When John Martinson founded a venture capital company in 1986, he named it “Edison Venture Fund” after the great inventor Thomas Alva Edison. But it wasn’t the lightbulb that fascinated Martinson.
Martinson used some of the money he made from his company to amass one of the world’s foremost collections of Edison memorabilia — 85,000 items at its height. His most prized possessions were Edison’s failures, like the 1875 electric pen. The pen, which consisted of a motor, a battery, and a reciprocating needle, punched tiny holes in a piece of paper as the user wrote or drew, creating a stencil that could be copied with a press.
The electric pen was a commercial failure, and that’s what Martinson likes about it.
“I enjoy that it failed for him, but he kept on trying,” he says. “Most of his inventions were not first-time overnight successes. He used the trial-and-error approach. I think he’s a good role model for any entrepreneur. While you may be thoughtful and multi-disciplined, never assume that you’re going to come right out and shoot perfect.”
The pen worked, but it faced competition from devices that were easier to use, such as typewriters. However, the technology behind the electric pen was eventually licensed to the A.P. Dick company, which used it to create the highly successful mimeograph machine. Another inventor turned it into a tattoo needle. From failure came success.
The spirit of trial and error helped Edison Ventures grow from a startup to a firm that has $850 million under management, and a record that includes investing in almost 200 companies. Edison generally invests in growth-stage companies that are generally located on the East Coast, although it has broken both of these rules in the past. Most of Edison’s investments are in four arenas: enterprise software, healthcare IT, financial technology, and interactive media.
As the company has grown in recent years, Martinson’s Edison collection has shrunk. He now has only about 15 pieces left. As Martinson approaches the end of his career, at age 66, he wants to spend less time on his hobbies and more time working. Martinson remains a founder and general partner at the company, even though his successor, Chris Sugden, 44, now holds the title “managing partner.” As leadership has changed, so too has the name: it’s now Edison Partners.
Martinson grew up in Franklin Lakes, where his father was a railroad industry executive. He majored in aeronautical engineering at the Air Force Academy, and then joined the Air Force as an officer. Martinson flew more than 500 combat missions over North Vietnam during the war, including reconnaissance, electronics countermeasures, and transport missions with a record that earned him the Distinguished Flying Cross. His cargo plane was the third-to-last to fly out of Saigon before the city fell.
It was in the Air Force Academy that Martinson made his first investment, in a small real estate company that eventually became Re-Max. He borrowed money to make the investment. “I made pretty good money and it taught me that I didn’t want to be in debt; I wanted to be in equity,” he recalls.
Martinson returned from the war and earned a master’s in astronautics from Purdue with the goal of becoming an astronaut. Disqualified from space flight because he was too tall at 6’ 2”, he earned and an MBA from Southern Illinois University. He found out about venture capital from a friend, and soon he had joined a company called Innoven, based in Saddlebrook, which invested in high-tech companies. He later worked with Exxon Enterprises, flying to the West Coast and the Boston area, where most tech companies were located.
But the constantly traveling lifestyle didn’t suit the young family man, who had just become a father in the mid-1980s. “I realized the New Jersey area, where I’d grown up, was largely untapped in the venture world, and ironically, it still is today,” he says.
If you have seen the show, “Shark Tank,” you may have some idea of what a venture capitalist does. On the show, entrepreneurs come before a panel of money men to pitch business ideas, hoping to receive seed money in exchange for ownership of part of the company if it is successful. If the business turns out to be the next Microsoft, the venture capitalist gets rich. If it’s the next Pets.com, the money is sucked into a vortex of failure.
Therefore, the main goal of the VC is to send his money to companies that will thrive. That means investing in sound companies, and on the other hand, not just sitting back and hoping for the best, but actively helping them succeed.
Martinson takes a different approach at Edison than on “Shark Tank.” There are many events where investors and early stage entrepreneurs meet in a somewhat Shark Tank-like scenario, and pitch ideas, and Edison does attend these events. But mostly, Martinson has preferred to do the opposite: doing research, finding likely companies, and wooing them to accept his money, rather than the other way around. Usually, the advice and mentorship begin years before the company agrees to accept any money from Edison.
“We try to think ahead, and think about what market segments we would like to be in, understand the dynamics of that industry, see which companies fit our criteria and time frames. Then we reach out to those companies and try to understand the early leaders in that segment, and try to build relationships with them. We become almost their de facto partner before investing, and that way we’re in a much better position to make a decision.”
In other words, Edison finds a small company that had demonstrated it can succeed, and then give it the funding to expand.
