Monday, November 01, 1999

Firm targets Internet unknowns

Venture capital group invests early

The Cincinnati Enquirer

Since its inception in 1998, the second River Cities Capital Fund has invested in nine Internet-related companies. They are:

• Intelliseek Inc. ($2 million in June 1999). Based on Sharonville Road, the company develops and markets Web-based knowledge management applications and proprietary databases for enterprises and customers. The company recently licensed content to Lycos.

• DPEC Inc. ($3 million in September 1998). The Columbus-based company is a leading provider of Web-based training, mostly on information technology topics, to enterprises and consumers via intranets and the Internet.

• Fourthchannel Inc. ($2.2 million in June 1999). The company, based in Columbus, provides e-commerce solutions to mid-market manufacturing and distribution companies.

• High Speed Access Corp. ($2.1 million in May 1998). The business provides turnkey high speed Internet connectivity and marketing solutions to cable TV operators in smaller and medium sized markets using cable-based technology. The Louisville company went public in June 1999.

• Darwin Networks Inc. ($2.5 million in March 1999). The private company was spun off from High Speed Access Corp. Based in Louisville, it provides turnkey high speed Internet connectivity and marketing solutions to telephone companies and operators of multi-unit structures, such as hotels, apartment and office buildings using xDSL and wireless technolo gies.

• Ironside Technologies ($1.5 million in October 1999). Based in Pleasanton, Calif., the firm develops business-to-business e-commerce applications.

• Southeast Telephone ($2 million in June 1998). The Pikeville, Ky., local exchange carrier also is an Internet service provider.

• Technauts ($1.5 million in September 1998). The Cary, N.C., company develops low cost and highly specialized server technology.

• CMHC Systems Inc. ($2.5 million in April 1999). Columbus-based firm develops and sells business and clinical information systems for behavioral and public health care markets. Vertical Web site called mental health net.

—Amy Higgins

        While watching the share price of a company's initial public offering soar, you might think tech stocks are where the future is — if only you could get in the game that early.

        But what if you could get in the game even earlier?

        Some people on the 19th floor of downtown's Atrium Two are doing just that. They are River Cities Capital Funds, a venture capital fund managed by Mayfield & Robinson Inc.

        The role of venture capital firms is to invest in companies years before they go public, if they ever go public. River Cities has increasingly been investing in technology and Internet-related companies — even though none of them has turned a profit.

        “The Internet tends to be the current industrial revolution,” said Glen Mayfield, chairman of Mayfield & Robinson and general partner of River Cities. “There's plenty of opportunity to put the money to work.”

        Indeed, technology-based and Internet-related compa nies set venture capital records during the second quarter of 1999, according to the PricewaterhouseCoopers Money Tree Survey. Technology companies accounted for $6.9 billion, or 90 percent, of all venture capital investments from July through September.

        Within the technology sector, investments in Internet-related companies quadrupled to $3.8 billion, up from $947 million in 1998's second quarter. The number of companies getting that capital more than doubled to 412 from 174.

        “We are seeing a lot of deals flow in this region,” said Mr. Mayfield, whose fund tries to limit investments to Midwestern companies. “There are more opportunities cropping up here all of the time.”

        The corporate finance advisory firm started its venture capital in 1994 with a $45 million fund, which was fully invested by 1998. Its second fund totals $95 million — which comes from private individuals, institutions and the government's Small Business Administration.

        About 20 percent of that so far is invested in 13 companies, nine of which are technology and Internet-related companies. Rick Kieser, River Cities principal, said those nine were found after sifting through about 450 technology business plans.

        Mr. Kieser said the firm's search process for Internet companies starts by segmenting the field into four categories: infrastructure (routers, servers and access); tools and platforms (firewalls, security, search engines and databases); applications (browsers, e-mail and e-commerce platforms); and content (directories, catalogs, chat rooms and portals).

        While the fund has made investments in all four of those sectors, it sees greatest potential in Internet commerce. And consumer spending, while expected to grow, isn't expected to grow as fast as business spending.

        “We think it's the year of business-to-business e-commerce,” Murray Wilson, another River Cities principal, said. “The name of the game is revenue growth.”

        But in such a young industry, the hardest part is valuing the companies to know first how much to invest — and then what the return on that investment is.

        Mr. Wilson said the fund's goal is to “swing for the fences,” meaning that it looks for investments that have the greatest potential return because of the greater risk that comes with the unproven industry.

        “Some are vastly overblown,” Mr. Wilson said of Wall Street's treatment of Internet stocks. “You have to identify the segments that are not over blown.”

        Still, in valuing the companies, the firm's managers look at comparable companies' prices and how much they've returned for investors.

        “All traditional valuation methods are thrown out the window,” Mr. Wilson said. “If you don't see your investment increasing 50 to 100 percent a year on average, your investment probably won't be worth it.”


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