David Levi acknowledges that the odds of a small business raising venture capital with Vancouver-based GrowthWorks Capital Ltd. are extremely slim. Last year, about 1.5% of firms seeking capital passed muster, although normally it's been about 3%. Only nine of the 570 business plans that the firm entertained for its group of labour-sponsored investment funds were accepted.
"They have to fall into three key areas to make the cut," says Levi, 49, lead manager of the $347.3-millionWorking Opportunity Balanced, and president of GrowthWorks, a venture capital leader with about $750 million in assets. "They have to have the makings of a good management team. We have to have a CEO we feel we can work with, at least in the initial years." Secondly, the candidate company has to have a technological innovation that is genuinely different. And it has to have a reasonably large market. "We're looking for firms that are world-competitive and have potential markets of $200 million to $500 million."
Levi's team of 20 managers and analysts focuses on three industry sectors: information technology, life sciences and advanced manufacturing. Each business plan is carefully scrutinized in terms of the product cycle, potential competition and the company's value proposition. "It comes down to: 'What are the skill-sets of the management group? What is it going to take to develop their product? Finally, if we are successful, can we receive a 30% to 35% internal rate of return on that investment?'"
"Our hurdle rate is 30% to 35%," says Levi. "But our annual return [on Working Opportunity Balanced] is 18%, compounded over 12 years," he adds. "Had we set our targets lower, we would have had a much lower rate of return. We need big winners in our portfolio."
GrowthWorks has a time horizon of four to five years and looks to double its money every three years. In the venture-capital industry, normally only two out of 10 investments are very successful. Six are mediocre performers and two are downright failures.
Consider HotHaus Technologies Inc. GrowthWorks invested $2 million in the communications software maker in 1996. Over the next three years, it put in another $2 million. But in 2001, HotHaus was bought out by U.S. chipmaker Broadcom Corp. ( BRCM/NASDAQ) for $450 million (Cdn) as one of HotHaus's areas of expertise, voice-over internet protocol, attracted a lot of attention from cable companies. GrowthWorks netted a cool $120 million in profit. "It was a 30-bagger," says Levi.
While Levi is today thoroughly immersed in the high stakes world of venture capital, he came by it through a circuitous route. In 1980, the Vancouver native -- who studied economics and accounting at universities in Israel, Hawaii and Vancouver but never completed a degree -- landed a trainee job at investment broker C.M. Oliver.
Levi clearly had a knack for retail sales, because he was a top performer within two years. In 1987, he became sales manager and later senior-vice president of broker services in charge of the income side of the operation. Coincidentally, he was also named chairman of VanCity Credit Union, which gave him a taste of working with a large organization.
During the winter of 1989-90, he and a group of partners tried unsuccessfully to buy C.M. Oliver. Undaunted, they set out on their own and established Global Securities Inc. In 1992, Levi left the firm to help launch Working Opportunity Balanced, a labour fund for B.C. residents.
As a rule, GrowthWorks is an early-stage investor. It typically starts with an initial investment of $1 million to $1.5 million. But since it often adds to its investments -- putting in as much as $10 million in follow-up financing -- it ends up with a portfolio of early-, mid- and late-stage companies.
Between the four funds in their stable -- the three others areWorking Opportunity Growth,GrowthWorks WV Canadian andGrowthWorks WV Opportunity -- the managers look after about 120 companies. Positions are limited to 10%, although the ceiling is typically 5%. Since the average holding is about four years, turnover is in the 20% to 25% range.
Levi's own role is primarily administrative. Although he no longer has a hands-on role in choosing the companies, he meets with his senior executives to approve all the investments.
Levi's biggest current challenge is turning around the poor track record of the former Working Ventures Canadian, now GrowthWorks WV Canadian, which GrowthWorks took over managing in December 2002. He says there was a 50% turnover in names at GrowthWorks WV Canadian and the much smaller GrowthWorks WV Opportunity, which changed hands at the same time.
The portfolio makeovers have now been completed. Levi says he is pleased that the two funds are now being run with the same investment style as the other GrowthWorks funds, and producing positive results.
For instance, GrowthWorks WV Canadian was up 4.5% last year, compared with a median loss of 1.3% in the Labour Sponsored Venture Capital category. "We are already starting to see benefits from our management," says Levi. "We thought we would break even, but we actually made some money."
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