earlier real estate deals.
Jimmy: Good. Yeah. It is still an industry in its infancy. And I know your fund is brand new as well. It only launched last September of 2019. So definitely blazing a trail you are and a few other funds like yourselves. The space hasn’t really fully matured for business investing yet, but it’s getting there, especially with final regs getting issued late last year. So we got Len’s brief bio on the previous episode. So I want to turn to Natalie now. Natalie, could you tell us a little bit about yourself and specifically what your role at Verte is?
Natalie: Yes, absolutely. So I have a marketing background. I actually have a direct mail marketing background. So I came to Len and Verte Opportunity Fund with the focus of really trying to help get the word out, let people know that the fund exists, and really get that marketing strategy implemented. Since I have joined the team, I’ve also taken on the role of helping communities get to know our fund and reaching out to local connections. Part of our strategy is to really focus on utilizing local partnerships.
So we rely heavily on economic development offices, local philanthropic organizations, local incubators, and universities and really state and local Opportunity Zone leaders in our strategy to find Opportunity Zone businesses and investors. So part of my role with Verte Opportunity Fund is to open up those lines of communication with those connections. In addition to that, I’m also right now Head of Investor Relations. So really helping those investors feel confident in their investment and also just be a resource for them if they have any questions or would like to know about the companies that we’re investing in.
Jimmy: That’s great. Thanks for the intro there, Natalie. It definitely takes a village to raise a fund, it sounds like. So I’ll turn to both of you now, one of you can chime in here, give us the update. We spoke a few months ago you guys were just getting started. You were just starting to raise money. It’s been a few months now. You’re still in your infancy. Of course, I think the fund is barely six months old, but how much money have you raised to date so far and where are you seeing that money come from primarily?
Len: In terms of where we are in our activities, at this stage of the portfolio, we’re making early stage, sometimes called seed investments. So the capital that we’ve raised so far, and the first initial investments we’ve made so far are around really early-stage investments. The consequence of that is that, for a brand new company, for example, that’s just getting started the capital requirements actually are not that large.
So what we do is we want to continue to expand the number of companies in that early stage. In addition, as these companies mature and become more stable, and further along on their business plan, we plan to up our investments in those existing companies. And that kind of dovetails with the nature of the legislation and the tax laws. In fact, the last round of rules had an interesting additional aspect. It doesn’t get too much play with respect to the real estate investors but for the operating businesses, it was a pretty big deal.
They initially had a working capital plan requirement of 31 months that was in their proposal and they made a special provision really targeted towards startup companies that they can extend that working capital plan as they go through subsequent financing rounds. And that’s very important to a startup company. There’s the first financing round, the seed, as I’ve described it earlier, but many times they’ll come in six months later, maybe a year later with another round. And what they’ve allowed in the new regs, the December regs, is to allow that working capital plan to get extended every time there’s a financing round, up to a limit. The total limit you can get is 62 months, which is roughly five years.
So our portfolio growth strategy is to add companies, new companies, but simultaneously be thinking about increasing our positions in the existing companies. And on the capital raising side, what that means on the capital raising side, is we are walking both sides of the street as I call it. We’re raising capital now and we’re also simultaneously investing that capital because you have a very limited time window, again, within the rules to deploy the capital. So we’re constantly on both sides of the street raising capital and deploying capital. And Natalie, maybe I’ll turn it over to you to talk about… We have made investments so far. Natalie, maybe this is a good segue to the companies we’re currently invested in.
Jimmy: Yeah. I’d like to hear a little bit more about that. When we spoke in October, you mentioned that you were just getting started, obviously, and you had closed one investment. Another one was imminent. But yeah. Natalie, what’s the update on how the portfolio is looking like now?
Natalie: So Jimmy, we have a lot of exciting news. There’s a rumor and I am promoting this rumor, but there’s a rumor that we’re one of the first qualified opportunity funds to have deployed capital to those businesses in Opportunity Zones. So such exciting stuff happening on this end. We do have a very diversified portfolio of early-stage companies as Len mentioned. We currently have four companies. I’ll just run through them quickly because they’re very impressive and each very unique and I do want to point out that each of these companies is very specific in their community impact. So each of them has a focus to bring different kinds of benefits to their communities and we’re very excited to utilize those in our reporting and in our fund strategy.
