Jul. 20–What investors want, investors should get.

So it goes at The St. Paul Cos., more now under the regime of CEO Jay Fishman than in the past.

Fishman’s chief investment officer, William Heyman, puts it bluntly.

“Our ultimate paymaster,” he explains, “is Wall Street.”

This laser-like focus on what the Street wants has significant implications for the Twin Cities’ biggest venture capital operation, St. Paul Venture Capital.

A week ago, we reported how St. Paul Venture has been working its way through the wreckage of the tech stock crash.

But that’s only part of the story.

The other part is that The St. Paul, which has staked the venture firm to $2.9 billion in six funds since establishing it 15 years ago, has thoroughly reviewed its unusually large stake in the venture business. In the future, it will no longer be St. Paul Venture’s only funder.

Thus, for the first time ever, St. Paul Venture’s partners are getting educated on how to raise money from many places instead of relying on a sole benefactor.

Most venture firms have been hitting the pavement all along, to find capital from a variety of big institutional investors. St. Paul Venture’s funding arrangement has been an exception to the rule.

The St. Paul Cos. is not walking away from St. Paul Venture.

The venture firm has invested only 35 percent of its sixth fund, which at $1.3 billion ranks as by far the biggest of the six. Michael Gorman, co-managing partner at the venture firm, says it could be making new investments from the sixth fund until the end of 2005 and potentially into 2006. It expects to tap the fund all the way up to 2010, to pump more money into the companies it has already invested in.

But for venture capitalists, raising money appears certain to be a much longer process in the foreseeable future than it was in the dot-com era. So Gorman and his partners probably need to be ready to hit the streets for Fund VII by the end of next year.

Gorman says St. Paul Cos. will be a “substantial investor” in Fund VII, meaning that the insurer “will remain an important investor for at least 10 more years.”

Heyman confirms that the company intends to invest in Fund VII.

He expects the company to meet its commitments to Fund VI, subject to certain provisions. And he says St. Paul Cos. will help St. Paul Venture make the transition to the new fund.

Soon after Heyman arrived at The St. Paul 15 months ago, he began acting on his belief that the company’s $22 billion investment portfolio was much too exposed to equities — venture capital investments and publicly held stocks.

Then, one of the insurer’s key financial measures — the portion of its total shareholder equity that’s invested in stocks — was 39 percent. Heyman says that’s well beyond the comfort zone for the kinds of investors most likely to buy St. Paul Cos. stock. They prefer to see a greater portion of the company’s portfolio in fixed-income investments, mainly government-issued securities and corporate bonds.

Since spring of last year, the company has whittled that 39 percent number down to 14 percent.

Heyman says venture investments tend to be illiquid. The St. Paul’s stockholders want interest income from bonds more than capital gains offered by venture firms, he adds, and venture returns are “lumpy.” A look at the management discussion and analysis section of The St Paul’s latest annual report suggests just how lumpy.

In 2000, The St. Paul realized a gain of $554 million from its venture investments — 89 percent of its total property liability investment portfolio gain that year. But in 2001, the company realized a loss of $43 million from venture investments.

Last year, the loss ballooned to $200 million — enough to put the portfolio in the red for the year. Liquidations of some investments in St. Paul Venture’s portfolio, writedowns of some of its other investments and sales of venture investment partnerships accounted for the losses.

Such has been the scene across the venture landscape ever since the tech bubble popped.

This year, unlike 2002, St. Paul Venture has benefited from two lucrative cash-outs.

In January, it chalked up a $30 million gain when Cognos Corp. acquired Adaytum Software in Bloomington.

In May, the venture firm gained $80 million from a secondary offering of stock in publicly traded Select Comfort. St. Paul Venture still holds a $130 million stake in Select Comfort.

Heyman says the partners at St. Paul Venture are competent. It’s not a question of their performance, but rather of what kinds of assets are most appropriate to loom large in the St. Paul Cos. portfolio.

Buddy Ruvelson, the longtime St. Paul investor who is the dean of Minnesota’s venture capitalists, is not surprised.

“Venture capital is very cyclical for any investor,” says Ruvelson, “and for insurers, it can be very risky.

“Venture capital can be feast or famine. It lacks predictability. Fishman and Heyman are non-nonsense guys and they want to be able to produce predictable growth in earnings per share.”

Dave Beal can be reached at dbeal@pioneerpress.com or 651-228-5429.

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(c) 2003, Saint Paul Pioneer Press, Minn. Distributed by Knight Ridder/Tribune Business News.

