Executives Pool Money for Venture Capital

Executives Pool Money for Venture Capital

By Bob Starzynski
Staff Writer

Zimri Putney, a longtime Washington technology player, is jumping on the region's venture capital bandwagon with a new fund that is uniting many local industry leaders.

The Next Generation Fund is quite small at $6 million to $7 million, but its impact could be powerful. That is because the investors actually will give advice and offer support to companies receiving investments.

The list of investors is a veritable Who's Who of technology in Washington: Edward Bersoff, chairman and chief executive at Fairfax, Va.-based BTG Inc.; Dan Bannister, chairman of Reston, Va.-based DynCorp; Earle Williams, former president and CEO of BDM International Inc. of McLean, Va.; Dendy Young, president and CEO of Government Technology Services Inc. in Chantilly, Va.; and Tom Hewitt, president of Federal Sources Inc. in McLean, Va.

The fund, which has raised $3 million since September, is already seriously considering two investees. Although Putney declined to name the companies, he said that one is a 14-year-old company that is profitable. The second is an Internet company. The first investments should be made by early January, but Putney will continue raising money through the first half of next year.

According to Putney, the power of Next Generation Fund will come from the involvement of the investors, most of whom also invest in other venture capital funds. "We're looking at managing the companies, not just managing an investment," Putney said. "Today's executives will help foster the next generation of executives."

"The old government contractors didn't need venture capital to grow. They could fund themselves. But the new companies need money up front." -Zimri Putney Next Generation Fund

"I'm investing with my peers," Bannister said. "I know all of these people, and I know how successful they have been with their own businesses."

Until recently, technology companies in the Washington area were funded primarily by outsiders, including Silicon Valley and Wall Street investors. But, upward of $500 million in local venture capital has been pledged or promised in the region over the past two years - a serious sign of change.

"The old government contractors didn't need venture capital to grow," Putney said. "They could fund themselves. But the new companies ... Internet and so on ... need money up front."

Putney is not a venture capitalist by trade. But he is no stranger to the local technology scene. He was one of the founding members of the Northern Virginia Technology Council and was a board member of the council for several years. He also is the president and CEO of Putney & Eckstein Inc., a Fairfax, Va., consulting firm that offers technology companies
services ranging from merger coordination to management restructuring. Before starting the firm seven years ago, he designed circuits for IBM and raised $20 million in financing for Solarex Corp. in Frederick, Md.

"He's got good connections," said another area venture capitalist, who requested anonymity. "But the tough issue for him will be the size of the fund."

Most venture capital funds have at least $25 million to invest in companies. A smaller fund, like Next Generation, brings several challenges.

A small VC fund has less money to invest. Less investments means less diversification, which mean higher risk. Not all venture capital-supported companies succeed. Others become billion-dollar companies. Most venture capitalists try to balance their portfolios to get investment returns of about 30 to 40 percent per year. A small fund could yield more money, but it carries the additional risk.

Also, smaller funds do not have as much money for follow-on investments. When a small company gets a venture capital infusion, it will typically need additional funding in 12 to 24 months. If venture capitalists cannot provide follow-on funding, the investee has less of a chance of survival and success.

Furthermore, venture capital is a very tight community that is tough to enter. "To get more investors, you need to prove yourself," said Jack Biddle, general partner of
Novak Biddle Venture Partners in Reston, Va. "You can only raise a large fund if you have a good track record. And larger funds get to look at good deals first." Novak Biddle is currently operating a $25 million fund.

Putney realizes that he is not a "club member" in the venture capital community. But he does not think that will hinder Next Generation's success.

"Several funds have come into the region that are run by people who are very experienced asset and portfolio managers," Putney said. "Instead, we are using the existing assets of the technology community."

Next Generation should make about 10 investments, mostly in the $600,000 to $700,000 range, Putney said. The fund is meant for small technology companies in the Washington area that have some experience under their belts. Start-ups are not a consideration, he said, because it is too difficult to predict their future capital needs. He is looking for companies that have $1 million to $3 million in revenue.

If Putney is successful with his first fund, he anticipates raising another, much larger fund in the next two years. "Some people have said that our fund is too small," he said. "My answer is that there is a wide-open gap in the VC market. Good companies need money."