Venture group grows in hardscrabble times
By KRIS HUNDLEY, Times Staff Writer
ST. PETERSBURG -- Ballast Point Ventures LP, a new but well-connected venture capital fund, accomplished the near-impossible in May.
While established investment funds watched portfolio companies go under and valuations decline, the partners in Ballast Point of St. Petersburg talked wealthy individuals and a couple of institutions into committing $40-million for new investments.
That makes Ballast Point the only Florida fund to raise new money for investments since 2000, according to data gathered by the National Venture Capital Association through the first quarter of this year. Nationwide, $42.2-billion in new capital was raised during the same 15-month period, compared with $105.2-billion in new investments made in 2000.
The dramatic decline in new money flowing into venture funds accompanied a sharp reduction in the number of venture capital deals. In the first quarter of 2002, $6.2-billion was invested by venture capital companies, down 50 percent from year-ago levels.
Despite the sudden evaporation of new deals and new money, Drew Graham, Ballast Point's managing partner, said his group decided the timing was perfect for a new fund.
"No one said we were nuts," Graham said of investors' response to the group's seven-month fundraising campaign. "But quite a few told us we were trying to do this at the worst possible time. To us, that makes it the best time to do investing."
Ballast Point intends to use the money to fund early-stage companies in the Southeast. Startups need not apply; the fund wants companies with a minimum of $2-million in revenues and the opportunity to triple sales within three to five years. Areas of interest include health care, consumer products, business and financial services and technology. Ballast Point's average investment will be $3-million to $5-million, and the partners hope to finalize two or three investments in the first year.
Ballast Point hit a snag early in its fundraising.
"We were sitting in Tampa airport on the morning of Sept. 11, heading to Houston to make our first presentation," Graham said. "That kind of short-circuited us. But after an appropriate delay, we decided to get out and tell our story."
Though Ballast Point is a new entity, it entered the investment community with powerful ties. The fund, organized in mid-2001, is an affiliate of Raymond James Financial, with the St. Petersburg financial services company investing approximately $7.5-million in the fund.
And Don Burton, founder of a longstanding Tampa venture fund, South Atlantic Partners, is a special limited partner in Ballast Partners. Burton's support and the past success of South Atlantic's funds held considerable clout with investors. About 40 percent of the individuals who had invested with Burton's funds -- and reaped average returns of 23 percent over the years -- invested with Ballast Point.
"Investors have an appreciation for our conservative strategy," said Graham, who worked with Burton at South Atlantic for five years. "Many funds have the strategy that they can lose on 60 to 70 percent of their companies but make big money on a few winners. We want to make money on 80 to 90 percent of our companies."
Other members of Ballast Point's management team include Richard Brandewie, another former partner in South Atlantic funds with experience running portfolio companies, and Paul Johan, who had been a vice president of the communications investment banking group at Raymond James.
Johan said Tom James, chairman and chief executive at Raymond James, became interested in starting a venture fund in late 2000. Burton, whose South Atlantic funds had attracted investments from Raymond James over the years, had declared in mid-2000 that the market was overpriced and he had no interest in raising new money.
"Then when Tom saw valuations of companies collapse, he got excited," Johan said. "He thought he saw good investments for a fund and instead of turning it over to a peer to run, he wanted us to run it ourselves." (Johan said Raymond James continues to invest in unaffiliated, outside funds as well.)
James sits on Ballast Point's investment committee, along with the three partners and Jeffrey Trocin, head of equity capital markets at Raymond James. Though Ballast Point is not a "captive fund" because there are outside investors, the management company that handles the fund is a subsidiary of Raymond James. Venture capital managers typically receive a fee of up to 2.5 percent of the fund's committed capital.
The partners say the affiliation with Raymond James is a tremendous benefit. "We're not beholden to them, but we see them as resources," Graham said. "They offer great experience in terms of research, financial advising and investment banking."
Nor do the partners think Ballast Ventures portfolio companies will feel undue pressure to use Raymond James' investment banking services if the time arrives to go public or merge.
"There's no exclusivity arrangement in place," Brandewie said. "And it's important to remember we'll only be minority investors in our portfolio companies, so the decisionmaking will be independent."
Ballast Point partners learned early in the fundraising process that individuals, not institutions, would be their best source of capital. Only Raymond James and a Midwestern insurance company have invested in the fund, which has attracted about 40 individual investors.
"There's a lot of heartburn now in the institutional market," Johan said. "They said, "Talk to us in 2002 when we've reallocated our venture money.' They're trying to figure out what's up."
Many institutions are wary of putting more money into speculative investments such as venture funds because they've seen the value of existing private equity investments decline in the past year. According to the National Venture Capital Association, funds reported an average loss of 27 percent last year, based on internal valuations of their portfolio companies.
Another problem is institutional money that has been committed to existing funds but not yet invested -- an estimated $80-billion nationwide.
"That overhang is definitely an issue in the investment community, which has made a substantial commitment of money but doesn't want to commit more until they see how it plays out," Johan said. "But it's a much bigger problem in Boston and Silicon Valley than it is here in the Southeast."
Ballast Point hopes to capitalize on its distance from the nation's money centers to find promising companies in Southeastern markets that have been overlooked by the big guys.
"We're looking for entrepreneurs who have bootstrapped themselves," Johan said. "If companies get venture capital too early, there's a lack of discipline. We want companies that recognize the value of the dollar."
-- Kris Hundley can be reached at email@example.com or (727)892-2996.
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