SPC, COGN,

Jul. 12–St. Paul Venture Capital expects its investments to rise 63 percent to $165 million this year, in a trend that’s running counter to the picture nationwide.

The investments include two that closed this week in a pair of Plymouth companies, Optical Solutions and Atritech, both of which the venture firm also put money into in earlier rounds.

Nationally, the latest estimates are that the venture capital industry will invest about $15 billion this year. That would be down from roughly $21 billion in 2002.

Michael Gorman is the co-managing partner in charge at St. Paul Venture. The firm, affiliated with The St. Paul Cos., is Minnesota’s largest venture capital operation.

Gorman cites figures suggesting that the tumultuous ups and downs in the venture business lately have been less volatile at his firm.

The firm’s investments rose from $130 million in 1999 to $197 million in 2000 and $227 million in 2001, then fell to $101 million in 2002. Industry-wide investment rose and fell at greater rates, as the air surged into and then out of the tech stock bubble.

This year, Gorman adds, St. Paul Venture added a partner in northern California, Allan Will. Will specializes in medical devices.

The firm is financing companies with money from its sixth fund. So far, it has invested about 35 percent of the fund’s $1.3 billion.

St. Paul Venture has 15 Minnesota companies in its active investment portfolio out of about 90 overall.

It just put $1.8 million into Optical Solutions. Other investors chipped in another $10.2 in this latest round.

Optical Solutions, a telecommunications firm founded in 1994, has 101 employees in Plymouth. It provides systems that enable phone companies, municipalities and developers to offer data, voice and video services over fiber optic cable.

Atritech got another $3.5 million from St. Paul Venture, part of a new round of $7 million. This firm makes cardiovascular devices.

St. Paul Venture has also directed follow-on investments into two other Minnesota companies this year: Sistina Software and Minneapolis and SPS Commerce in St. Paul.

Sistina got $1.8 million, part of a $9.4 million round.

SPS got $2.5 million, in a $17.4 million round.

Another Twin Cities firm backed by St. Paul Venture, Internet Broadcasting Systems, is flourishing. The company, now profitable, has 231 employees including 133 at its home office in Eagan.

IBS helps television stations build up, manage and sell advertising for their Web sites. It has signed up 70 stations covering 93 percent of households in the nation’s top 25 markets. Most of the stations are parts of big media groups, including NBC, Hearst, Washington Post, McGraw-Hill and Cox.

“These are some of the best broadcasters in the country,” says Jim Simons, a general partner at St. Paul Venture who is also an IBS director.

Simons says online ad sales for IBS’ station-clients are expected to rise to $60 million this year from $44 million in 2002. He won’t part with IBS sales figures, but says IBS gets a large share of its clients’ online sales revenue.

St. Paul Venture, the lead investor in the first round at IBS in 1998, now has an $8.7 million stake in the company. Gorman says the venture business faces two major obstacles to full recovery.

First, venture firms can’t easily cash out of companies because slow markets have clogged up their two traditional exit routes: acquisitions and initial public offerings.

Second, many venture-backed companies are grappling with slower-than-expected sales because their customers have curbed capital spending.

So when will these clouds break up? Gorman thinks the recent rise in the Nasdaq average “is beginning to build the foundation for a recovery in liquidity” both through IPOs and mergers and acquisitions.

NOT LIKE IT WAS: The board of the Greater Metropolitan Automobile Dealers has been getting a makeover.

Two of the association’s four officers for 2003 are women.

Sue Jacobson, from Tousley Ford in White Bear Lake, is secretary.

Julie Feldmann, from Feldmann Imports in Bloomington, is treasurer.

Joining them on the dealers’ 14-member board is Barbara Lupient from Lupient Automotive Group in Minneapolis.

“It’s a sign of the times that women are coming into the industry,” says Bill Abraham, the association’s executive director.

“It isn’t a male-dominated organization,” he says. “It was in the past.”

HUBBARDS HAILED: There they are, listed right between two legends — comedian Bob Hope and the Chet Huntley-David Brinkley TV news anchor team — among the “First Fifty Giants of American Broadcasting.” We’re speaking of the Hubbards — Stanley S. and son Stanley E. — president and vice president, respectively, of St. Paul-based Hubbard Broadcasting.

The Library of American Broadcasting named both men to this august group. All will be saluted in September, when the library opens its new quarters at the University of Maryland.

Dave Beal can be reached at dbeal@pioneerpress.com or 651-228-5429.

