Newport Beach-based Forrest Binkley & Brown is finding its broad style of venture investing back in favor.
Officials at the firm said they plan to soon close the initial phase of their third fund, raising an expected $70 million. In all, they hope to raise $100 million to $150 million for the fund by December.
Forrest Binkley has never shied away from technology. In fact, some of its biggest hits,and misses,have been tech-related. But an equal amount of its funding goes toward manufacturers, consumer businesses or management-led buyouts.
The firm’s broad approach likely earned it some knocks in the heady times of the tech boom. But it looks pretty good these days, said Greg Yurkovich, an associate at the firm.
“We have been able to attain very respectable and consistent returns through a diversified investment approach,” he said. “You could argue that we have limited our upside potential, but then again we have stood the test of time.”
Forrest Binkley currently manages two funds with $190 million under management. If it raises the targeted amount for the third fund, the firm could be managing between $300 million and $350 million. That could make Forrest Binkley the largest venture capital firm based in Orange County, as ranked by funds under management.
“We are essentially an opportunistic broad-based venture group that focuses on the Southern California market,” Yurkovich said.
The firm has 28 companies in its portfolio and has invested in 45 since its inception. In OC, Forrest Binkley has funded Santa Ana-based Wellspring Solutions Inc., a maker of supply-chain software, Newport Beach-based IPNet Solutions Inc., a developer of electronic exchanges, and Irvine-based FieldCentrix Inc., a provider of field service automation systems.
Some of the more diversified investments the firm has made include those in Napa-based Golden State Vintners Inc., an outsourcing supplier of premium wines, and Kane Magnetics International Inc., a Kane, Pa.-based maker of industrial magnets.
“We have a lot of different companies in our portfolio,from wine and guns to funeral homes, and from magnets to coffee,” said Jeffrey Brown, a partner at Forrest Binkley.
The firm bills itself as being among the top performing in the country. Its annual returns have been in excess of 30% since inception, Yurkovich said.
Among the hits: In 1994, Forrest Binkley invested in Somerville, N.J.-based Tekni-Plast Inc., a maker of plastic trays for meat packaging, egg cartons, medical tubing, garden hoses and closures for medicine bottles. Six years later, the firm cashed out with a return of more than 700%.
Another winner was the firm’s funding of San Francisco-based NextCard Inc., a credit card company that does most of its marketing online. Forrest Binkley invested in NextCard in 1997 along with AST Research Inc. founder Safi Qureshey.
Since then, Forrest Binkley has sold its stake in NextCard and multiplied its initial investment some 20 times, according to Yurkovich.
Another notable deal was that of Fremont-based OnPrem Networks Corp., which was bought by Palo Alto-based Copper Mountain Networks Inc. Forrest Binkley invested in OnPrem in 1999 and had sold most of its stake by mid-2000. OnPrem was a provider of network management products with a focus on hotels, office buildings, and apartment complexes.
“This is a good example of having a good sense of timing and of exploiting the momentum of the ‘irrationally exuberant’ market a few years ago,” Yurkovich said.
Of course, Forrest Binkley has had its share of flops. It invested $5 million in New Global Telecom Inc., a Colorado telecommunications start-up. The company had AT & T; Corp. and British Telecommunications PLC as partners, as well as an aggressive management team. But New Global ended up an early victim of the turmoil now thrashing the telecommunications industry.
“New Global Telecom was the quickest and most spectacular failure,” Brown said. “The company went bankrupt within 12 months after funding. We lost $5 million before we could blink an eye.”
Then there’s the one that got away. Yurkovich said the firm had the chance to invest in Marina del Rey-based Internet company Geocities at a $90 million valuation, but decided against it.
In 1999, Yahoo! Inc. paid around $5 billion for Geocities, or more than 50 times what Forrest Binkley would have paid for its stake.
Brown, Gregory Forrest and Nicholas Binkley formed their firm in 1993. The three partners worked together at Security Pacific Bank until it was bought by Bank of America. Shortly after, the three left to form Forrest Binkley & Brown with an eye toward investing in early stage, emerging growth and leverage-buyout opportunities.
The firm was able to lure an early big-name backer in Texas investor Lee Bass, who provided the initial capital. The firm counts eight investment professionals today.
While some venture capitalists are cutting back on their activity in the wake of the tech meltdown, Forrest Brinkley officials said they are stepping up their deal making. In the last 12 months, the firm has invested about $25 million in eight different companies, they said.
“Our average investment in a company is $2 million to $4 million, but we lock in $8 million for follow-on investments,” Yurkovich said.
The firm said it goes through some 200 deals a week and invests in about one company a month.
“Bigger VCs who raised $1 billion moved upstairs, leaving a vacuum in the early stage companies,” Yurkovich said. “We are seeing extremely high quality deals in the tech sector.”
With lackluster demand for initial public offerings, the firm has stepped back from companies looking to go public in the near term, according to Brown.
“We are not investing in any deals right now that require a public financing event,” Brown said. “That market is not only gone, but I think it should be gone for some time.” n
