A puzzling venture capitalist.

A puzzling venture capitalist 

David B. Jones claims the same analytical skills that enable him to whip through a big-time crossword puzzle in minutes stand him in good stead in the venture capital business -- which he reports is alive and well

At a time when many venture capital firms are cutting back or even going out of business, David B. Jones, general partner and founder of downtown-based InterVen Partners, has chosen the opposite tack. He seeks to raise $60 million for a new fund, which will more than double the $50.9 million the 5-year-old firm currently has under management.

"Anyone able to finance with new money is ideally situated to take advantage of a new flow of investment opportunities," Jones declares.

Those remaining venture players will also win more favorable terms in what has become a buyer's market. In this case, the venture capitalists are the buyers. Jones says that represents a 180-degree turn from the mid-1980s, when a tidal wave of institutional money poured into venture funds, resulting in too much money chasing too few deals.

Besides expanding, Jones looks to buck current industry trends in a number of other ways. For one thing, he plans to devote up to 70 percent of new funds to early stage investments. As other firms have forsaken this sort of pure venture capital investing for less risky later stage investments and leveraged buyouts, something of a vacuum has been left behind.

A typical upstart company may require several rounds of capital infusion, from the time the business is no more than a glimmer in the mind of an entrepreneur to when the venture is sold or goes public and the investors can cash out part or all of their investment.

The balance of InterVen's new fund will go into what Jones calls "growth buyouts." These involve the acquisition of an established small company or a division of a larger company and using some of the techniques associated with the venture business to accelerate growth. Generally this high-growth strategy entails further related acquisitions.

Such an approach has been successfully followed by some larger venture capital companies such as Brentwood Associates. The objective typically is to create economies in fragmented businesses ripe for consolidation.

InterVen has already done several growth buyouts. In the electrosurgical equipment industry, InterVen made its first acquisition in 1987, when it picked up Birtcher Corp., a 50-year-old public company for $1.5 million. At the time the company had revenues of roughly $6 million and it lost $1 million in its June 1987 fiscal year. Within a few months InterVen had placed the company on a profitable footing, where it has remained ever since. The next year the company earned $700,000, and earnings have continued to rise. Building on the base laid by Birtcher InterVen bought two other companies in related businesses. The resulting enterprise is the second largest in the industry, estimated by Jones as $100 million to $120 million in revenues annually.

A new technology that came with one of the subsequent acquisitions could catapult the combined companies to an 80 percent market share, Jones forecasts. One catch: the company is currently engaged in a patent litigation involving the argon gas-based technology with a firm organized by former employees of the acquired division.

The case underscores that patent disputes are a perennial problem of new ventures. However, in the case of Birtcher, distribution was driving InterVen's investment, not technology or management, which have successively been the most popular engines behind most venture deals. "Distribution is the most costly and slowest part of developing a business," Jones explains. Despite what he considered weak management, Jones liked Birtcher's established distribution channels, which he thought could be exploited by other products.

In both early stage and growth buyout investments, Jones has sought to keep his investments diversified, resisting the temptation to specialize in hot industries. "I can't say what industry will do the best over the next ten years," he says in his characteristic self-deprecating fashion.

Not that InterVen will consider anything that looks promising. The company restricts itself to enterprises based in Southern California and the Pacific Northwest, where it maintains a Portland office. "We have a lot of contacts in these areas and our deal flow is as good as or better than others located here," says Jones' partner, Ken Deemer. Jones adds Southern California has a higher concentration of technological resources than even Silicon Valley, yet paradoxically, is underserved by local firms. "There is a shortage of local firms when you consider the opportunities here," he says.

Within the Southland, Jones predicts the most interesting opportunities will occur in the outlying counties, including San Bernardino and Riverside counties.

In terms of industries, Jones recommends keeping an eye on consumer electronics. He predicts it will take off again from the lull it has been in for the past few years as home telecommunications equipment is upgraded to fiber optics technology.

Jones also sees potential in environmental businesses, but like many others, holds some reservations. One limitation is the huge capital these companies frequently require to play in narrow niches. "There is a systems problem for environmental companies, since I can't imagine anyone addressing all the issues," he says. Jones predicts the most successful ventures in the area will be small companies which align with larger companies such as a Bechtel through joint ventures.

Arguably InterVen has already made an investment which stands to benefit indirectly from environmental concerns. It bought an interest in in Northwest Pipe & Casing Co., Inc., a maker of large diameter steel water pipes, for $1.9 million, when the company was in Chapter 11. Its finances repaired, Northwest is now positioned to win contracts from infrastructure repairs inevitably down the pipeline.