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To see more of the Saint Paul Pioneer Press, or to subscribe to the newspaper, go to http://www.twincities.com/mld/pioneerpress.

(c) 2003, Saint Paul Pioneer Press, Minn. Distributed by Knight Ridder/Tribune Business News.

Jul. 6–Rick Brimacomb and his wife used to think nothing of going out for a big night on the town, but then there were just the two of them.

Today, there are four more Brimacombs, children ages 2, 4, 6 and 8.

“Now we go out to the Old Country Buffet and that’s a big night out on the town,” he jokes. “We’ll never get back to normal because there’s always a new normal.”

Brimacomb says that same principle guides his business, as well. In his day job, he is a partner at the Sherpa Partners venture capital firm in Edina. He’s also the program chairman for the Minnesota Venture Capital Association.

The venture capital business is still working through an otherworldly experience: the tech stock bubble and its rugged aftermath.

All too frequently, journalists and others describe the business by comparing venture activity during the bubble years with what’s happening today. That paints a bleak picture because of the astounding windfalls that venture firms enjoyed during the bubble era.

Brimacomb cites venture capital investments since 1980 to make his point. Investment jumped to $56 billion in 1999, $106 billion in 2000 and $41 billion in 2001, but never topped $20 billion in almost all the other years.

Typically, all a venture capital fund needs to flourish is hit one or two “home runs.” So what if nine out of the 10 companies in which the fund has a stake go out of business or just muddle along? All that matters is that the fund reaps a stunning gain, a home run, from the 10th.

In the late 1990s and on into 2000, some of the home runs were landing on Mars. Even then, many venture capitalists knew they were living in a dreamland that couldn’t possibly be sustained.

I remember one of them saying to me at the time, “Dave, we’ve never seen anything like this, and we’re not going to see it again in my lifetime.”

That’s the way Brimacomb sees it.

Little can be gained from wringing hands about those quarterly or annual comparisons showing how much the business has contracted since 1999. Instead, we’d be well-advised to declare the bubble years as blip years, then get back to the future.

Brimacomb is a believer in the future.

He points to a thick study, just released by the Center for Venture Capital and Private Equity at the University of Michigan’s Business School. The center’s research shows that venture-backed companies have provided 356,000 jobs in Minnesota. That ranks the state 12th, well above its population ranking, among the 50 states.

He stresses that tomorrow will not unfold exactly as yesterday did. Yet he’s convinced that the state still has the capacity to mint more Medtronics.

He thinks venture firms have under-invested in early-stage technology companies in the Upper Midwest, relative to all the investments they’ve made in the region.

This niche has provided the opening for Sherpa.

The Sherpa partnership, formed in late 1997, consists of three principals: founder Mac Lewis, a former CEO at Computer Network Technology in Plymouth; Steve Peterson, who was a marketing executive at Skyline Displays Midwest in Burnsville; and Brimacomb.

They are out raising money now for their second fund. Their first has committed about half of its $13 million to seven companies, five of them based in Minnesota.

Among the seven are two — Unlimited Scale and Bermai — whose roots go back to the heyday of the Twin Cities’ computer industry. Their presence, he says, is evidence that the successes of those days have not flickered out.

Brimacomb doesn’t skate over the troubles that loom in his business today.

When the air whooshed out of the bubble, an ill wind began buffeting many venture capitalists. The storm is not over.

The weak stock market, a lack of initial public offerings and the sluggish market for acquisitions have made it tougher for venture firms to cash out at good prices.

And, says Brimacomb, “so much money went into the industry when things were hot that there’s this big overhang.”

“Overhang” or “dry powder” are the industry’s terms for uninvested capital. The industry has a record overhang of close to $80 billion, nearly four times what it invested last year, according to Thomson Venture Economics.

The biggest venture firms hold most of that money. To put it to work, they must invest their cash in larger and larger chunks. Thus it tends to go to the same companies they already invested in; early-stage companies aren’t getting much of it.

Now, though, the outlook is brightening for the stock market. The industry is slowly working through its overhang.

And the business, as always, is brimming over with subplots.

Life goes on. Gradually, Rick Brimacomb and his associates are finding their way toward that new normal.

Dave Beal can be reached at dbeal@pioneerpress.com or (651) 228-5429.

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To see more of the Saint Paul Pioneer Press, or to subscribe to the newspaper, go to http://www.twincities.com/mld/pioneerpress.

(c) 2003, Saint Paul Pioneer Press, Minn. Distributed by Knight Ridder/Tribune Business News.

MDT,