They Link Local Firms, Foreign Money
Although Cymer Laser Technologies, a small San Diego laser manufacturer, has yet to begin marketing its first product, it can already boast such big-name Japanese partners as Nikon and Canon.
Cymer and dozens of other fledgling firms in Orange and San Diego counties got an early introduction into foreign markets from Ventana Growth Funds, a venture capital firm in Irvine that specializes in linking foreign investors with local start-up companies.
Although the U.S. venture capital industry has seen its money supply shrink alarmingly since the mid-1980s, Ventana has been thriving. With offices in Irvine and San Diego, it manages funds worth $130 million, most of it from overseas investors.
Ventana has reached into Scandinavia, Europe, Japan and Mexico to tap investors for funds that it channels mostly to entrepreneurial firms in the biotechnology, computer, environmental technology, telecommunications and health services industries in the two counties.
“I think the fund-raising that Ventana has been able to do in the last few years has been fantastic,” said Bob Mast, vice president of corporate services at Venture Economics, a Needham, Mass., publisher of venture capital data.
Ventana has raised $90 million in the past 12 months, compared to $15 million in 1983.
By contrast, between 1984 and 1989, the annual flow of funds into U.S. venture capital firms shrank dramatically from $4.2 billion to $2.3 billion.
A major reason for the decline is that many U.S.-based pension funds, discouraged by poor returns on their investments, have been pulling out of the venture capital market in which they historically have been major players.
“We are bucking the trend,” said Thomas O. Gephart, founder and managing partner of Ventana, which so far has helped finance 42 firms in the two-county area.
Ventana’s growing status in its industry became evident recently when it was named as part of an investment group participating in the $200-million sale of Kendall McGaw Laboratories in Irvine. Ventana supplied about $4 million of the $35-million equity portion of the deal, its largest investment to a single company.
Also, earlier this month, Ventana was identified as an investment banking adviser to a New York industrial holding company that made an unsolicited offer to buy business-computer maker Alpha Microsystems in Santa Ana.
One reason for Ventana’s fund-raising success, Gephart said, is its strong record of return on investment, which he said has averaged 18% a year since 1984. That compares to a 5% to 6% annual rate for the venture capital industry as a whole, he said.
Since 1984, he said, only two of Ventana’s investments have failed, representing a combined loss of $700,000.
And Ventana has garnered attention by backing a couple of “home-run” companies, including Medical Imaging Centers of America, a San Diego operator of medical imaging centers, and Pancretec, a San Diego manufacturer of intravenous drug pumps.
Since Ventana began backing Medical Imaging Centers in 1985, the company has gone from losing $2 million in 1985 to earnings of $4 million for the first nine months of this year. Its sales zoomed from zero in 1985 to $56 million for the same recent nine-month period. Tony Lazos, chief executive of Medical Imaging, said that besides receiving financial help from Ventana, his company benefited from Ventana’s management advice and its contacts in the local medical community. “I don’t consider Ventana just a vendor of capital like most venture capitalists are,” he said.
Pancretec’s sales have soared from $1 million in 1987 to $15 million in 1989. The Ventana fund reaped a $5-million profit on its initial $500,000 investment when Pancretec was acquired by Abbott Laboratories for $54 million last year, Gephart said.
Ventana is among only a handful of venture capital firms in the United States that focus on attracting overseas investors. Only 13% of venture capital investment in the United Sates comes from foreign sources, although the figure is expected to grow as overseas investors step in to fill the gap left by dwindling domestic capital sources, Venture Economics’ Mast said.
Unlike U.S. pension fund investors, who usually are interested only in receiving a high return on investment, international investors tend to be corporations that are at least equally interested in forging business alliances and gaining access to American technology, Gephart said.
Gephart, who has worked with foreign investors since founding Ventana a decade ago, said he looks for foreign investors who can provide American firms with the contacts and know-how they need to sell their products overseas.
One of Ventana’s many overseas investment partners is Tokyo-based Shin-Etsu Chemical Co., the world’s largest supplier of silicon wafers. Shin-Etsu is an investor in Cymer, the San Diego laser firm.
But the two companies’ relationship has evolved beyond financial aid. Cymer buys optical glass from Shin-Etsu to make its laser. And Japan’s Nikon and Canon have invested in Cymer with the intention of buying Cymer’s lasers to use in making equipment for the semiconductor manufacturing industry.
A significant advantage of foreign investors, Gephart said, is that they tend to be more patient than pension funds and more willing to make additional cash infusions into a company when it is ready to sell stock to the public.
In turn, Gephart said, foreign corporate investors are interested in gaining access to American technology that may prove useful in their own businesses.
Most of Ventana’s investors have been from Scandinavia and Japan, but the company recently established a $50-million investment fund comprised mainly of Mexican investors.
Investment prospects for the new fund will be mostly mid-size manufacturing firms in the United States that need “revitalization,” Gephart said.
Jose Carillo, senior vice president of Promociones Industriales S.A., the venture capital arm of Banamex S.A., Mexico’s largest commercial bank, said Promociones is investing in the Ventana fund with the understanding that it will finance U.S. companies that have plans to manufacture some products in Mexico.
