Novell Goes Against the Tide –

While other corporate venture units are being mothballed, Novell Inc. is expanding its VC effort in a risky bet to boost its sagging bottom line.

The Provo, Utah-based company has created an in-house venture team that will invest with the sole purpose of making money instead of focusing on strategic development efforts. In yet another twist, Novell for the first time is soliciting capital from institutional investors.

Novell’s new venture fund – Novell Technology Capital Fund I LP – hit the market in December. Novell has put up $15 million and may invest up to $30 million in the fund, according to documents filed with the Securities & Exchange Commission. The company reported in February that it had raised $14 million from three outside investors and aimed to close with $200 million in its coffers. It has been mum on the status ever since.

Successful fund raising will depend on whether limited partners are willing to invest with what is essentially a new and unproven venture firm. Two LPs contacted by Venture Capital Journal say they have not seen Novell’s offering memorandum, nor are they very interested. The only thing that caught their attention was Novell’s purchase last summer of Cambridge Technology Partners (CTP), whose venture unit posted above-average returns. Still, the LPs said they would need to make sure it wasn’t beginner’s luck for CTP before they gave Novell’s fund serious consideration.

Not only is Novell raising money in a difficult environment, the company’s poor financial performance (see chart below) and depressed stock price could stall its fund raising efforts.

Slippery Slope

Its annual sales have declined in the past two years, and it posted net losses in two of the past five years, including a $273 million loss in 2001. Its stock, which hit a high of about $40 per share in 2000, has been drifting down ever since. It closed at $3.33 per share on June 11.

Novell Ventures – once headed by Chris Stone, the company’s vice chairman – was launched in the fourth quarter of 1997 with a $50 million fund. That fund, capitalized solely by Novell Inc., had 27 Internet, networking and software companies in its portfolio. Apparently, the fund’s performance came up short. After Novell acquired CTP, an e-consulting firm in Massachusetts, it merged CTP’s venture arm with its own and changed the name to Novell Cambridge Technology Partners.

For its part, CTP launched a successful venture initiative in 1997. Cambridge Technology Capital Fund I (CTC Fund 1), with $25 million under management, posted an internal rate of return (IRR) of 260%, according to Ralph Linsalata, the fund’s former manager and now Novell’s senior vice president for venture investment. As a result of its acquisition, Novell owns 24% of the fund. (Other LPs in the fund include TL Ventures and Safeguard Scientifics, which seeded CTP in 1991.) CTC Fund I invested in 20 companies, nine of which went public, including DigitalThink Inc., E.piphany Inc. and Interwovern Inc. Another four of its companies merged, two were acquired and one was liquidated. Of the four companies that remain in the portfolio, one is in registration for a public offering.

Details are sparse on what Novell’s remodeled venture unit will look like. LPs have only just begun to weigh in and Novell declines to reveal their names. What’s clear is that the fund will be managed as a revenue-generating vehicle, like any other business unit. To be successful, the group is expected to return between 15% and 20% on invested capital, a figure that would put its ROI in line with historical averages for venture investment.

The ROI model stands in contrast to the traditional corporate model of defining success by how well a portfolio company fits into a corporation’s strategy.

Forget the Software

“Our goal is to maximize shareholder wealth at Novell,” Linsalata says. “There’s nothing that says the only way to do that is to sell software. We’ve already said we’d sell solutions – which is a combination of software and services. If we can make money in technology investing and maximize shareholder value, as long as we believe that, we’ll stay in it.”

Linsalata adds that the venture unit’s performance will be scrutinized. “If the group doesn’t do it, then we change the people or get rid of the business, but I think we can do it, and history says we can,” he says.

The unit is staffed largely by CTP’s investment staff – Linsalata, Linda Chow and Walter Napp. The only Novell Ventures holdover is Rob Kain. Blake Modersitzki, the most recent managing director of Novell Ventures, left in May to join Utah Venture Partners in Salt Lake City.

Broadly defined, Novell Cambridge Technology Partners’ investment targets will include the information technology and communications sectors. More specifically, it will invest in communications infrastructure, enterprise applications, companies in which IT is used to improve drug discovery, nanotechnology and network and enterprise storage solutions.

One thing that it won’t do is invest in other venture funds, like Novell began to do in 1997. Novell invested in 24 funds with 17 venture firms. Those stakes are worth about $190 million, about half of which already has been drawn down. Novell will continue to honor those commitments, but the venture arm will adopt CTP’s policy of not investing in third-party funds.

Miracle Grow

“The company has strategic opportunities to grow,” Linsalata explains. “When those investments were made, it didn’t see any other use for all that excess money. Now some business groups will be able to make investments that will help the corporation to have better IRRs by putting money back into the corporation.”

Novell is quietly making the rounds among LPs. It will be the first time the corporation has gone outside itself to fund a business unit, and if it succeeds in raising outside capital, it will have to spread the reward, as well as the risk, to all its investors. Linsalata declined to talk about the venture unit’s funding plans, except to say that it doesn’t need to go outside Novell to capitalize what it has planned. SEC documents show that Linsalata has personally committed $100,000 to the fund, while Novell CEO and President Jack Messman has committed $182,500.

If it can add heft to its parent’s sagging bottom line, Novell Cambridge Technology Partners may make some corporations rethink their retreat from VC.

Email Carolina Braunschweig at