A Spokane venture-capital fund that has its roots in the Momentum economic-development movement has received a federal license that gives it access to $22 million in additional investment fundsincreasing the pool of capital that it and a sister fund have to almost $40 million.
The fund, Northwest Venture Partners II Limited Partnership, obtained the license from the U.S. Small Business Administration to operate as a Small Business Investment Co. (SBIC), says Tom Simpson, president and managing director of a Spokane firm that manages the fund. The licensing approval makes the fund eligible to tap the hefty stockpile of additional capital.
Our little fund, which started out in 1988 with $3 million in capital, now has $40 million in capital to invest, which makes us the second largest venture-capital firm (that invests primarily) in the Northwest, Simpson says.
SBICs, which are private investment firms regulated by the SBA, make venture-capital investments in emerging businesses both with their own capital and with funds made available through the federal government at favorable interest rates.
The Spokane venture-capital fund and its sister fund are managed by Northwest Venture Associates Inc., which selects fast-growing emerging businesses for the funds to invest in. The Spokane management firm, the one Simpson heads, says it seeks investments in companies in rapidly growing industries, while particularly seeking out companies managed by people who have a successful track record in related businesses.
The investments the funds make usually involve buying preferred shares that are convertible into common stock. After the funds make their investments, Northwest Venture Associates provides management expertise to those companies, including financial advice, with Simpson in many cases taking a seat on the businesses boards.
Third of three funds
Northwest Venture Partners II is the third of three venture-capital funds to be managed by Northwest Venture Associates, formerly known as Spokane Capital Management. The first of the three funds, Spokane Capital Partners Limited Partnership, was set up in 1988 with seed money from the Momentum economic-development organization to make venture-capital investments in emerging companies, stimulating growth.
That fund invested $2.9 million in 12 companies between 1988 and 1995, then liquidated its investments, returned its capital to its investors along with returns that had been earned, and went out of business, Simpson says. The fund also returned its seed money to Momentum.
That was economic development aimed at the Inland Northwest, Simpson says. Right now, were focusing on the whole Northwest.
Inland Northwest Investors Limited Partnership, the second of the three venture-capital funds run by Northwest Venture Associates, set up shop in 1996 after completing a $6.1 million fund-raising that year, Simpson says.
That fund is slightly more than half-invested, he says. Weve now made seven investments.
The third venture-capital fundthe one that the SBA has licensed to operate as an SBICwas formed in December 1997 when an $11 million fund-raising was completed. Some $1.6 million of that money has been invested to date or will be invested shortly, says Jean Balek-Miner, who manages Northwest Venture Associates with Simpson.
The SBAs approval of that funds license to operate as an SBIC gives the fund access to an additional sum of investment capital thats twice as large as the $11 million the fund raised when it was capitalized, says Balek-Miner. Thus, the fund will have access to a total of $33 million, she says.
Were going to apply for the first $11 million initially rather than seek all $22 million that the fund is eligible to draw, Balek-Miner says. Thats because interest expenses and other costs begin to accrue as soon as a fund receives money through the federal program. Those costs dont have to be paid until the fund liquidates investments made with the money that the federal government makes available.
The SBAs approval of the SBIC license for Northwest Venture Partners II came after a thorough review by the agency, Balek-Miner says.
No. 1, they want to make sure your management team is strong, and No. 2, they want to make sure you can invest the money in a reasonable amount of time, she says. The government had some assurance on the latter point because in the Pacific Northwest, demand for venture capital outstrips supply. Balek-Miner says Northwest Venture Associates expects to have invested all of the governments capital within five to seven years.
Managers choose investments
Through the SBIC program, the government encourages investment of capital in emerging businesses, but the managers of the fund that has been licensed through the program select the investments that are made. If the fund makes gains, the government can share in them. The capital it makes available for investing is to be returned, along with a share of any gains, but while the capital is invested, its put at riskand can be lost if an investment goes sour. Still, the SBA says, Tax revenues generated each year by companies that have become successful through SBIC investments more than cover the cost of the program.
In its alliance with Northwest Venture Partners II, the SBA stands to do well if the fund emulates the success of Inland Northwest Investors Limited Partnership, the second of the three funds here, in an investment that was liquidated last December.
In that investment, the Spokane fund had put $500,000 into PrintPaks, a Portland, Ore., software company, a year earlier. The Portland companys software enables children to do craft projects with a multimedia computer and a color printer, which was appealing to Mattel Inc., the toy giant. Mattel bought the Portland company at a price that earned the Spokane venture-capital fund a return of about 40 percent on its money, Simpson says. He says Northwest Venture Associates typically seeks that rate of return annually when it selects investments for the funds it manages.
In two recent investments, the Spokane venture-capital management firm has selected emerging companies with a strong bent toward technology. In one of those investments, Simpson says, Inland Northwest Investors and Northwest Venture Partners II together sunk a total of $500,000 into netPodium, a Seattle maker of software thats used to give live interactive presentations on the Internet.
Simpson, now a director of netPodium, says that Microsoft Corp. co-founder Paul Allen also has invested money in netPodium.
In the other recent investment, the two Spokane venture-capital funds put a total of $1 million into Merlin DataWorks, a young Seattle company that is in the process of developing software that will enhance data gathered during magnetic resonance imaging procedures. The companys plan is to commercialize a patented new solution to provide more useful information from MRIs, Simpson says.
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