With the sluggish economy and the crash of the dot com bubble, enterpreneurs in wireless communications are finding it difficult to interest investors in their next big idea. At the same time, investors with a technology focus are facing their own challenges in deciding which next-generation high-tech risks are worth taking. Here, we present both sides of making the connection between ideas and investments from the point of view of two members of the College's Board of Advisors. James Harkins, an entrepreneur with a proven track record, has formed a new start-up company that needs financial backing. Richard Vines, a venture capital investor, is focusing primarily on his current portfolio rather than seeking new investments.
A 10-YEAR CYCLE - RICHARD VINES'S PERSPECTIVE
Most venture capital firms investing in the information technology industry are relatively young, having entered the business in the heyday of dot com start-ups and emerging mobile commerce. They've only been around long enough to see their profits go up, even soar that is, until recently.
Geocapital Partners, founded in 1984, is one of the exceptions. Because the company has experienced down markets before, it has an advantage in the current recession, according to partner Richard Vines, MBA '74. Vines describes Geocapital as a leading trans-Atlantic venture capital firm focused on information technology investments in Europe and North America. With $500 million under management, Geocapital seeks out a select number of highly successful information services and technology companies with which to partner, particularly those in the early to middle stages of development.
Vines finds these potential partners using what he calls "proactive sourcing. Most of our firms don't come to our attention via business plans delivered over the transom. Rather, we have associates in the field who are looking for us at trade shows, on web sites, in journals." When a lead develops, Geocapital approaches the company to determine if a partnership might be mutually beneficial. Geocapital's typical investments fall between $5 and $20 million, and they have enabled many companies to achieve top status in their competitive fields.
Take Geneva Technology, for example. In November 1999, Geocapital invested in the company, a leading international provider of convergent billing software for telecommunications and the Internet. Geneva received the World Billing Award for Overall Best Contribution to Billing in 2000, and, in the following year, through a transaction valued at $700 million, the company joined with Convergys (which billed the first U.S. cellular call in 1983). Today, the combined company produces more than 1.3 million bills each day, including about 41percent of all wireless subscribers' in the United States, making it the biggest telecommunications billing company in the world.
WHO WANTS TO BE A GEOCAPITAL MILLIONAIRE?
When Vines joined Geocapital in 1987, he sometimes was the first contact with promising investments. Today, he is one of four partners who manage the venture capital fund, working primarily in the areas of finance and administration and playing an active role in Geocapital's investments. He sits on the boards of three of Geocapital's companies, helping to recruit top management, making strategic management decisions and assisting companies that wish to be acquired and merge with other firms.
Vines's 27 years of experience in a range of businesses make him more than capable for the challenging work. After completing his MBA in accounting and information systems from the Robinson College of Business, he landed his first job at what is now Deloitte & Touche with help from another alumnus, James Copeland, the current CEO of Deloitte & Touche and a member of Robinson's Board of Advisors. Vines next worked at the software company Comshare in product development and as director of marketing. Vines gained additional exposure to investments as director of valuation services at Broadview Associates, a boutique investment bank handling mergers and acquisitions of information technology companies. When Broadview became a general partner of Geocapital in 1987, Vines stayed on board, eventually rising to partner status.
Rather than direct investments in wireless technology itself, Geocapital focuses on wireless applications and management or infrastructure of mobile communications. One Geocapital success story in Finland is Codeonline, a leading developer and provider of interactive wireless entertainment. Codeonline develops, markets and sells high-profile games such as Trivial Pursuit and Who Wants To Be A Millionaire? for distribution by network operators, mobile portals and other service providers around the world.
In April, Geocapital invested $19 million in Axiom, a leading telecommunications software provider, to enable that company to expand its European market. Axiom helps telecommunications companies rapidly roll out new products and services such as internet protocol (IP) and third-generation (3G) mobile. It also can optimize network utilization and ensure consistent quality of service. Astracon, another Geocapital investment company that supplies software to the telecommunications industry, has experienced equal success, thanks to Geocapital's backing.
Locus, a leading prepaid wireless service and a fast-growing provider of international wireless solutions, is yet another of Geocapital's growing portfolio companies. In Europe, prepaid phones, which can be be renewed with vouchers on sale at news agents or the corner market, have been immensely popular for years. Originating in Italy to exploit a tax loophole, prepayment allowed cell phone users to track their telecommunications spending and allowed people without bank accounts for example, teenagers to have access to mobile phones. Locus, based in New Jersey, allows American teens the same freedom. With prepaid cards, they can have use of a mobile phone while their parents can assure their usage is reasonable. The prepaid cellular cards are also popular for people who are credit challenged, such as new immigrants. In ethnic neighborhoods, prepaid phones are popular with people who couldn't otherwise qualify for a cell phone, and merchants like them, too, because they keep customers coming back to renew.
Locus was the brainchild of a South Korean immigrant to the United States, Jason Chou. With Geocapital's investment, the company has grown to be a leading contender in the prepaid cell phone market as well as an up-and-coming international telecommunications provider. Already, Locus spans four continents and has interconnections with global partners such as Korea Telecom and Capcom in Spain, generating more than 100 million international long-distance minutes each month.
INTELLECTUAL PROPERTY VS. SWEAT EQUITY
Despite these past successes, Geocapital investors find the current climate for wireless investments to be cautious. "There is still a lot of money on the sidelines," Vines remarks, "but most of the industry today is in a state of triage. Many companies are working on their existing portfolios rather than looking for new investments."
Geocapital is no exception. Vines is spending more time with companies in his existing portfolio. In considering new investments, he is less interested in those with intellectual property than those with sweat equity. "We're still interested in those companies founded in someone's basement or garage that have brought a product to a stage where you can see it and touch it, and where, with a modest investment, you could bring it to market," he said. "By contrast, those companies with just a business idea, or some intellectual property, are going to have an extremely difficult time raising money right now because a lot of people are going for scarce funds."
The wireless landscape is not totally bleak. One Geocapital portfolio company is doing better in the climate of the post-9/11 recession than in the previous 10 years of economic boom. That company, FocusVision Worldwide, operating in a niche market of video conferencing for focus groups, recently has seen a dramatic increase in its customer base. At its inception, video conferencing could cost as much as $50,000 for good equipment and additional fees for long distance. Today, costs are more affordable at $4,000 for a single camera and between $5,000 and $10,000 for multiple camera setups. Charges for bandwidth have fallen at the same time that quality has improved. Both large and small businesses with multiple locations now find it cheaper and easier to use video conferencing than support employee travel budgets.
As Vines approaches his 15th anniversary with Geocapital, he feels a stability that eludes many in today's business climate. "Venture funds are different than managing companies that can suddenly fade away," he explains. "Typically, a venture fund has a 10-year life span. Over the life of that fund, its portfolio companies either have to be sold, go public or go away. Many of our successful companies have taken years to develop, but if you are patient when you get to the end of the 10 years, you have a success."
