PITTSBURGH – Based on its goal of investing $1 billion in private companies, Mellon Ventures Inc. (MVI) has succeeded, and by way of virtually unlimited access to its parent’s capital, the firm has done so relatively quietly
Founded in 1995, MVI may be a relatively new player in venture capital, but its parent, Mellon Financial Corp. is no newcomer. After all, Andrew Mellon invested in Alcoa Inc. in return for an equity stake when the company was just a guy, an aluminum ingot and a dream at the turn of the century. That sounds a lot like VC – doesn’t it?
Larry Mock, president of Mellon Ventures, helped organize Mellon’s current efforts. Mock cut his VC teeth in Atlanta when Raytheon Co. bought Hangar One, an aviation company where he was chief operating officer. Hangar One’s investors asked Mock and three partners to manage proceeds of the sale in a new VC shop called River Ventures Inc.
That was back in 1983, and Mock says he’s seen about 10 private equity market cycles since then. He’s invested in the Old Economy (before and after it was old), the New Economy and even a Hollywood movie.
You can’t mail a business plan or syndication papers to your Silicon Valley MVI representative or even your rep in Boston. They don’t have offices there, and in fact the New York office was their fifth and last addition.
“When we started Mellon Ventures we were looking for areas of unfair competitive advantage,” Mock said. The group wanted to avoid overly competitive markets, among other things. By way of the bank, the Mellon brand already had a strong institutional presence in its first three VC markets of Pittsburgh, Philadelphia and Los Angeles with the venture company opening a new office each year after its founding.
These three cities served big geographies with many industries, and MVI continued with a new Atlanta office, which Mock said, like Los Angeles, is a regional capital and a great investing hub for the region.
The company keeps a five-person deal team in each office, and each partner typically focuses on different industries and investing stages. When an investing professional identifies a potential deal, the lead professional will appoint another professional and a critic to form a review team. The critic’s job is to point out every flaw in the company, and if the company survives the critic, the nationwide team will consider it for investment.
MVI looks for the best technology to keep their offices coordinated, and Mock said they recently began using the Investran software to manage their portfolio. When they all get together, the managing directors use their perspectives in the different markets to evaluate a potential deal’s competition and market opportunities in other parts of the country.
Mock said the company now “covers the bulk of the country” and is not planing any new offices. He also said the company does not aspire to venture overseas in the short-term.
When MVI enters a market, the company attempts to build its venturing brand in the market and build partnerships with local players. Mock calls this “going deep” in the market, and the company often starts by investing in the existing local private equity players that specialize in venture investing through debt financing.
In fact, of the $1 billion the firm has invested, $300 million has been committed to about 50 VC partnerships with another $100 million in commitments yet to be drawn down.
As for the other portion of the company’s portfolio, Mock says direct investments typically mean a “bigger return for Mellon, and you have more control.” The other $700 million has been invested in 110 operating companies, and the firm will likely increase its proportion of direct investments to 80% as it matures.
However, MVI’s fund investments have built the firm good industry relationships and introduced them to many deals a newcomer to a market may have missed. Mock said that the company routinely shares dealflow with its partner VC firms, and MVI aggressively uses their partner funds to identify dealflow in areas where they do not have an office, such as Silicon Valley.
Mock estimated that partner VC firms had at some stage supported about 60% of MVI’s portfolio operating companies, which don’t all predicate their success the market saturation of the Internet.
“When you look at our portfolio, it’s about 60% New Economy/40% Old Economy,” Mock said, basing the breakdown on cost, which is higher on average for Old Economy companies. “Having said that, 90%, if not 95%, [of the companies] are high-growth companies.”
Mock said the firm can be flexible on the industries it supports and its investment stages, because of its relationship with its one limited partner. MVI shifts its investment strategy to focus on the sector where it sees the highest growth potential, and he said that those sectors change, as often as every six months recently.
“Anyone under the age of 35 in the venture capital industry is pondering what’s hot,” Mock said. “The answer is simple: Nothing’s hot. When nothing’s hot, you make your best deals.”
MVI draws on its parent’s resources to make deals in companies seeking financing from the angel level on through subordinated debt and has owned stakes ranging from 2% to 92% of their portfolio companies.
