BOSTON – Another corporation has entered the venture capital fray.
TF Ventures has been formed to identify and invest in early-stage companies that could be acquisition candidates for business units within its parent company, Thomson Financial Services (TFS). TFS is a division of The Thomson Corp. and the parent owner of Venture Capital Journal.
Investments will fall in the $1 million to $5 million range for early-stage companies that somehow serve the financial services sector. Examples include transaction processing, data gathering, publishing or general services, as long as the ultimate goal of the company is selling its service into some realm of financial services. Concept-stage companies typically will not be targeted, as the group will favor opportunities where a product has been proven and is at least entering beta testing.
William Zola, vice president at TF Ventures, said the group will consider being part of later-stage rounds but acknowledged that these will be rare because of the desire for exit by acquisition. “Those deals are harder for us because we cannot position ourselves as the exit option,” Mr. Zola said.
While TF Ventures prefers its primary exit option to be an acquisition, the group has set typical VC return requirements on its investments, such as a 30% internal rate of return. When evaluating investment opportunities, TF Ventures will needs to obtain the imprimatur from one of TFS’ business units. Regardless of the venture merits of a deal, the group cannot invest without strategic support, Mr. Zola said.
“I will find a deal and present it as a VC opportunity to the president of a business unit,” Mr. Zola said. “But then the president of that unit has to say it would be an attractive acquisition candidate.”
Mr. Zola said the group would be active in its portfolio companies, generally seeking two board seats – one for a representative of TF Ventures and one for the president of the associated business unit. Having a representative of the appropriate strategic unit on the board will enhance the value-added service TFS can bring to a company, as well as provide the unit with valuable insight on the operations of the portfolio company, Mr. Zola said.
The investment committee for TF Ventures consists of Mr. Zola, Keith Jarrett, president of TF Ventures, and David Flaschen, chief executive officer of TFS.
The group has made five investments since October 1997 when it closed its first investment in CCBN.com, a Web-based investor relations service. Other deals include a February 1998 transaction with Cathox, a developer of software that facilitates trade processing for institutional buy- and sell-side investors; a $2 million September investment in Meridian Emerging Markets Ltd., an information service provider of information services and work solutions to the financial community; a $3 million October deal with BankServ, a processor of electronic funds transfer transactions for banks and businesses; and a late December investment in a data company that sells its services to broker-dealers and buy-side participants in the commercial mortgage-backed securities market.
Mr. Zola currently bears sole responsibility for sourcing the three to six deals the corporate effort wants to close each year. Initially, the majority of opportunities he evaluated originated from TFS business units. However, as more deals have closed external deal flow has increased and to accommodate the increased workload, Mr. Zola said the group recently hired an analyst and intends to add a deal professional sometime in the second quarter.
TFS will fund the venture operation entirely with in-house capital, and Mr. Zola said the likelihood of a fund targeting outside investors is slim.
“This will remain a business function [for TFS],” Mr. Zola said. “When we need more money on a deal, we will seek co-investors from the venture community.”