“Ours isn’t a reactive model, but an analytical approach,” Martinson says.
In some cases, the approach has worked perfectly. Martinson has taken the lead on a number of the company’s successes.
Best Software: One of Martinson’s most successful investments was a company called Best Software, located in Reston, Virginia. The company fit the profile of many Edison investments: a small company, laboring in an obscure yet critical field of business, that few people had ever heard of. “It was a leader in the fairly prosaic areas of depreciation accounting software, small business software and tax software,” Martinson says.
The company was owned by two brothers, and Martinson persuaded one brother to sell his stake in the company. Edison put $3.5 million into Best to help it grow over a seven-year period, until it made a public stock offering. When Edison exited the company in 1995, the investors made 25 times their initial stake. And that wasn’t all they got out of it. When Best was sold to Sage, many of the company’s top executives became redundant. Edison sent them to work at other companies in their portfolio, gaining talent as well as money from the deal. “A number of them today are in executive or mid-management roles for some of our best-performing companies,” Martinson says.
Dendrite: In the early 1990s, Martinson was on the lookout for companies in the sales force automation business. One of the hidden gems he found was Dendrite, which was focused on providing software to the huge sales forces of pharmaceutical companies. Founded in Australia, Dendrite had moved to Bedminster to find a larger market for its product.
“It took a year of courtship to convince them that we were the best match,” Martinson says. “We helped build their management team, find service providers, lenders, that sort of thing,” he says. After Edison’s investment in 1992, Dendrite grew more than 50 percent a year. In five years, the company had gone from $8 million in revenue, to more than $60 million. By the time it was sold to a French company in 1999, it had reached $400 million in revenue. Edison’s stake, grown from a $3 million investment, was worth $55 million when it exited in 1998.
As with Best Software, Edison used Dendrite to recruit leaders. “We have had 10 to 15 executives from Dendrite who have worked in multiple Edison companies. It has greatly impacted their lives and families and in some cases, has enabled them to start their own businesses.
Princeton Financial Systems: Princeton Financial Systems makes software for insurance companies. At the time Edison invested in it, it was a subsidiary of a larger company that wanted to spin it off. Edison financed PFS’s expansion in 1991, bringing in new technology and a sales force.
When Edison invested in it, it had about $4 million in revenue, and grew to $30 million when it was sold to State Street Bank in 1996. The company maintains its name to this day despite being part of the giant State Street. Edison exited in 1998, making 12 times its investment.
Not every Edison company is a light bulb, and Martinson has made a point of learning from the “electric pen” investments that didn’t pan out.
“The greatest mistakes we’ve made were to misjudge the market,” Martinson says. “We invest in niche markets, and sometimes it turns out that the niche is way too small to build a company, so we are unable to adjust. That’s been our number one issue; that and technology changing.”
Edison has invested in many companies that support the pharmaceutical sector, but without actually buying biotech companies that are developing drugs. (Martinson says the long development cycle of drugs makes them incompatible with the five to 10-year timeline of Edison’s investments.) At one point, Martinson led an investment in a marketing and market research company that specialized in serving pharmaceutical companies, which seemed like a good idea at the time.
It turned out that the market for their services was much smaller than Martinson had anticipated. The large players in the industry tended to have their own marketing departments, and were not interested in outsourcing. The smaller companies tended to fly by the seat of their pants and didn’t invest anything at all in marketing. That left Edison’s company — which he declined to name — without enough clients.
In another money-losing deal, Martinson spearheaded a deal to invest in a company that made educational software. The market for educational software is large, and the clients are easy to find: schools don’t go anywhere, and you know when they’re open, and how to contact them.
But there’s a catch. “They only want to buy once a year, and that’s in June or July,” Martinson explained. “They are in a rush to buy for the next year, so how do you organize yourself to reach schools that are all over the country? It turns out to be an expensive proposition to make that happen in a concentrated time. If you miss that one-month window, or are ineffective, or have bad weather, it’s another year before you can try.”
Edison tries to avoid such missteps by spending a long time — sometimes years — in an advisory role before giving any money. It spends an average of 33 months working with a company before investing. That means recruiting senior talent, giving advice, and generally observing the company. It also gives the company a chance to evaluate Edison, since it is the VCs trying to win the company owners as well as the other way around. “One of the most frustrating parts is that often the companies we find are somewhat self sufficient,” Martinson says. “Raising more capital is optional for them. We have to prove that we are going to add value for them with our capital and guidance.”
In that time, Edison looks for signs the company can handle growth, such as having a solid retention of clients, employees, and partners.