Mock said in his experience working within a VC subsidiary of a financial institution is different than working in a partnership. For one thing, the prospect of fund raising does not always sneak onto the meeting agendas.
“In the venture capital business it’s important to have capital, because without that you are just in the venture business,” he said. Mellon Financial listed their assets under custody and management at $2.8 trillion at the end of 2000.
“If the institutions want to dominate the venture capital business, they can,” he said. He said the institutions have flexed flexed their well-heeled muscles to some extent over the last five years.
He added that institutions transition new management teams much more successfully than firms. At least in the VC business, the retirement of the old guard has often led to the end of the partnership, but financial institutions, who may have experienced this problem in related fields such as investment banking, preserve their culture much more effectively between generations.
Mock has seen thousands of deals in his years in the industry, and a few years ago, a fellow who had previously encouraged him to invest in an Atlanta-area poultry farm invited him to a cocktail party. Despite the fellow’s pitch, Mock had passed on the poultry idea, because he wasn’t very comfortable with the agricultural industry.
At the cocktail party, Mock spotted a gentleman in overalls and correctly assumed he was the host’s poultry farmer friend. He asked him how the poultry business was treating him. Mock considered the farmer’s response to be a good lesson on understanding risk.
“Terrible,” the farmer said. “We had to kill all the chickens.”
Following are Mellon’s portofolio companies
THINQ Learning Solutions Inc. (Billerica, Mass.) helps companies effectively manage and procure learning resources.
Co-investors include CIBC Capital Partners, BCI Partners Inc., Charles River Ventures and Bessemer Venture Partners.
Broadband Storage (Costa Mesa, Calif.) provides next generation storage solutions.
Co-investors include Moore Capital Management Inc., Morgan Keegan Inc. and GlobalEuroNet Group Inc.
Eftia OSS Solutions (Ottawa) develops, deploys and manages OSS products designed to meet the service management and delivery needs of next-generation network and service providers.
Co-investors include Spectrum Equity Investors LP, Apax Partners, Insight, GSM, and Citizens Capital Inc.
Trendium Inc. (Fort Lauderdale, Fla.) develops software specializing in service support solutions for emerging next generation telecommunication carriers.
Co-investors include M/C Venture Partners and Trinity Ventures.
CyberStateU.com (Lafayette, Calif.) delivers online training for the information technology industry.
Co-investors include Sigma Partners, Acuity Ventures LLC, and Compass Technology Partners.
RunMoney Corp. (San Diego) provides front-end services enabling financial institutions to offer individually managed accounts.
No other investors were provided.
Berkley Industries LLC (La Mirada, Calif.) manufactures custom thermoform packaging for the medical and consumer industries.
Co-investors include Century Park Capital Partners.
Rich FX Ltd. (New York) creates e-commerce infrastructure solutions.
Co-investors include Morgan Stanley, Deutsche Bank AG, Prudential Volpe Tech, Itochu International Inc., Reicon Capital, and Thomas Weisel Partners.
SecureWorks (Atlanta) provides intrusion-detection systems with real-time monitoring and response services.
Co-investors include Noro-Moseley Partners, Monarch Capital Partners and Imlay Investments.
Wilmar Industries (Morristown, N.J.) distributes specialty maintenance products to facilities managers.
Co-investors include Parthenon Capital, Chase Capital Partners, General Motors Investment Management Corp., Sterling Capital Ltd., BancBoston Capital, JM Huber and Svoboda, Collins LLC.
Ondax Inc. (Pasadena, Calif.) develops advanced Dense Wavelength-Division Multiplexing (DWDM) optical components.
Co-investors include Alcatel Ventures, Corning Innovation Ventures, Gabriel Venture Partners LP and AM Venture Partners.
eToll Inc. (Pittsburgh) operates marketing application service providers (ASPs) for consumer commerce initiatives.
Co-investors include Adams Capital Management Inc.
Plan4Demand Solutions Inc. (Pittsburgh) designs web-centric business solutions helping manufacturers manage their relationships more effectively.
Co-investors include Draper Triangle Ventures LP and Stonewood Capital Management.
Mellon Ventures is located at One Mellon Center, Suite 5300, Pittsburgh, Pa. 15258-0001. Tel: (412) 236-3594, Fax: (412) 236-3593. The firm’s web site is www.mellonventures.com.