MISADVENTURES OF A VENTURE FUND: AFTER THREE YEARS, BIG APPLE INVESTMENT CAN’T POINT TO MUCH

New York City’s first foray into venture capital has failed to produce any big winners or generate anywhere near the number of jobs forecast, and it is stuck in a number of mediocre investments.

The Discovery Fund, a $76 million venture fund underwritten by the city and three public utilities, has invested $35 million in eight companies since 1995.

Three years into the plan, Discovery has produced only a few hundred jobs vs. its projected 4,000. One of its ventures fell apart 15 months after the fund’s initial investment, and two have been overhauled in an effort to avoid similar fates.

The city and Prospect Street Ventures, which manages the fund, insist it’s too early to pass judgment. Over the 10-year life of the typical venture fund, the city and Prospect say, there are one or two big winners and a raft of losers. It is also true that some of Prospect’s more recent investments have the additional backing of veteran venture capitalists.

“Venture capital success or failure can’t be judged for five to eight years,” says Charles Millard, president of the city’s Economic Development Corp. “It’s a business that constantly has ups and downs requiring restructuring and flexibility. That’s why we chose someone to do it for us.”

Experts agree that venture funds’ success must be evaluated over a lengthy period. But whether Discovery will ever achieve its goals remains highly questionable.

a mixed bag

The Discovery Fund was the brainchild of the previous administration, headed by Mayor David Dinkins, but didn’t take shape until 1995, when the current Rudolph Giuliani administration was eager to produce jobs and show support for the nascent new media industry.

The city threw $10 million into the fund from general tax revenues and mustered another $20 million from Brooklyn Union Gas Co., Consolidated Edison and the New York Power Authority. Structured under federal rules as a small business investment company, Discovery has the ability to tap into another $46 million in federal equity monies.

The city received four applications in its quest to find a fund manager. It chose Prospect, a Boston-based firm with money management expertise but only limited experience in venture investing.

“(An economically targeted fund) generally would pick a manager that has a gigantic track record in that area if it’s going to be so focused,” says Jesse Reyes, director of Venture Economics Information Services in Newark. Mr. Millard says Prospect was the best choice among the bidders. “They had experience managing a similar fund for Connecticut, unlike other bidders.”

Three years later, Discovery’s results are decidedly mixed. Its first investment was not even a high-tech company. Publicly-held Skyline Multimedia Entertainment Inc. operates a computerized tourist attraction in the Empire State Building and a virtual-reality and games emporium in Times Square.

Skyline today is in considerable difficulty. Its stock recently traded as low as 50 cents. The company, which is struggling to pay its bills, is negotiating with an investment group to help raise money.

The company that is arguably the brightest star in Discovery’s portfolio, Manhattan’s Air Media Inc., is retrenching. The developer of software for wireless devices recently laid off about 25 employees and abandoned its retail strategy in order to concentrate on selling its products to computer and wireless equipment makers. Ron Celmer, a general partner in Prospect, has taken a leave of absence to help run the company.

seeing winners

While Discovery and the Connecticut fund were the lone investors in some of the earlier ventures, Discovery’s more recent investments have the advantage of backing from other partners. Comet Systems Inc. has developed an on-line advertising tool, and 24/7 Media Inc. is an on-line ad network set to rival industry leader DoubleClick Inc. Air Media has a stable of Fortune 500 customers in the wireless equipment business.

Still, it’s doubtful that Discovery can generate the more than 3,500 additional jobs it has targeted — the equivalent of 10 Yahoos.

Mr. Barry disagrees. “One company that really takes off can create 40,000 jobs,” he says. “I’m confident we have winners.”

Crain News Service