So the first company that we invested in is called Galen Robotics. They are formerly a Silicon Valley company that moved to an Opportunity Zone in Baltimore. So that’s something that you don’t hear of very often. They are a qualified Opportunity Zone business that focuses on establishing a new surgical robotics platform for microsurgeries that combines robotics, AI, and data analytics, which could really change the way minimally invasive surgeries are performed. So very cutting-edge technology there. That technology is actually being developed at Johns Hopkins University and Galen Robotics is working to commercialize that high-tech stuff.
So very cool in that and we’re excited. We worked very closely with Ben Seigel in nailing down that investment. So lots of exciting things happening in Baltimore. And that was actually the first Opportunity Zone investment made to a business in Baltimore. So starting the snowball effect there, hopefully. Another investment we’ve made is in Native American Ventures. We’re very excited about this one as well. They are a partnership that’s working to develop, diversify, support and expand the economic infrastructure of tribal nations.
They have an array of programs that they are currently getting off the ground, two of which we’re very excited about. One is called Travel Carbon. They are working to reverse carbon emissions by generating offsets through the management of tribal forest. So very cool there. Another program that we’re really interested in is called Tribal Logistics. They are establishing a network of free trade zones and facilities in Washington State and it will be operated by federally recognized American Native Tribes.
So those two companies, Galen Robotics, and Native American Ventures, as you can see, are two very different companies. Okay. So, Jimmy, our third investment is actually in Smith OZ. This is a very new qualified Opportunity Zone business. They’re actually investing in electric vehicles and infrastructure. Their plan is to build out a collection of Opportunity Zone Hubs, is what we call them, they’re locations that service and lease electric trucks and buses for commercial fleet operations.
So as you know, the electric vehicle industry is really up and coming and we have great anticipation for this company to really have a lot of excitement they are partnering with Smith EV, which is a hundred-year electric vehicle company. They’re industry-leading and they actually have trucks on the road right now that have been collecting data and performing beautifully for the last 10 years. So we have a lot of high hopes for that business as well.
And then our fourth investment is in Fortress Media Storage. This is a huge and very exciting opportunity for our portfolio. They are a three-dimensional next-generation data storage device company and they’re utilizing crystal and holographic technology which is really going to disrupt the industry and change the way we store data. This technology will be commercialized and will outperform hard disc drives and flash technologies because as we all know the density of current storage is just not where it needs to be. We need more. So Fortress Media Storage is really leading the way and changing the industry as far as data storage goes. So four very different companies. Like I said, we’re excited about each investment individually and they really fit nicely with our portfolio strategy.
Len: Three of the four companies that we are invested in are currently contemplating already their next round of financing. So we’re currently evaluating those, but it’s likely that we will try to participate in those additional rounds with larger investment sizes.
Jimmy: Oh, that’s great. Yeah. And it sounds like the overall portfolio strategy is investing in companies that are potentially disrupting current industries. But at the same time, as you mentioned, all of these investments are very different. They’re in different industries. Is there anything that your fund is doing? If I’m an investor with capital gains and I’m interested in investing in maybe just one or two of these companies or in a specific location, can you help me out in that regard or do I have to buy into the whole fund?
Natalie: Jimmy, this is a great question. We actually pride ourselves on the fact that we are uniquely structured to appeal to those investors who are interested in only investing in a specific location or a specific company. So we’ve worked within our fund, although we’re a nationwide fund, we have worked in those special mandates so that we can appeal to those investors who really want to make a specified investment.
Jimmy: Okay. So if I just want to invest in Galen Robotics, I can come to you and say that, and you’ll make sure that my capital stays within that part of your portfolio within the fund? Is that how that works, roughly?
Len: Yeah. So maybe I’ll just elaborate on the technical structure that’s there. So either from a geographic preference or mandate, as Natalie put it, or from a company-specific mandate, we’re a new fund as been described earlier, but we’ve discovered as we’ve been talking to these economic development people and other agencies that the OZ program, even though it’s a federal program, it has a very local flavor. People want to see their communities and similar communities obviously, but their communities succeed. And that’s very natural. Even though it’s a federal program, it has a lot of local feel to it.
So we want to accommodate that inside the fund structure. The other type, if it’s a specific company or perhaps two companies would be, and I alluded to this earlier as well, a situation where the company is now no longer a startup company. It’s matured. It’s got some customers. It’s farther along in its business life cycle, which is a good thing. And, for that expansion phase, oftentimes it requires a higher level of capital. It’s not just a proof of concept anymore. It’s a higher level of capital to really leverage that business plan.