Around 90 percent of Edison’s investments are with growth-stage companies like that, with the other 10 percent being startups.
Venture capital has changed a lot since the mid-1980s, although Martinson believes New Jersey is still under-capitalized. Finding companies is easier, with the amount of information available on the Internet, but that means Edison has to compete with other VC firms.
The cost of starting an IT company has fallen along with the price of computers. Consider that the best computer available when Martinson started his company, the Cray 2 supercomputer, cost $17 million. It was used more for scientific purposes rather than business, but hardware in general was very expensive. The Cray 2 had less processing power than a $500 iPhone does today.
Sales, marketing, and generally scaling up a company are still expensive, however, Martinson says. A surprisingly small portion of the companies are scientists and researchers, with the rest being administrative, executive, sales, or support staff.
One major change is that the staff for these operations, more than ever, is spread all over the world. Edison still focuses on the East Coast area. But a typical Edison company these days might have 500 employees, of which 75 are at the headquarters. Other branches might be located on the West Coast, India, Europe, Asia, or South America. Martinson recently worked with a company that had a headquarters in New Jersey and a COO in India.
Edison has changed with the times, most dramatically by making Chris Sugden co-managing partner with Martinson, then giving him the leading role when Martinson stepped aside in 2012.
Sugden joined Edison in 2002 after meeting Martinson at a golf tournament. At the time, Sugden was an executive at Princeton eCom, a College Road East-based electronic payments company. “We were literally playing against each other and he said, ‘Geez, how do you hit the ball like that? You seem like a good competitor. I like competitive guys,’” Sugden recalls. Before long, the two businessmen were talking strategy. Sugden joined Edison as a vice president.
Sugden grew up in West Chester, Pennsylvania, and Michigan, moving to follow his father’s job as a sales representative for air valve controllers used in factories. Sugden says his father instilled in him a respect for that side of businesses. “Nothing happens in business unless it starts with a sale,” Sugden says. “You have to make customers happy and delight them.”
Sugden went against the grain when he studied accounting at Michigan State University, getting his first job as supervisor in PricewaterhouseCoopers’ entrepreneurial services group in Boston. His business career has spanned finance, sales, marketing, and raising capital, including as director of finance and operations for two New York-based magazine startups, and an early Internet payment company.
Prior to joining Edison, he was an executive vice president for Princeton eCom. After joining Edison, he rose through the ranks, becoming a partner in 2007 and managing partner in 2009 alongside Martinson.
“He knew he had to have a succession plan,” Sugden says. Suddenly transferring power to an unknown player would have spooked Edison’s institutional investors, he says, so it was important to have a smooth transfer of power to the next generation. “All organizations have to evolve to the next generation of leadership,” he says.
One of the changes Sugden has led has been the formalization of the talent network that the company has built up over the years. The “Edison Director Network” consists of about 300 executives from companies that Edison has invested in. Education programs are another part of the package. On September 17, Edison will host its fifth “Director College” at the Capella Hotel in New York, a twice-a-year gathering of business school faculty, Director Network members, and Edison CEOs who share their expertise on various business topics.
All of this is aimed at answering the question that every business owner has when Edison approaches them, which is why they should dilute their ownership by 20 to 40 percent, when the company is doing fine on its own. “We’re trying to convince founder teams that it’s worth it,” Sugden says. “That what we bring to the table is going to help them grow the pie. The whole pie is going to be bigger when they sell it.”
The nature of Edison has changed too, having gone from single ownership by Martinson to ownership by Sugden and four other partners. “I have a tremendous amount of respect for what he did,” Sugden says of Martinson. “If you’re going to do what I did and join something that already exists, you’d better have a lot of respect for what that person has built.”
In his spare time, Martinson golfs and runs the Martinson Family Foundation, which makes grants supporting math, science, technology, and engineering education. He has two boys and a girl, and his wife, Eileen Martinson, is the CEO of Sparta Systems, a software company on Waterview Drive in Hamilton. However, he is doing the reverse of what most business owners do when they near retirement. Rather than hitting the golf course or buying more Edison memorabilia, he plans to spend more time helping companies succeed.
“I am still very enthusiastic about the drive, dedication, and creativity of entrepreneurs,” he says. “I do think myself and others here can contribute to helping them prioritize and steer the direction of their companies, while also not inhibiting their innovation.”
Edison Partners, 1009 Lenox Drive, Building 4, Suite 200, Lawrenceville 08648; 609-896-1900. Chris Sugden, managing partner. www.edisonpartners.com.