Tech Slump Got You Down? Perhaps VCs Should Rethink Strategy –

It seemed like a perfectly reasonable question at the time: Why don’t venture capitalists consider investing in, say, a consumer products company? Why only technology? The man who posed that question to a panel of venture capitalists was clearly agitated, in part because his businesses over the years have received scant attention from the private equity community.

After several seconds of silence, Edwin Goodman, president of Milestone Venture Partners LLC, said: “There is a whole species of sectors that VCs won’t touch because there isn’t the potential for explosive growth.”

Another VC on the panel echoed a similar sentiment, and the man sat down.

That VCs wouldn’t go ga-ga over a consumer products company shouldn’t surprise anyone who follows the industry. But with no technology sector offering anything close to explosive growth – at least not in the immediate future – and with VCs saying that they have returned to the basics of growing companies over a five- to-seven-year time horizon, perhaps it’s time to rethink that strategy.

Indeed, some have.

Ned Grace, an Orlando-based VC, expects to raise $20 million to $50 million for a hospitality venture fund, which he touts as the first of its kind in the nation. While even $50 million is paltry by today’s standards, it’s a start.

Grace has a tech background. Five years ago, he sold his highly successful Bugaboo Creek and Capital Grille steak-house chains to Rare Hospitality Inc. of Atlanta for $62 million and started a tech-oriented fund called WebVestors Equity Partners. In 1999, he began to raise money for the high-tech firm in what was then a flourishing sector.

The tech fund remains very active, but Grace has changed his firm’s name from Web Vestors Equity Partners to Grace Venture Partners to promote a broader investment reach that will include early-stage restaurant chains, hotels and other hospitality ventures.

“If we had launched this hospitality fund 15 months ago, people would have said we were crazy,” he said. “You had to be in technology then. Now people have seen there is a down side to technology – these investments can, in fact, be risky and people can lose their capital.”

Grace acknowledges that the hospitality fund will not achieve the return a tech fund would, “but if you find the next Outback or Starbucks, then there is a substantial, tangible return.”

Venture capitalists occasionally talk about contrarian investment strategies. As Ann Winblad, co-founder of Hummer Winblad, once said of her firm’s investment in Napster: “You have to be willing to be disruptive.”

This is not to suggest that VCs should abandon high-tech investing. But diversifying a portfolio is not a bad thing, and raising a small fund in a new area like hospitality may be a wise business decision. Even in sectors where many fail, there are winners. Even in the airline industry. Just ask David Neeleman, founder and chief executive officer of JetBlue Airlines, which turned profitable after its first full year in the business despite offering low fares.