So as a consequence of that and the risk of change, the risk dimensions that have changed, it’s no longer just an idea, it’s actually a proven product. And so as a consequence of that we want to allow investors to get a little farther along on the maturity spectrum with respect to these companies. And there may be some special interest in those particular companies. So in terms of updates, this is actually a pretty significant development for us over the last six months or so that we’ve changed our strategy or enhanced our strategy a bit along those lines.
Jimmy: Oh, that’s very interesting. Definitely unique, as far as I know. Len, earlier you spoke about the ability to invest in companies and the nature of the legislation, investors having only 180-day window and then inside the fund you only have six months to begin complying with the 90% investment standard. What’s the consequence of that, particularly in the case of your fund that’s investing in businesses, can you discuss some of the challenges that that poses?
Len: Well, it’s fast. We have to, and it’s in the spirit of the legislation, these rules around not sheltered…there was never an intent to shelter money here. The intent is to move money into these communities. And they don’t want people sitting on it. So it makes sense from an intent point of view. It makes perfect sense. A typical venture capital fund will go through a phase where they raise money or commitments for money and then, take two, three, five years to deploy that capital. The intent of this is not to do that, the intent is to deploy that capital quickly and hence those six-month windows particularly on the fund side.
So the consequence of that is, as I alluded to before, we’re looking for companies. We’re looking to expand our investments in existing companies. That’s happened simultaneously with that fundraising because as soon as it comes in the door, the clock is ticking on us, which is a good thing. I’m not complaining. It’s a good thing. But we have to be ready, have a pipeline of investments ready to go as those funds come in. So that’s the major consequence for us, and a major difference between an OZ venture capital fund and a traditional venture capital fund.
Jimmy: Right. Yeah. There’s more of a balancing act for you to timely turnaround the capital that you received to stay in compliance with the statute and the regulations. All right. So Natalie, turning back to you now I want to get a sense of your portfolio. You did the rundown on the four businesses that you’ve made investments in to date. What does your pipeline look like? What’s your portfolio strategy going forward over the next six months or beyond?
Natalie: We are very excited about our pipeline of businesses. We actually have an entire division within Verte Opportunity Fund that focuses on that pipeline and doing the due diligence on these companies. Len mentioned earlier that we have a twofold strategy going on where we’re both prospecting for investors and new businesses so that when we do get that capital in the door, we are ready to deploy to a company that we know is going to be a great fit for our portfolio and bring investors a really good attractive return. So we have a team devoted to that. It’s made up of a senior member of the Verte Opportunity Fund team and then it’s also made up of a few University of Maryland students many of which are in the business school there. So we’re very excited about that opportunity.
Their focus is really just in getting those high growth small businesses that are located in Opportunity Zones into the door, seeing what their deal flow looks like, who their audience is. We have, like I said, a lot in the pipeline that we’re looking at right now some in Illinois, some in Virginia. So all across the nation, our pipeline is really filling up with companies that are revolutionary in their industry and have a lot of excitement and have a really great management team behind them. So I can’t really elaborate too much on who they are or what they’re doing until we get them into our portfolio, but lots of exciting things happening on that front.
Jimmy: No, that’s great. And the potential for industry disruption I believe is one of your other investment thesis. And, of course, I love business investment in Opportunity Zones. And I say this all the time, I think business investment offers the best use case for Opportunity Zone investing because you get those high multiple exits and the ability to exclude that amount of capital gain on a huge exit is what makes this program so enticing. Real estate, you can only get so much bang for your buck, so to speak, but small business investing, you’ll have some strikeouts of course, but you’ll also have more potential for a home run as opposed to real estate investing. So Len and Natalie, thank you for joining me today. I think this has been great. It’s been great catching up with you guys and getting the update on what’s happening with Verte OZ. Before we go, Natalie, can you tell our listeners where they can go to learn more about Verte OZ?
Natalie: Yes, absolutely. First of all, Jimmy, thank you again for having us. To learn more, please do visit our website. It’s www.verteoz.com. And I know I spoke very quickly about our portfolio companies, so there you can actually see in more detail what they are all about and how they’re impacting the communities that they are serving. So please do visit our website and again, Jimmy, thank you. We’ve really enjoyed being on the podcast today.
Jimmy: Perfect. Great. Great having you guys once again and for our listeners out there, I’ll have show notes on the Opportunity Zones’ database website for today’s episodes. So you can click around to some of the resources that Natalie and Len and I discussed, and I’ll have links to the businesses that they’ve invested in to date. You can find those show notes at opportunitydb.com/podcast. Len and Natalie, again, thanks a lot.
Natalie: Thank you, Jimmy. I really appreciate it.