Fund Targets Marginalized Projects

A new VC firm is out to salvage riches that may be hidden inside established storage networking and communications companies.

Garnett & Helfrich Capital, a new investment fund recently launched by technology and venture capital veterans Terry Garnett and David (what else?) Helfrich, is courting neglected business units of large, public, high-tech companies. The firm plans to use its recently raised $250 million fund to buy these units, spin them out, and nurse them back to positive growth.

"The opportunity here is germane to all of IT," says Helfrich, managing director of the fund. "There are many underutilized assets that don't belong or have been abused in companies."

This approach -- dubbed "venture buyout" by Garnett & Helfrich for its combination of VC and traditional buyout investing -- adds a twist to the private-equity game by aiming to acquire and rejuvenate promising business units trapped inside other organizations.

How can the fund identify potential candidates? Well, for starters, only buyout targets with $20 million to $100 million in annual revenues are being considered.The firm chose this revenue range, says Helfrich, because it typically includes businesses that are both past initial customer-acquisition hurdles and not too profitable -- the most likely profile of a stagnating business that could use investment help and management guidance.

Observers see potential for this model in some, but not all, areas of the storage market. "It's a tough proposition with storage networking gear like Fibre Channel switches and directors," says Stephanie Balaouras, senior analyst at The Yankee Group. "Competition is so intense and prices have been driven down so much, I wouldn't recommend getting into that market now."

But older product lines such as RAID subsystems could prove to be diamonds in the rough. "There's always a need for basic storage," she says. "All you need is a solid product and channel."

That idea could play into the strategy of Garnett & Helfrich, which requires the presence of a solid customer base before it will green-light a buyout.

"Invariably, customers in these businesses are being ignored," says Helfrich. "We want to figure out what they need and start delivering that."Often, these potential buyout targets are born as startups that have been acquired by larger firms. When the inevitable brain drain occurs after an acquisition, the business can lose its strategic value within the larger entity and languish. "The failure is a lack of leadership and management," says Helfrich.

Helfrich and team hope their entrepreneurial skills and industry experience will be the cure for what ails their buyouts. Helfrich has been a founder or early-stage manager of networking vendors such as Newbridge Networks, acquired by Alcatel SA (NYSE: ALA; Paris: CGEP:PA); Ascend Communications, acquired by Lucent Technologies Inc. (NYSE: LU); Centrum, acquired by 3Com Corp. (Nasdaq: COMS); and Copper Mountain Networks Inc. (Nasdaq: CMTN).

The firm's other half, Terry Garnett, was in executive management at Oracle Corp. (Nasdaq: ORCL) from the mid- to late-90s.

Both Helfrich and Garnett later went on to VC careers: Helfrich at ComVentures, where he helped launch CoSine Communications Inc. (Nasdaq: COSN); Entera, acquired by CacheFlow, now Blue Coat Systems Inc. (Nasdaq: BCSI); IntruVert Networks, acquired by Network Associates Inc. (NYSE: NET); and Internet Photonics, acquired by Ciena Corp. (Nasdaq: CIEN). Garnett worked at Venrock Associates, where his deals included CrossWorlds Software, acquired by IBM Corp. (NYSE: IBM); Neoforma Inc. (Nasdaq: NEOF); and NetObjects Inc. (OTC: NETO).

It was an experience at Venrock that led Garnett to the "venture buyout" brainchild. While at Venrock, Garnett bought Pretty Good Privacy (PGP), which had been floundering under parent company Network Associates. Helfrich recalls a subsequent conversation he had with Garnett as their "aha moment.""There were so many of these buried investments," says Helfrich. "This model could be replicated." With more and more VCs pursuing the same startup pie, the idea of staking out a different direction emerged. The new fund was raised in 12 months.

Although Garnett & Helfrich Capital has yet to announce specific buyout targets, Helfrich cites storage, LAN and WAN networking, carrier services, semiconductors, and enterprise software as particularly promising sectors.

The firm is seeking six to eight buyoutsabout two per year at $30 million on average, says Helfrich. After that, the group will try to start the same process over with a new fund.

The fund's stable of investors includes several well-known investment and endowment funds. The top three -- the Harvard University and Stanford University endowment funds and Harbour Vest Partners LLC -- have each kicked in at least 10 percent of the fund, according to Helfrich.

— Brett Mendel, Senior Analyst, Byte and Switch Insider0