“Venture cap firm looks to alternative markets”

 Nashville Business Journal, by Judy Sarles, July 26, 1999

A downturn in the level of venture capital funding for Nashville area health care companies has at least one local venture capital firm switching gears.

In about three months, Salix Ventures, L.P., a venture capital firm in Nashville, will open an office in Menlo Park, Calif., a high-technology center, to enhance the firm's focus on combined health care and Internet firms, says Marty Felsenthal, a principal of Salix. Salix also invests in specialized health care services companies and information technology companies. "The health care and Internet industry is just at the beginning of development," says Felsenthal.

Investors' money flows to venture capital firms, which invest the money in a portfolio of start-up or other risky companies that have the potential to become profitable. The venture capital firms form funds serving as sources for start-up company funding.

Estimates of the number of venture capital firms based in Nashville range from about seven to a dozen, because not all of the firms fall within the traditional definition of a venture capital firm. For example, one firm that has been designated as a venture firm invests in a company only when it's at least three years old.

Some of the larger banks in the Nashville area have venture capital divisions, national venture capital firms have offices here, and senior partners at investment banking firms also do some venture capital investing. One of the newest venture capital funds was formed by Vanderbilt University. Sam Belk, a market executive with the financial strategies group at NationsBank, says NationsBank Capital Investors in Charlotte, N.C., and in California do primarily second or later-stage venture capital investing and have benefited a few companies in the Nashville area. "Yes, we've definitely done deals in this region and this area," he says.

There also is a lot of "angel" money or invested dollars from rich individuals and accredited investors in the Nashville area. Accredited investors have a net income of at least $200,000 in each of the last two years or an excess of $1 million in net worth and a reasonable expectation of those amounts in the current year, explains Carter Todd, a partner with the law firm of Stokes & Bartholomew.

Several area venture capital firms are of significant size in their portfolios. Massey Burch Investment Group, the oldest venture capital firm in Nashville, founded in 1968, has $248 million in capital under management, reports Venture Economics, a New Jersey-based division of Thomson Financial Securities Data.

Salix, in its present form, was founded in 1997. Its largest fund is about $61 million and the total of its funds is just under $70 million.

Felsenthal says Nashville is a center for venture capital firms in the Southeast, along with Atlanta. Some sources claim Nashville has around $300 million in venture capital.

"I don't know if we're a center," says Jay Hoffman, a partner with Coleman Swenson Hoffman Booth Inc. "We have an outstanding group of firms. We're fairly well represented."

Laura Campbell, president of Laura Campbell & Associates, a Nashville consulting practice that assists rapidly growing companies, says California's "Silicon Valley" and Boston are venture capital hot spots. In the Southeast, she lists Atlanta, the Research Triangle area of North Carolina, Dallas and Austin, Texas, as locations considered centers for venture capital firms.

Due to the early-stage nature of venture capital investing, it is advantageous for the majority of venture capital firms to be near to their investments, so they can work closely with a company's management team, says Campbell. The beehive of activity from for-profit health care companies and the subsequent spin-off of health-care start-ups in Nashville has led to the need for venture capital.

The health-care industry has been less than healthy in the last 12 to 15 months due to publicly traded companies experiencing some problems with their stock prices and other companies being adversely affected by changes in Medicare reimbursement, so health care is out of favor with a lot of venture capital firms, says Chris Kyriopoulos, an associate with Clayton Associates.

But other sources say the health care industry may be making a comeback.

Telecommunications industries in the Nashville area are also starting to attract venture capital. Ed Nelson of Nelson Capital, a firm founded in Nashville 12 years ago, notes that his firm invests in information technology, broadcasting, telecommunications, insurance and manufacturing.

"Overall, there has been a tremendous increase in the amount of venture capital funding over the last several decades," says Campbell. "This growth has been paralleled by an increase in the number of venture capital firms."

Salix, when it seeks to invest in a company, looks for an outstanding management team as well as a market opportunity with momentum. Campbell says venture capital firms invest in companies that have experienced management teams, have the ability to grow rapidly and the potential to go public or be acquired.

"We're not necessarily expecting the company to pay us back our money," says Kyriopoulos. "We're going to take a percentage of ownership in the company for our capital so that down the road, if the company goes public or is sold outright, then we would expect to realize a return on our investment."