St. Paul Establishes Three Satellite Funds –

BLOOMINGTON, Minn./SAN FRANCISCO – St. Paul Venture Capital Inc. this fall created three more satellite funds based in Minnesota, Southern California, Pennsylvania and San Francisco.

The medically focused vehicles, managed by investment professionals well known to St. Paul, give the venture firm access to very early-stage and very niched opportunities. (VCJ, December 1998, page 6). The modestly sized funds get most of their capital from St. Paul Fire & Marine Insurance Co., St. Paul Venture Capital’s sole limited partner.

The largest of the new vehicles, Upper Lake Growth Capital will total about $35 million, with $32.5 coming from St. Paul and the rest from other private investors. It will be managed by Dave Stassen and Keith Eastman out of St. Paul’s suburban Twin Cities offices. Mr. Stassen had been a venture capitalist with North Star Ventures Inc. for about a decade and worked for St.Paul for about two years in the early 1990s. He eventually left, however, to lead a St. Paul portfolio company, Spine-Tech Inc., which developed and marketed spinal implants used to treat chronic, disabling pain. Mr. Eastman was Spine-Tech’s chief financial officer. The company was sold in late 1997, and Mr. Stassen said he decided to return to the venture business, where managers can spread risk rather than bet everything on one company.

Upper Lake will put about 50% to 60% of its capital to work in medical-related companies, including those focused on devices and services. The remainder of the money will go toward technology and other services companies. The fund will concentrate about 70% to 80% of its investing in the Midwest, predominantly Minnesota, Wisconsin, Illinois and Iowa.

Mr. Stassen expects to make initial investments of about $250,000, putting $1 million to $2 million in each company over time. Most investments will be in very early-stage companies, and Mr. Stassen foresees an investment period of about three to four years. Upper Lake should be fully operational in December or January, he said.

St. Paul also will fund Windamere Venture Capital, a San Diego operation overseen by Scott Glenn, who has experience as an angel investor and as an operator in medical companies including Allergan Inc. and Quidel Corp. He had known one of St. Paul’s partners, California-based Nancy Olson, for more than a decade and also co-invested with St. Paul in several companies.

Windamere will be a $7 million seed-stage medical fund making investments on the West Coast. Mr. Glenn was slated to add two additional partners in early 1999, but he would not disclose their names at press time.

Mr. Glenn generally creates a company around a discovery or idea and then runs the start-up as chief executive in its initial year, a level of involvement most venture firms do not have the manpower to handle, given the size of their funds.

The advantage of getting deeply involved as a company manager and backer, Mr.Glenn pointed out, is that companies pay him for his work, as well as whatever profit he makes from the equity investment.

Mr. Glenn anticipates backing six companies in about two-and-a-half years with $3 million to $4 million over time, adding his own money to St. Paul’s capital. St. Paul has co-investment rights allowing it to put three times Windamere’s investment in each deal, noted General Partner Pat Hopf. The firm also could co-invest with Upper Lake, although St. Paul does not have a three-to-one deal with that fund, Mr. Hopf said.

A third satellite fund, unnamed at press time, will be managed by Carl Witonsky in Bryn Mawr, Pa. The $3 million fund will back health-care information systems companies, such as those whose products ensure the computer-generated delivery of doctors’ orders to the proper hospital staff or that allow doctors to review lab results off-site.

Although Mr. Witonsky would like to concentrate his investments in the mid-Atlantic United States, he acknowledges he will have to look outside the region given the fund’s narrow industry focus. By press time, he had backed companies in Florida, California, Iowa, Massachusetts and Pennsylvania. Unlike Upper Lake and Windamere, Mr. Witonsky’s fund will back companies at various stages of development.

With a wide-ranging 30-year career in operations, Mr. Witonsky’s work experience has spanned from a systems engineer at IBM to a CEO of GMIS – once know as Gabrielli Medical Information Systems, a company that detects fraud and abuse in health care.

Mr. Witonsky became familiar with St. Paul when he was a board member for a Salt Lake City company in which St. Paul invested. He had worked on other St. Paul investments for the firm prior to creating the satellite fund.

“I wanted the freedom of being able just to focus on health care, not to be on a review board for other people’s investments,” he explained, adding that he has the option to participate more actively with St. Paul if he wishes.

Earlier last fall, St. Paul announced plans to back an early-stage consumer- oriented fund based in San Francisco. Perspective Capital is being managed by former investment banker Molly Barger Wuthrich. That vehicle totals about $3 million of St. Paul capital, but features the three-to-one co-investment plan, as does Mr. Witonsky’s fund, Mr. Hopf said.

St. Paul still is interested in creating one more satellite fund this spring, likely to include some emphasis on information technology, Mr. Hopf noted.