SIFTING FOR NEW OPPORTUNITIES

Boutique VC KB Partners focuses on finding value in the faltering midwestern tech economy.

By Jessica Littmann,
i-street magazine
Published: February 2001

Keith Bank is doing his best to combat what he calls "the myth that there's no venture money in Chicago."

Bank is managing director of KB Partners, a VC firm that funds early stage startups within a 300- to 500-mile radius of Chicago. KB Partners' investments include well-known firms like EthnicGrocer.com, Dynamic Trade, and Orbit Commerce.

Bank's intuition that the new economy would hit it big in Chicago prompted him to get in touch with partner Byron Denenberg, a veteran of the semiconductor business and an avid investor in private deals himself. The two launched the firm in 1996 as KB Partners--a name that Bank said he would change if he had the chance to start over. "People think it stands for 'Keith Bank, 'when it's really 'Keith-Byron,' Bank explained.

Getting in early

"We were the youngest early stage VC in business locally," when the firm was founded, Bank said. When KB Partners established its first fund, "there were no existing deals." Now, by Bank's estimate, "there are 20-30 competitors" in the early-stage investment space.

The increased competition means that KB Partners takes a "quick but not hasty" approach when reviewing business plans, typically offering a term sheet to chosen ventures within 30 days of first meeting.

In addition to Bank and Denenberg, the firm's investment team includes Robert Garber, who specializes in hardware, software, network, and database issues; and Bob Zieserl, who specializes in medical technology and software. The four partners review approximately 7,000 business plans annually.

A majority of the firm's requests for funding come from referrals, Bank explained, adding that proposals are also received via the firm's web site and by cold calls. "Everything that walks through the door gets a response within two weeks," Bank said, adding that "at other VCs, if they don't like it, it goes in the garbage can."

About 250 of the contenders are invited to the firm's Northfield offices to explain their business plans in person-with only a handful getting funding. In winnowing down the competitors, Bank explained that partners at the firm take an "opportunistic" approach, preferring to "bet on people and their ability to execute, as opposed to other VCs, which tend to focus on specific industries, or a certain size investment threshold."

The process, Bank explained, "entails separating the products looking for markets from the markets looking for products. We try to determine if there is a need or is this just a gizmo? We want to know that if we build it, people will come.

For a deal to pass muster, all four partners must reach consensus on the merits of the business plan. The plan is then reviewed by members of KB Partners' advisory board. "It's a formal process," Bank said, adding that the board functions as "more than just figureheads."

KB Partners typically participates at what Bank called "the riskiest stage of the venture"--early stage or seed investment, the occasional first round, and, on rare occasions, a second round.

Because they participate in deals before the company has marketplace acceptance and customers, KB Partners often takes an active approach to grooming portfolio companies, often helping in efforts to attract customers, supply real estate, and recruit management. "It's not rocket science," Bank explained, "but it's the kind of thing you need a network for."

Looking ahead

Despite the recent shakiness in the tech economy, Bank noted that 'the volume is still there" in terms of the number of proposals the firm receives. He estimated that the number or proposals has fallen off 10 percent between 1999 and 2000.

The firm's principals are reviewing more infrastructure and hardware deals than previously, due in part to the trend away from once-hot Web concepts. "We didn't do a lot of Internet deals when they were hot, and we don't do them now," Bank said, explaining that the firm is maintaining its status quo approach to deals. "We're not any more cautious or risk averse than before," Bank said, adding the firm has six to eight deals in the works and he expects to finalize three of four deals in the first quarter of 2001.

The firm's principals are reviewing more infrastructure and hardware deals than previously, due in part to the trend away from once-hot Web concepts. "We didn't do a lot of Internet deals when they were hot, and we don't do them now," Bank said, explaining that the firm is maintaining its status quo approach to deals. "We're not any more cautious or risk averse than before," Bank said, adding the firm has six to eight deals in the works and he expects to finalize three of four deals in the first quarter of 2001.

Bank took pains to explain that the firm has abstained from funding any new ventures for the last five months "because nothing compelling has come our way," not because of the economic slowdown.

He described the much-commented upon dearth of funding in Chicago as "baloney," nothing that "Firms that can't get funded here just don't have good ideas-or they have ridiculous valuations. Good ideas with good valuations will get funded here."

He predicted that "the venture business will soon revert back to the norm for investments," with a three to five-year period to exit---"and we don't see triple-digit fund returns." Bank predicted a 20 to 30 percent internal rate of return, with "some negative IRRs for funds in the last year."

"The market is a huge albatross, there are lots of failures out there," Bank conceded. Despite the current pessimistic outlook, though, Bank's message is the same: "We're not reining in or slowing down. We're still active and looking for opportunities."

© Copyright 2000, i-street magazine.