Friday Q&A: Dan McKinney of NextStage Capital

Forget the latest investment trends, NextStage Capital will do what it wants, thank you very much.
The firm was founded by Rob Adams and Dan McKinney -two ex-Safeguard Scientifics employees – and Terry Williams, a former recruiter during the post-dotcom boom year of 2003. Then, most investors were running away from early stage technology investment.
“There can be opportunity when people are fleeing markets,” says McKinney,  a managing partner.
It  firm has invested in 12 companies with four exits, mostly in the mid-atlantic region going as far west as to Pittsburgh. However, since its founding the firm has taken pride in being the contrarian, and has not made any new investments in 2010, choosing instead to reinvest its dollars in current portfolio companies.
After the jump, McKinney promises us that we will be hearing a lot from NextStage in the coming months and gives his take on the age-old debate about whether Philly needs more investment dollars.

As always, this interview has been edited for length and clarity
You guys started in 2003, at a time when a lot of people were running away from early stage tech investment. Why did you start then? What did you see that other people didn’t?
I think we’ve always taken a contrarian view. There can be opportunity when people are fleeing markets.
What kind of companies do you like to invest in?
A critical criteria is no biotech and no FDA approval process. Companies need an underlying technology, as that lends itself to leaving out “people service” businesses. Generally we’re software and software-as-a-service though we’re pretty opprutunitistic when it comes to industries.
And what to you look for in founders?
We look for passion, staying power and some experience with the customer set and technology. In a perfect world you’d find a serial entrepreneur.
You guys haven’t made an investment since 2009. What gives?
That’s correct, but we’ve made significant followup investments this year. With the current environment, you can be more choosey with investments. We’ve spent more time evaluating companies and we have a couple that are on deck and ready to go.
The one’s we’ve reinvested in are the ones we significantly increased our ownership in because the companies were doing so well. We’ve put a lot of our reserve where it really matters.
When TP talks to the community we hear from some people that Philly doesn’t have enough investment dollars to compete with other regions, while some say we have plenty. Where to you come down on that?
Lets talk seed and early stage as I can’t talk about the other stuff. I think seed [i.e. capital that companies typically receive in the idea stage] is tight. When you move into early stage, it’s still tight but there are plenty of us out there. For good entrepreneurs and good ideas there’s enough money to build good businesses here in Philadelphia..
We have Ben Franklin Technology Partners, lots of angel groups and DreamIt Ventures doing a really good service. It’s probably less money than entrepreneurs would like to have, but I think its sufficient.
It sounds like you’re saying that it’s good but it could be better.
I think we have a really good balance. In other regions there may be tons of capital and innovation but those market dynamics aren’t always best. I think here it’s a terrific balance of opportunities and dollars. From the macro perspective this region needs more money. From the micro perspective, we need more angel and seed money and I’d like to see that.
Every Friday, Technically Philly brings you an interview with a leader or innovator in Philadelphia’s technology community. See others here.