Venture Fund Attracts the Stars for State Firms

As star-studded investment groups go, Stone Canyon Venture Partners is as gold-plated as it is eclectic.

The Century City-based fund is an investment pool bankrolled by a roster of investors that includes basketball superstars Tim Duncan and Kevin Garnett, a top Hollywood producer, the chairman of a major airline, the founder of the Kinko’s Inc. copying chain, a billionaire mogul and other well-heeled investors.

The $90 million at its disposal is aimed at California-based ventures that may lack celebrity sizzle but nonetheless show potential for promising returns. Among them: a chain of Italian restaurants, a Glendale alarm company and the San Diego maker of an alternative to Styrofoam boxes.

What makes these companies appealing to wealthy investors who might not give them a first glance is the federal Small Business Investment Companies Program, which dates to the Eisenhower era. The program makes it easier for funds such as Stone Canyon to better leverage their money.

If approved by the Small Business Administration, venture groups can raise additional money from institutional investors, which buy unsecured bonds knowing that the Small Business Administration will guarantee that they will at least get their principal back. The money is used as capital to help small businesses grow.

Producer John Davis, the main catalyst behind the fund, said Stone Canyon planned to invest $4 million to $6 million in companies poised to expand but which lack capital and typically have a net worth of less than $15 million.

“We want to put them into hyper drive,” Davis said.

Stone Canyon is one of scores of such funds -- more than 60 licensed in California alone -- using the program, which is self-funded through fees it collects from the groups. The $5.5-billion program doesn’t involve a direct investment of tax dollars, only a guarantee of the loans. Still, under certain conditions, the SBA can share in the upside as a profit participant when the companies start making money.

Mike Stamler, spokesman for the SBA, said the program isn’t wasn’t about providing money to wealthy investors but rather steering private venture capital money that might have gone elsewhere toward smaller companies with potential. He cited as success stories such alumni of the 45-year-old program as FedEx Corp., America Online Inc. and Amgen Inc.

“We do not look at this as providing money to these venture capital investors,” Stamler said. “We look at it as an opportunity to encourage private venture capital to invest in small businesses.”

What makes Stone Canyon different from the other groups is the star wattage behind the program. Davis’ credits include hits such as “Daddy Day Care,” “Dr. Dolittle” and “Grumpy Old Men.” Duncan of the San Antonio Spurs is the reigning most valuable player in the NBA, and Garnett of the Minnesota Timberwolves was runner-up.

Another investor is New York Giant running back Tiki Barber. Others are Walt Disney Co. board member and Northwest Airlines Corp. Chairman Gary Wilson and Kinko’s founder Paul J. Orfalea.

Personal ties are often at the core of who is involved. Davis and Wilson have invested before in ventures such as the Wetzel’s Pretzels chain of shops that sell hand-rolled soft pretzels. Garnett previously had invested with Davis after his agent, Andy Miller, read an article about the producer and met him. That eventually led to an investment group that includes Garnett and other athletes putting money into the Stone Canyon fund.

A quiet operation given its star power, Stone Canyon is emerging as one of the more active small-business funds in California. One company in its portfolio is Pasta Pomodoro, a San Francisco chain of Italian restaurants aiming to grow statewide.

“We were looking to expand. It was important to get these guys,” said Adriano Paganini, the company’s founder, chief executive and executive chef. Others include alarm company Alliant Protection Services in Glendale and Cargo Technology in San Diego, which makes the Styrofoam alternative.

Helping spearhead the operation is Davis. He’s the son of billionaire Marvin Davis, who has a small investment in the fund, but John Davis operates separately from his father.

Davis said he was especially enamored of the potential profit margins in the food business after his experience seeing the kind of money that could be made selling pretzels at Wetzel’s.

“I walked into the store in Century City,” he said. “I liked it so much that we tracked them down and said we wanted to buy in. You make them for 7 cents, and they sell for $2. I love those margins.”