Venture Capital Is Game of Skill; 97 Banking Firms Own Small Investment Companies

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Venture Capital Is Game of Skill

CHICAGO -- Venture capital is really a game of skill more than size. But it clearly has become a game large institutions are taking seriously.

Eith of the 10 largest banking companies in the United States, and 20 of the top 25, are investing in venture capital through small business investment companies, or SBICs. A total of 97 banking companies own SBICs of varying size.

NBD Bancorp. the nation's 28th largest bank holding company, owns Michigan Capital & Service Inc., a venture capital fund capitalized at $28 million. Michigan Capital, which was started in 1966 and acquired by NBD in 1980, is an example of a bank-owned SBIC that is on the brink of profitability.

"In 1980 we had just a modest portfolio," says Joseph Conway, president of Michigan Capital. "Now we have 42 companies. We should have a better 1986 [than 1985] and that will be the result of putting 35% of our money in seed or start-up ventures [four years ago] that are now maturing."

Mr. Conway describes 1985 as an average year for the SBIC. "It could have been better if the [initial public offering] market wasn't at a lot spot," he says.

But in 1986, he says, Michigan Capital has a number of companies that are profitable whose next step is an initial public offering, and that could happen this year.

New Emphasis on Leveraged Buyouts

Michigan Capital's portfolio is divided among several industries, Mr. Conway says, including communications, data-type products, manufacturing, and leveraged buyouts. Noting that several other venture capital funds have had good luck with leveraged buyouts, Mr. Conway says he would like to see some growth in this area.

"We're planning more later-stage [financing] and leveraged buyouts next year and less seed and start-ups," he says. In fact, Michigan Capital's budget for 1986 calls for 75% of its capital to be put in expansion or later-stage financing and 25% in start-up projects. From 1980 to 1985 Michigan Capital has 35% of its money in seed and start-up ventures, 35% in early-stage projects, about 25% in later-stage funding, and about 10% in leveraged buyouts.

Michigan Capital's market essentially is the Michigan-Ohio-Indiana area. Within this region, Mr. Conway sees increased market opportunities.

"We won't be another Silicon Valley [in California] or Route 128 [in Massachusetts], but we are seeing more entrepreneurship, a lot of research at the University of Michigan, and a lot of entrepreneurial spirit," he says.

A lot of the business activity in Michigan is related to industries that are suppliers to the automobile market. There is also substantial computer-related activity and a strong surge of interest in factory automation, Mr. Conway says. Meanwhile, at Michigan State University, Mr. Conway is seeing a lot of research in biotechnology that may prove attractive for future venture projects.

Although venture capital is traditionally very competitive, Mr. Conway says he still finds "a high number of opportunities, and we can afford to be selective." For banks that are just now contemplating setting up an SBIC, Mr. Conway believes it can still be a good business.

The minimum size most people find acceptable for a venture capital fund is $3 million, which is the capitalization of the M&I Ventures Corp., a subsidiary of the Marshall and Ilsley Corp., Milwaukee, the nation's 96th largest bank holding company.

M&I Ventures was licensed last year and is focusing on very early stage companies that are at the point of having one identifiable product, as well as leveraged buyouts, vice president Dan Howell says. …