IAI Veterans Form Sapient Capital, Focus On Private, Public Micro-Cap Deals –

JACKSON, Wyo./MINNEAPOLIS – Two former venture capital executives from IAI Ventures Inc. teamed in May to launch Sapient Capital, a new venture fund with an innovative strategy focused on middle- to late-stage and public micro-cap technology, communications and health-care companies.

At first glance, Sapient, managed by Principals Noel Rahn and Mitch Dann, two Investment Advisor Inc. (IAI) executives who helped launch the money management firm’s first venture fund in 1983, seems no different from a host of other venture funds on the market. The $150 million targeted vehicle features a 2% management fee and an 80%/20% carried interest split.

However, the firm is willing to sacrifice a part of its share of the carry in exchange for access to good deal flow. In the Sapient Capital network, the firm has established a team of investors and acquaintances who will alert the firm to good opportunities. If Sapient signs a term sheet on the deal, the network member who sourced the deal will receive 5% of the firm’s 20% share of the carry.

“We’re willing to give up part of the carry to experts to find the best deals,” Mr. Rahn said.

Members of the Sapient Capital network, who will be required to invest a minimum of $100,000 in the fund, will be drawn from the pool of high-net-worth executives in the technology, communications and health-care industries and whom Messrs. Rahn and Dann met while at IAI.

The vehicle, which at press time had about $50 million in soft-circled commitments, will hold a series of rolling closes before wrapping by the end of the year, Mr. Rahn said. Sapient is targeting both institutional and individual investors.

Cutting some of its deal originators in on the carry is not Sapient’s only innovation, however. In addition to later-stage investments in private companies, the firm will invest half the fund in public micro-cap companies.

“It’s not just fallen angels,” Mr. Dann said. “There’s a huge opportunity to invest in companies with very attractive values relative to their growth potential.” While biotechnology and health-care companies will provide an abundance of these types of opportunities, Sapient expects to also invest in public technology and communications businesses.

“Some of these companies are … not being acquired for one reason: it would be dilutive to the larger company,” Mr. Rahn said, explaining that micro-cap companies have no liquidity and often do not have proven concepts. Further hurting the valuations of these businesses, only 35% are even covered by analysts, he added.

For investments in private companies, Sapient looks for businesses that have “some semblance of customer interaction,” Mr. Rahn said. “We stay away from conceptual [deals].”

Approximately one-third of the fund, which will invest an average $3 million to $5 million per deal, will be dedicated to technology, one-third to telecommunications and one-third to health-care companies.

Mr. Rahn, who will focus on Sapient’s technology and communications deals, was president and chief executive officer of IAI from 1974 until his retirement in June 1998, shortly after which the IAI Ventures management team bought the firm’s venture business and renamed it Crescendo Venture Management (VCJ, November 1998, page 5).

Mr. Dann, who will specialize in health-care investments for the new firm, joined IAI in 1982 as a buy-side security analyst for one of the firm’s mutual funds that invested in both public and private companies. In 1983, he helped Mr. Rahn form IAI Ventures, which launched a series of vehicles that invested in more than 50 companies and 10 venture funds by 1991, when Mr. Dann left the firm to form a health-care consulting firm.

In the 16 years Messrs. Rahn and Dann were involved in IAI Ventures’ operations, the firm netted a 44% internal rate of return.