Venture Firm Puts Its Good Fortune to Work
After an early investment in a satellite start-up made him and his family multimillionaires, David Nazarian got bit by the “VC†bug.
His transformation from aerospace executive to Southern California venture capitalist in recent years has proved to be a smooth one. Nazarian’s firm has investments in nearly 40 companies, more than half of them headquartered in cities from Santa Barbara to San Diego.
Nazarian formed Smart Technology Ventures in Beverly Hills in 1997, mostly with family money. The firm recently raised its third fund, with $175 million, primarily from high-net-worth individuals and institutions such as AIG-owned insurance firm SunAmerica.
Although the fund is considered small in venture capital circles, especially at a time when $1-billion-plus venture funds are common, Nazarian said the size fits the type of early-stage investments he prefers.
The focus of the new fund is companies specializing in wireless communications, optical and broadband Internet infrastructure. Most investments will be $2 million to $7 million.
“Southern California is the hotbed for innovation in wireless, fiber-optic and Internet infrastructure,†said Nazarian, 38. “We have all the right ingredients to build a tech community, but [it’s] less crowded and competitive than up north.â€
Several of the firm’s prior investments have worked out well, including:
* VerticalNet Inc., a Philadelphia-area company that develops business-to-business information portals. Smart Technology made a $550,000 investment in May 1998 that was worth $30.25 million when the venture firm sold most of its shares a year later. The company went public in 1999.
* Sequoia Software. Smart Technology’s $500,000 early-stage investment in 1999 is worth more than three times that as the Columbia, Md., company went public in May. Smart Technology has held on to its investment.
* Innovent, an El Segundo company, was recently acquired by Broadcom Corp. for $440 million, netting Smart Technology a 42% return on its initial investment, which it won’t disclose.
Smart Technology’s newest fund has already made investments in six companies, including San Diego-based Domain Knowledge Inc., which develops low-cost wireless modules, including software and hardware that could, for instance, connect a computer with a cell phone.
“They are very savvy about the wireless business and made a decision to invest in us immediately,†said Domain Knowledge President Hock Law, who said he spoke to several venture funds when he was looking for money and liked how quickly Smart Technology reacted. He said the firm’s partners have already introduced his executives to several potential clients and connected them with other companies in Smart Technology’s portfolio.
Smart Technology takes a hands-on approach and likes to invest in companies nearby. Nazarian and his three partners typically take seats on the boards of the companies the firm invests in. He believes that to be successful, a venture firm needs a strong local presence and a skilled team of partners that can provide start-ups with strategic direction.
Nazarian’s Smart Technology partners are Joel Balbien, a former analyst with the Jet Propulsion Laboratory who worked in the aerospace industry; Joseph Marks, who worked at Kane Anderson Investment Management, a private equity business in Los Angeles; and Mehran Matloubian, a former manager of Hughes Research Laboratories and an inventor who has been awarded 15 U.S. patents.
Iranian-born Nazarian got his MBA from USC and helped build two aerospace companies in the early 1980s. He went on to help expand such start-ups as Qtron Inc., a San Diego electronics firm.
Nazarian and his family were major investors in and operated Omninet, a Los Angeles company that provided two-way messaging services via satellite for mobile users. It merged with Qualcomm Inc. in 1988. With that money, he began doing “angel,†or early-stage, investing before starting Smart Technology. Nazarian and his family, including his father and uncle, still are major shareholders in Qualcomm, owning about 5% of the company.
“The relationship with Qualcomm gives us added value and helps open doors,†Nazarian said.
Jim Armstrong, a partner with Idealab Capital Partners, the venture arm of Pasadena incubator Idealab, said Smart Technology has spoken to him about co-investing, and he likes the deals they’ve shown him.
“They are really tech, wireless guys. They are active in the market here and a welcome presence,†Armstrong said.
Nazarian said the hardest part of his job is finding companies to invest in that have realistic valuations.
Despite market turmoil earlier this year, many entrepreneurs still think their companies are worth much more than they are, he said. Given the huge amounts of venture capital available, many entrepreneurs can find someone willing to invest.
“In the hot areas like fiber optics, the valuations are high,†Nazarian said. “We have to show a company the added value we have--we don’t want to compete on valuations. We’re a smaller fund, not a $1-billion fund. But being small has its benefits.â€
Because of Smart Technology’s smaller size, the companies it invests in won’t get lost in the shuffle, Nazarian said.
Andrew Malik, a managing director with Lehman Bros. in New York who serves on the advisory board of Smart Technology, agreed.
“We’re not just going to shovel money at a company and say, ‘Here you go,’ †Malik said. “This team gets involved.â€
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Times wire services were used in compiling this report. Remember that initial public offerings are highly speculative and not suitable for all investors. Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at [email protected] or Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90053.