Yet to date, Jones' biggest success was in retailing, far removed from high tech or medical technology. When he ran First Interstate Capital, Inc., that company invested $2.5 million in Home Club, the discount warehouse retailer. Within one year First Interstate took out $11 million from that one investment.

Along with the Home Clubs of his past, Jones has had a few big misses, most notably, Federal Express. "I rejected it for the right reasons at the time," he says. The innovative air courier was seeking $22 million back in the early 1970s, making it the largest venture deal ever put together at that time. Jones correctly feared that amount would not satisfy the appetite of the capital intensive business for long. "There were several rounds of venture investment, and if you didn't participate in every round, you'd end up diluted," he explains.

As is inevitable in the venture business, Jones has also had his share of clinkers. Nonetheless, Jones claims his track record has improved over the years. From a 20 percent failure rate during his first decade in the venture business, Jones has brought down the average to 12 to 15 percent, better than the industry average, he says.

"In the future we're going to have to have fewer losses because there are going to be fewer home runs; we'll need more doubles and triples," he says.

An attorney by training, Jones wanted to enter the venture business from as soon as he heard what it was while in school. "I showed up my first day at the law firm I worked with two business plans; I was told to get down to business and start practicing law," Jones recalls.

Like many more recent law graduates, Jones was seduced into private practice by starting salaries, which in 1970 were a fraction of what they are today. Money aside, Jones failed to find his id during his two year stint in the corporate department of the downtown law firm, now known as Hufstedler, Miller, Carlson & Beardsley. "I was more interested in the business aspects of a deal than dotting the i's and crossing the t's," he says. Having met people from Union Ventures, a subsidiary of Union Bank, at a closing, Jones successfully hit them up for a job because they were looking for someone with a legal background. Unlike many frustrated attorneys, he had an M.B.A. from USC, which he had earned separately from his USC law degree, in the days before the joint degree.

At Union Ventures, Jones cut his teeth on some enormously successful ventures, including Amdahl Corp., an early dark horse IBM competitor.

Jones has a certain nostalgia for those days. "I could name all the people in the industry in 1972, but now there are so many people," he says.

Jones bemoans the institutionalization of the business, with large venture fund investors imposing a uniformity and structure in a business ill-suited for such an environment. Decrying the multi-layered management at many venture firms, Jones points with pride that his firm has remained small, with all five professionals general partners, each with the power to commit the firm at meetings. All five worked with Jones when he was president of First Interstate Capital, Inc. between 1979 and 1985.

Critical to the partnership's success, Jones says, are the complementary talents of the partners. Describing himself as almost incorrigibly disorganized, Jones says his partners bring discipline and order to the firm. Compensating for his disabilities are Jones' strong memory and analytical skills, evident in the quick work he makes of crossword puzzles. Professing to do a dozen puzzles a day, Jones says he disposed of The New York Times puzzle in 15 minutes, the Los Angeles Times in seven to eight.

Jones left the relative security of a bank with the conviction venture capital should be done in a partnership format. "It is an inherently more stable way because you lock up money for a period of time," he says. The risk in a corporate setting, Jones suggests, is that the rug may be swept from underneath you in annual budget reviews. As an example, Jones cited Time Inc., which had an active venture unit until top brass shut it down in the late 1970s after a dry spell.

Despite the political infighting which has doomed more than a few once successful partnerships, Jones believes the stability derived from InterVen's partnership set-up gives the firm a competitive advantage. "If I were an entrepreneur, I'd be drawn to a source of funds I had heard of and thought would be in business later if I should need more money," he explains.

Setting Jones apart from the majority of venture capitalists is actual operating management experience. He left the venture business for two years in the late 1970s to work as chief financial officer at a medical electronics company and a national retail chain. "I learned you don't really know the value of a company until you have worked with people in a company for some time," he remarks. Due diligence, Jones notes, is no substitute. The experience also shaped the characteristics he looks for in management, including a basic moral sense. "Believe it or not, morality is still important in American business," Jones says.

The payoff of such a standard, one might expect, is greater trust between Jones and the managers of the operating companies in his portfolio. Such mutual respect may facilitate Jones' recent effort to raise between $500,000 and $1 million from the entrepreneurs he has sponsored. The funds raised will be used to invest in InterVen deals. In return for attractive terms, the investors in what is called the "side by side" fund will lend their minds to the investment process.