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— Venture Well —
"We're kind of like plumbers with a truck full of tools," Swildens says. "We help people with all their problems. We provide liquidity." The San Francisco-based firm acquires the portfolios of venture firms, corporate VCs and angel investors, as well as limited partner commitments. With the dearth of exit opportunities available to private investors and their backers, there's a strong pipeline for these deals.
Proving that point, last month Industry Ventures closed its fifth fund at an oversubscribed $265 million, more than twice the previous fund it closed in December 2006.
The typical investment for Industry Ventures, which holds positions in about 80 companies, ranges from $1 million to about $50 million. The firm had a busy 2008, with more than 40 acquisitions of secondary direct investments in private companies and limited partner interests, compared with 27 the previous year. Although many of Industry Ventures' deals are conducted in private under nondisclosure agreements, bankruptcy filings sometimes reveal terms. For example, Industry Ventures bought interests in nine VC firms from Washington Mutual Inc., which collapsed in September. The firms include Arch Venture Partners, Madrona Venture Group and Maveron LLC, all with headquarters or offices in Seattle. Industry Ventures acquired the stakes for $3.1 million and assumed unfunded commitments of $1.7 million. Swildens declines to discuss the returns of Industry Ventures' previous funds. Recent exits include BlueLithium Inc., an advertising startup that was acquired by Yahoo! Inc. for $300 million in 2007; and BeVocal Inc., which was bought by speech recognition software company Nuance Communications Inc. for $140 million that same year. Swildens, 39, launched Industry Ventures in 2000. Before that, Swildens co-founded Microline Software, a startup that developed software components based on the Java programming language. He sold the company in 1997 to Blaze Software, which eventually was acquired by Fair Isaac Corp. After that, Swildens held a variety of advisory board seats with companies including nCircle Network Security Inc., Speedera Networks Inc. (acquired by Akamai Technologies Inc. in 2005) and StepUp Commerce Inc. (purchased by Intuit Inc. in 2006). The Deal spoke with Swildens about Industry Ventures and its new fund. The Deal: How did Industry Ventures get started? Hans Swildens: I was an entrepreneur, doing some software companies with my brother. For the first 24 months of this business, I was looking for direct investments in software. When the crash happened in 2000, there were a lot of people I knew that needed liquidity. Instead of buying directly from companies, I bought secondaries -- corporates and other investors I worked with that wanted to get liquid. Our first transaction was a secondary from Interpan Network Services Inc., then EDS Ventures, then a portfolio from Enron, and then a portfolio from InfoSpace. So we bought direct portfolios first. We found that the secondary market on the direct side was a free space, there was nobody doing it. No competitors, lots of pain and no firm that could address that pain. Nobody knew how to value these assets. So it was a big market opportunity, and I was an entrepreneur looking for an opportunity. I didn't know this was going to become what it did. I was simply trying to find a market to build a differentiated business in a growth space. When you started out, were you investing your own money or did you have investors backing you? It was almost all high-net-worth individuals, primarily technology entrepreneurs. In 2005, we switched to institutional pension funds and life insurance companies. Who are your LPs in the latest fund? It's mostly -- about 65% -- pension funds. U.S. states and counties, U.S. corporate pension funds, and some foreign. The remaining 35% is life insurance and money management firms, family offices, endowments, trusts and foundations. What do you predict this fund will look like compared to your last one? The last one looked like an index of the venture business but didn't have very much biotech -- that made up less than 1% of the fund. It didn't have much cleantech either, about 3% to 5%, and no China investments. We buy everything that is at least five to 10 years old, so investments that were made five years ago is what we buy now. Cleantech is just starting to come online for us now. It's going through a tough time and some cleantech investors are starting to look for liquidity. There will be more of that, and more medical devices stuff, than the last fund. The last fund had about 5% international, and this new one might have 10%. Have you acquired anything with the new fund? It's been very active. In the past five months, we did 11 deals. We had about 15% of the money called down, and now we just did another 10%, so 25% of the money has been called down and wired out. We have 11 transactions and 23 venture funds, and we think eventually it will have about 50 direct secondaries and 75 to 100 funds. What kind of due diligence do you do on your acquisitions? Can you cherry-pick certain investments from a portfolio? The majority of times, the seller just wants liquidity on everything. Sometimes we can cherry-pick what we like, but usually it's the whole package. We try to introduce the struggling companies to service providers to help them out, like investment banks, strategics, or liquidators. Nine times out of 10, when there is a failing company, it gets sold. We've exited lots of companies, some for really nice multiples. Now are you mostly buying VCs' portfolios or LPs' capital commitments? We've expanded our scope. We buy LP interests, we buy strip transactions. No one thought the IPO market and the M&A market would shut down; so many have overcommitted their funds. In many cases where the fund has no money, the companies still do. We give them, say, $10 million, then get that back on preferred and then participate with other LPs pro rata. That kind of thing wasn't happening five years ago. We just bought out an individual angel investor's stake of about 10% in a company. But we'll share the upside after certain return hurdles with that individual. They will still make money if the company does well. There are always unique things in this market that people need liquidity for, and our fund allows us to do all of them. Glynn [Capital Management] just does common founder stakes, W Capital does directs, and Pantheon [Ventures] just does LP interests. We are one of the only firms that can do all of it in the same fund. Do you expect to keep acquiring portfolios from corporate venture funds? We acquire at least one corporate VC fund every six months. We just bought WaMu's corporate fund. They are always selling noncore portfolios. Why did you name the firm Industry Ventures? Because we serve the venture industry with liquidity -- we keep the machine moving. |
Hans Swildens, principal and founder of secondary venture investment fund Industry Ventures LLC, prides himself on being a kind of Mr. Fix It for the venture capital industry. Right now, with the nonexistent initial public offering market and lean M&A opportunities, his firm's services are in demand more than ever. (
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