Risky business? Indiana venture-capital companies offer more than money.

AuthorHorvath, Terri

When one of the riskiest entrepreneurial exploits set sail in 1492, a venture capitalist helped carve her own immortality in the history books. According to legend, Queen Isabella I of Spain sold some of her jewels to finance Columbus' voyage across the Atlantic. It was a gamble she was willing to accept for the possibility of a healthy return on her investment.

Today's venture capital firm must be prepared to fail more often than it succeeds. When it wins, however, it must win big. Those successes are supposed to compensate for the higher percentage of failures.

Venture capital was not recognized as an organized and distinct industry until after World War II. Many lessons had to be learned, and it was not until the 1980s that venture-capital companies experienced rapid growth--from $3.5 billion under management by venture-capital companies in 1981 to more than $30 billion by 1991. Yet over-zealous investing, unrealistic expectations and a myriad of other problems during the decade brought poor returns for many. The industry saw its ranks shrink, with the strongest surviving.

An Indiana survivor is CID Equity Partners, with headquarters in Indianapolis. "For the 1990s, I think the situation has stabilized," says John Hackett, CID's managing general partner. "For those who have continued to do well, they don't have much difficulty in raising funds."

CID has invested in about 29 companies since its inception in 1981, and only in the Midwest.

"Probably one-third of all our investments are start-up companies. Another third is equity capital to small companies for expansion, and another third to management buyouts" and similar investments.

The types of companies CID chooses for its investment vary. A partial listing of its diverse partner companies include Coresource Inc., which provides health-care and worker's-compensation cost-management services through a nationwide network; The Indiana Railroad Co., which operates a short-line railroad; and Software Artistry Inc., which develops software to automate corporate customer support centers and internal help desks.

According to Hackett, CID initially invests $1 million to $2 million and has gone as low as $500,000. CID may then follow up with additional funding topping out at about $3 million. Yet CID limits its investing in any one company to 10 percent of the size of the particular fund.

CID has three funds. The first, initiated in 1981, has had a 21 percent compounded annual rate of return...

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