Industry Ventures Provides Little-Known Pressure Valve for LPs

4/25/13Follow @wroush

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enterprise software—meaning infrastructure, communications, and software-as-a-service. Between 5 and 10 percent is invested in cleantech and healthcare. There are still a few consumer Internet funds and companies in its portfolio, but nowadays the firm avoids the consumer market, Swildens says.

By the way, Industry Ventures isn’t a pure secondary fund, Swildens explains. On occasion, it also buys company shares directly from shareholders, such as founders. It also maintains a “fund of funds,” in effect acting as an LP in about 15 small venture funds. And once it owns a position in a specific fund or company, it’s frequently a very active shareholder.

While most of Industry Ventures’ deals are shrouded in non-disclosure agreements, the firm was able to share one recent example that illustrates its style.

In 2012 Industry Ventures bought out an LP in a fund that had invested in GetWellNetwork. The Bethesda, MD-based startup turns the TVs or computer monitors in hospital patients’ rooms into portals for personalized health information designed to speed their recovery and reduce readmission rates. It was founded in 1999 by Michael O’Neil, who survived an episode of cancer that year and says he had “a terrific medical outcome but a really challenging experience from a patient standpoint.”

According to Industry Ventures, GetWellNetwork was the most promising company in the venture portfolio it was buying into. So promising, in fact, that Swildens decided to make a direct secondary investment, buying out two of the three funds that had participated in GetWellNetwork’s Series A round seven years earlier. That made Industry Ventures one of the largest shareholders in the company.

“As Hans came in, in the secondary, it really was the perfect fit,” O’Neil told me. “These guys are typically looking at companies where the organizations themselves aren’t struggling or tired, but you may have shareholders who want or need an exit for whatever reason, internal or external. Hans found his way to our deal in that typical way.”

What was uniquely welcome about Industry Ventures’ involvement, however, was that Swildens promised to help position GetWellNetwork for an acquisition, O’Neil says. “The company was at a point where we felt like there was an exit in sight, in a fairly short amount of time, and we wanted a more action-oriented, involved presence at the board level.”

Swildens joined GetWellNetwork’s board and immediately became co-chair of a new M&A committee charged with finding a buyer for the company. In short order the company entered discussions with Welsh, Carson, Anderson & Stowe (WCAS), a New York-based private equity firm focused on healthcare and technology.

O’Neil says Swildens provided valuable expertise and insights, and helped to keep the discussion with WCAS alive throughout 2012. “Industry is a firm of action, which matches Hans’s personality,” O’Neil says. “He was helpful all along the way in making sure, A, that this was big enough, that there was great momentum behind the company, and B, really keeping us very action-oriented and making sure we were moving forward.”

On January 3 of this year, WCAS announced it had completed the acquisition of GetWellNetwork. The company will now have the resources to grow quickly, O’Neil says. “We spent the first five years trying to convince everyone that patient engagement was important,” he says. “With Welsh, Carson, we have an opportunity, on day one of Act Two, to set out to build what we believe will be one of the most important healthcare companies of the next 10 years.”

It’s standard for Industry Ventures to get more involved in a fund or a company than the shareholders it’s replacing, who have typically been holding out for five to 10 years. “One type of seller might be a venture fund that was raised in 2000 and is now at the end of its term and wants to sell the investments so it can close the fund down,” says Swildens. “Another might be a founder who has been in a company for nine years and has a paper net worth of $50 million and wants some diversification, and sells $5 million or $10 million in stock.”

Without a secondary market, Swildens argues, the venture industry would be having even more trouble raising new funds than it already is. (The number of funds raising money in the first quarter of 2013 was the smallest since 2003, according to the National Venture Capital Association.) The secondary market “allows the venture market to get exits and cash back, which in turn allows them to raise more capital and found new companies,” he says. “Almost every entrepreneur we buy from wants to start a new company, but not until they get an exit. So the secondary market actually creates more innovation.”

That’s a useful buffer at a time when the larger capital markets are so unforgiving toward venture-backed companies (though hope might be coming in the form of the JOBS Act, passed in 2012 and intended in part to smooth startups’ path to an IPO). “There is nothing wrong with the companies here” except that it’s still so much harder for them to go public than it was before 2001, Swildens says. “We constantly talk around the office about how if we owned it in the 1990s, our entire portfolio would already be public.”

That’s scant comfort for startups, their venture investors, and LPs—but for those who’ve run out of patience, Swildens and other secondary investors offer a way to start fresh.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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