When Joe Trustey of Summit Partners invested $10 million in Keystone RV, a recreational vehicle maker, his peers in the venture capital industry thought he’d gone bonkers. After all, this was 1999, and everyone was buzzing about the New Economy. “This is a deal that most every venture capitalist would have passed over at the time,” says Tom Roberts, also a partner at Summit. “I remember getting that you got to be kidding me’ type of reaction.”
Nobody thinks Summit is nuts anymore. While most VCs are saddled with worthless dot-coms, Summit “did very well,” in the modest words of Roberts, when the RV company sold for $150 million in 2001. This story proves that venture capital doesn’t have to be an all-tech/all-the-time business. Forget about biotech, nanotech, or anything tech. In a surprising turn of events, venture capitalists are increasingly investing in non-tech startups. Even big technology-focused firms like Benchmark Capital, Sequoia Capital and TPG Ventures are dabbling in non-tech. They’re pumping millions into everything from sandwich shops to board games to prepaid credit cards.
As if to put an exclamation point on this trend, the one and only venture-backed company to go public in the first quarter was Accredited Home Lenders. For their collective investment of $4.2 million in 1994 and 1995, Crosspoint Venture Partners and Enterprise Partners Venture Capital made $12.4 million by selling stock in the IPO. Their remaining shares were worth about $28 million in early April, which means they saw a return of about 10 times their investment.
After years of doing nothing but tech deals, Joanna Gallanter, managing partner of San Francisco-based Venture Strategy Group, is seeing renewed opportunity for deals outside technology. She recently came across a company that makes organic personal care products. She would love to provide some growth capital for the young company, but she has run up against one big stumbling block. No, she’s not afraid of being laughed at by other VCs. The problem is she’s competing with four other venture firms that are also aggressively pursuing the deal. “If that doesn’t prove the world has changed, I don’t know what does,” says Gallanter.
Non-tech deals don’t come without substantial risk. Compared to technology investments, returns are small, deal flow is sporadic and finding an exit can be a long and painful ordeal. And even though these deals may seem fairly simple to understand, especially compared
with the likes of, say, nanotechnology, they require their own set of expertise and industry knowledge. “If technology was booming, this shift would not be happening,” says Chip Adams, managing director of Rosewood Capital, an experienced non-tech investor. “There’s a lack of a new, new thing in technology, so investors are moving off their base and looking to invest their money in other places before they have to give it back.”
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