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fund-raising efforts in 2007, the firm was ready to close in the fall of 2008—when the financial crisis hit Wall Street. “Morgan Stanley was a lead investor,” Coats deadpans, “and we had to start fund-raising all over again.” It took another 21 months or so for Correlation Ventures to secure its first $8.5 million, and Coats says they didn’t close the fund until November, 2011.
Of the 21 investments that Correlation Ventures has made so far, four are in life sciences startups and 17 are in technology, or consumer products and services. While they invest nationwide, their list of portfolio companies includes Mogl and RQX Pharmaceuticals in San Diego, Aldea Pharmaceuticals in San Francisco, and Framehawk in San Francisco.
While the firm can invest as much as $4 million over the life of a startup, Coats says a first round deal is typically $1 million to $2 million or smaller—and after 21 deals, Correlation has invested only about a sixth of its fund. “We are a co-investor, remember,” Coats says, “so a key requirement is that at least one other investment firm is going in at the same time.”
A deal typically begins with an introductory phone call from the lead investor. Instead of scrutinizing gigabytes of information about a prospective deal, Coats says Correlation gets the information it needs from five documents—the business plan or power point presentation, term sheet, historical financial, capitalization table, and pertinent legal documents.
“We get what we need and put it through our analytical process,” He says. “We guarantee we’ll make a decision in two weeks, but it’s often just 48 hours. We’re often wiring the money within two weeks.”
As part of their decision, Correlation also tells startups up front how much capital will be reserved for follow-on investments—and the firm’s partners won’t take a board seat. “We are literally getting hallelujahs from entrepreneurs for making the decision in record time,” Coats says.