Sunday, May 23, 1999
Blue Chip Venture Co. ascends into cyberspace
But founder rejects Internet fever
BY JOHN J. BYCZKOWSKI
The Cincinnati Enquirer
"Good” Cincinnati business people think you shouldn't blow your own horn too loudly, and John “Jack” Wyant likes to consider himself one of those people. But the results of the venture-capital fund he helped form here in 1992 speak for themselves, as do his busy schedule and cell phone bills.
The Blue Chip Venture Co. started with a $44 million fund intent on making the lion's share of its investments within a 100-mile radius of Cincinnati. It has since invested $130 million more and just completed raising $180 million — and today, the firm finds itself becoming immersed in the Internet and playing in the same league as high-tech legends such as Hambrecht & Quist.
Mr. Wyant, who is general partner of the funds, insists that the firm hasn't caught Internet fever. About 40 percent of the fund's investments are in technology companies, and 45 percent are in health care.
But when a $10 million investment turns into $200 million a year later, as it has with USInternetworking, it breeds a certain enthusiasm. Blue Chip isn't writing checks for every HTML jockey that walks in the door. “But are we intrigued by it? Absolutely,” Mr. Wyant said.
Some of Blue Chip's Internet investments:
• USInternetworking of Annapolis, Md., was formed in March 1998 to provide human resources and financial software packages for small and medium-sized companies. Much of this software is typically too expensive for smaller companies to implement. USI uses central computers to operate the software, then connects to customers via the Internet.
Today, the company has almost 600 employees. It went public April 9, and Blue Chip's $10 million investment for 10 percent of the company is worth more than $200 million, according to SEC documents.
• ×plan of Stamford, Conn., provides marketing information for Internet advertisers and advertising agencies. The company has an exclusive contract to use the Gallup Organization's data on 40,000 adult Web users and has contracts with the top 20 Web publishers. The company was to go public Friday..
• Mothernature.com of Acton, Mass., sells “healthy living” products such as vitamins, herbs, and bath and body products. The company's chief executive is Michael Barach, a former Cincinnatian and son of Philip Barach, former CEO at U.S. Shoe Corp. The company just completed a round of private financing that brought it $40 million. A year ago the business was valued at $3.5 million, and today that's grown to $192 million.
Michael Barach was in the venture capital business himself, and made a point to meet Mr. Wyant when Blue Chip first got off the ground. The two stayed in touch.
When he started Mothernature.com, Mr. Wyant “cold-called me and asked me what I was doing,” he said. Blue Chip became an investor in November.
“He's a terrific guy to have as an investor,” Mr. Barach said of Mr. Wyant. “He really is extremely well-networked on the coasts. He's tied into all the right firms. By being an investor, he has ties to 14 other investors, and two are the leading e-commerce investors.”
Blue Chip's success is good news for local entrepreneurs, in a roundabout way, and it has to do with the way the fund works.
A venture fund isn't exactly a piggybank. The fund proposes to raise a specific amount of money, to make a specific number of investments. The investments later are sold, and the money plus any profits are paid back to the investors. The profits are not set aside for new investments.
But they might be recycled. If a venture fund is successful once, then another bigger fund is devised, and typically, many of the same investors return. Mr. Wyant said many of Blue Chip's investors return to in vest in subsequent funds.
Blue Chip's first fund raised $44 million and invested in 22 companies; 70 percent of those investments were in companies within 100 miles of Cincinnati.
Dennie Sullivan, executive counselor at Dan Pinger Public Relations in Cincinnati and a member of Blue Chip's investment committee, said those investors have made their money back and will probably have at least doubled their money when all investments are closed out.
The second fund raised $130 million and just made the last of its 30 investments. Half those investments were local. Seven of the 30 companies are Internet-related.
It's too soon to tell how the second fund's investors will make out, but it's been successful enough to spawn a third fund. That one is $180 million, and the first few investments are likely to be in Internet-related companies.
With the exception of Mothernature.com, Blue Chip is staying away from the retail side of the Internet. “We know the Internet will be here. We don't know who are the winners and losers,” Mr. Wyant said. “We don't want to slug it out on the retail end,” so Blue Chip is leaning toward companies on the side of support and infrastructure.
The good news for local entrepreneurs is that Blue Chip retains its strategy of making half of its investments within a 100-mile radius of Cincinnati. That means $90 million of the new fund will be available to help push local businesses into the big time.
Blue Chip typically doesn't fund start-ups. They want businesses that have gotten off the ground, that have proven the viability of their products and markets.
The local investments so far reflect the region's economic diversity. There are technology companies such as software firm Entek, health care companies such as Richwood Pharmaceuticals, broadcasters such as Regent Broadcasting and Blue Chip Broadcasting, and food companies such as Big Sky Bread and North American Baking.
Mr. Wyant says the local atmosphere for entrepreneurs has improved. Cincinnati used to have what Mr. Wyant called “a corporate overhang.” Because the local business scene was dominated by big companies, people had a hard time thinking small, in ways that didn't involve big structures and bureaucracies. That's not fertile ground for entrepreneurs.
That's changed. “There's an infrastructure today that didn't exist” a decade ago, “that supports and celebrates entrepreneurs,” he said. The city has developed a network of accountants, lawyers and consultants that understand venture capital.
Said Mr. Sullivan “What we're seeing are a lot of guys who grew up in companies like P&G and Milacron. People are leaving those companies and starting businesses.”
The venture culture locally isn't yet built for speed, as it is in Silicon Valley. Still, there's plenty of business plans floating around, and the region “is fertile enough to support a sustained venture capital fund,” he said.
Having just raised money for the third fund, Blue Chip is actively reading business plans. Mr. Wyant said the advantage in being in Cincinnati is that the proposals are filtered through the coasts, so the number of plans seen is smaller, but the quality is higher.
Blue Chip has acquired a reputation for offering sound advice on marketing — based on Mr. Wyant's experience in brand management and marketing at Procter & Gamble and Paramount's Kings Island — and cost control for growing companies, so the phone rings when another venture firm finds a prospect in need of those skills.
“The fact that we're bigger and have a good success quotient makes it easier to attract venture opportunities. People know Blue Chip, where they had questions in the past,” said Mr. Sullivan.
“There's an increasing number of deals where we share with other venturists. That's a tangable indication of respect for one's judgment.”
THE FUNDS
Blue Chip Venture Co.'s venture funds:
• Blue Chip I (1992): Raised $44 million for 22 investments. Investments included health care companies Richwood Pharmaceutical and Eye World, Ciao Cucina restaurants, Digex Internet services, Blue Chip Broadcasting, Regent Broadcasting, Entek software.
• Blue Chip II (1997): Raised $130 million and 30 investments. USInternetworking computer services, @plan marketing information, Big Sky Bread, Entek (a second investment), Integra (health care), Centennial Security.
• Blue Chip III (1999): Raised $180 million, with 30 investments planned. The first investment, made last week, was $4 million for MShow of Denver, which provides interactive videoconferencing over the Internet.
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