Quietly operating beneath a shroud of anonymity for several months after withdrawing its initial public offering late last year, Garage Technology Ventures recently resurfaced and is now trying desperately to redefine itself in a post-dotcom world.
Formerly known as Garage.com, the small investment bank has recently started making a number of changes to its business model in order to stay afloat in a difficult market that has already forced many of its competitors, including Offroad Capital, to close up shop for good.
Others, such as once high-flying incubators CMGI Inc. and Internet Capital Group Inc. (ICG) are barely a blip on the financial community’s radar screen anymore. CMGI’s @Ventures group has seen a mass defection of its partners in recent months, and its once-astronomical stock price now hovers at about $1.67 per share. Furthermore, the Andover, Mass.-based firm’s Q4 2001 earnings report showed that the company had suffered a devastating $1.276 billion net loss, which included pre-tax losses related to a $187.5 million write-down of CMGI’s investment in Pacific Century Cyberworks Ltd., a $119.3 million write-down of certain @Ventures investments and a $106.3 million write-down of certain marketable securities investments.
And ICG, which is now calling itself an “Internet company actively engaged in business-to-business e-commerce through a network of partner companies,” recently announced that it was repurchasing a portion of its debt in order to strengthen its liquidity position and increase its financial flexibility. The Wayne, Pa.-based firm is expected to release its third quarter financial results after the market closes on Nov. 7. ICG’s stock price was $0.94 at market close on Thursday.
So the question remains, will Garage be able to rebirth itself? It looks as though the company surely will try.
Like most of its peers before it, Garage has attempted to diversify its business model more than once. The company has been operating as a placement agent for a few years, however, its latest fancy is not just placing deals, but also raising money to invest in them.
Through partnerships with 3i Group PLC, an international venture capital firm with $11 billion under management, and the California Public Employees Retirement System (CalPERS), Garage is currently raising two separate funds. The capital will be used for seed money to help Garage’s private placement clients build up their companies so they can attract additional financing from outside venture firms, said Guy Kawasaki, Garage’s chief executive.
He stressed, however, that Garage’s fund-raising efforts are not a desperate act to save struggling companies in its private placement portfolio. “If we think you can get funded, we can help you with some start-up funds,” he said.
Kawasaki would say only that Garage already has raised several million dollars, but he declined to give an exact figure. The funds are expected to be invested over several years and will back somewhere between 25 and 40 companies in the enterprise software, Internet infrastructure and wireless communication sectors.
Kawasaki believes that having the extra cash on hand will help Garage attract higher quality deals.
“We are now a hybrid of a VC and I-bank. We can write checks or syndicate a deal. In the long term, this will help us make money,” he said.
Cash Is Critical
Money is indeed what Garage needs right now. While Kawasaki did not say Garage was in financial trouble, the numbers do show a story of a company that is feeling the pinch of a tightening VC market. Since January, Garage has raised only $55 million for 12 of its placement clients, which makes it unlikely that the firm will hit its original 25- to 40- deal target for the year.
“We are seeing a decrease in quantity but an increase in the quality of the deals. We’re down more than half from last year, but this year is not over yet,” Kawasaki said.
Last year, Garage placed 38 deals and raised more than $140 million for its clients.
However, Garage is not the only company that has felt the crunch this year. According to VentureXpert, venture capital spending is down $894 million from last year.
Year-to-date Garage has brokered, among other deals, a $13 million Series A round for Lefthand Network Inc., a Boulder, Colo.-based provider of storage and network systems. The investment came from Boulder Ventures and Sequel Venture Partners.
The company also placed a $10.5 million Series A financing from Siemens Venture Capital in August for Digital Envoy Inc., an Internet infrastructure provider based in Atlanta; and a $3 million Series B round for Scotts Valley, Calif.-based Pure Carbon Inc., an application service provider focused on corporate employment sites.
Kawasaki also said Garage has signed up four other private placement clients.
Trimming The Fat
Taking into account the tremendous decrease in this year’s placements, Kawasaki said he was forced to restructure the organization. As a result, the firm shut down its two remaining branch offices in Boston and Israel and now operates solely out of its Palo Alto, Calif., headquarters. Additionally, with the closing of those offices, Garage handed out 20 pink slips, keeping on only 29 employees.
“We’re doing the right thing. We had to reduce our headcount. In this market where so many fewer deals are being done, we had to get in line with size of the market,” explained Kawasaki.
However, while Garage was busy downsizing its general workforce, it was also busy beefing up its executive staff with people who have expertise in the technology and communication sectors.
“In 1999 we could operate as generalists,” Kawasaki said. “Everyone knew a little about a lot of sectors. But now the only kinds of deals that can get funded are hardcore technology deals and communication devices. When clever ideas were being funded, no one needed PhDs to know that selling books online would work.”
So in an effort to keep pace with the changing times, Garage has added to its employee roster Anita Rao, a software engineering executive. Prior to joining Garage, she was the vice president of engineering at Jamcracker Inc., a software company.
Recently, Brian Jenkins also joined Garage’s communication sector. Prior to coming on board at Garage, Jenkins served as director of customer management and business development at Turnstone Systems.
Both Rao and Jenkins now report to Gideon Marks, who used to lead the Israel office and is now vice president and head of Garage’s venture finance group, which is responsible for sourcing and raising funding for private placement clients.
Danielle Fugazy can be contacted at: Danielle.Fugazy@tfn.com