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Targeting & Timing

The partners at JMI Equity were smiling when ServiceNow Inc. filed documents recently for a planned initial public offering.

A San Diego venture capital firm, JMI has a 54 percent stake in ServiceNow, a fast-growing San Diego company that provides cloud-based computing and information technology services to businesses.

Paul Barber, JMI’s managing general partner, wouldn’t talk about the investment, citing a federal regulatory “quiet period” that prevents comment on upcoming IPOs, but noted that earlier exits have generally benefited investors.

Once a business issues stock, investments in the company can be more easily sold. As an early investor in ServiceNow, most recently pumping in $5 million in 2006, JMI has a chance to realize a profit — especially if ServiceNow’s shares appreciate when they’re issued.

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JMI is by far the largest investment firm based locally, with about $2.1 billion in capital under management. In late 2010, the firm raised $875 million for a seventh fund, the largest in its 20-year history.

Investment Team

Investors include public and private pension funds, endowments, fund of funds, and a handful of individuals. The company’s name derived from John Moores, majority owner of the San Diego Padres whose family has invested in all seven funds, but remains a limited partner and has no involvement in how the money is deployed, Barber says.

“We’re growth equity investors,” Barber said. “The areas that we’re most heavily in are software, the Internet, business services and health care IT.”

In 2011 and through the end of March, JMI did eight new investments; in its two decades, it’s done about 100 investments and currently has 42 active companies in its portfolio, Barber says. Generally, companies getting funded have revenue ranging from $10 million to $50 million and are operating in fast-growing industries. Many of them are founder-owned businesses and aren’t receiving venture capital.

Two winning JMI investments made in San Diego are Arrowhead General Insurance Agency, sold for a reported $395 million in January, and DriveCam Inc., which provides video recording systems for transportation fleets and raised $85 million in new private equity last year.

Perhaps the most successful investment was DoubleClick, an Internet marketing firm, acquired by Google in 2008 for a reported $3.1 billion. Asked what JMI’s cut was, Barber just said, “We don’t reveal dollar figures, but it was a good outcome.”

David Titus, president of the San Diego Venture Group, says the recent increase in planned IPOs and a generally improved stock market in the past six months have helped spur more venture investment activity.

The IPO Catalyst

“Clearly, as you get a healthier IPO market, it obviously gives venture capital firms more ways to profit from their investments, which encourages people who fund them to loosen their purse strings a little bit,” Titus said.

In the first quarter of 2012, 20 companies conducted IPOs, raising $1.4 billion, compared with 11 IPOs that raised $768 million for the like quarter of 2011, according to Dow Jones VentureSource.

While the climate for investing appears to have gotten better, some locally based venture firms aren’t actively raising money.

Mission Ventures says it has about $500 million in three funds that it’s managing. Managing Partner Robert Kibble says it’s managing 20 companies. It has plans to raise a fourth fund, but declined to say how much is targeted.

Forward Ventures, which concentrates on life sciences, is managing its current portfolio, and not adding new pieces.

“We’re focused on completing the investments we have,” said Stan Fleming, managing member of Forward, which had about $400 million in capital under management.

Lull for Life Sciences

Fleming says market conditions within biotech and life sciences aren’t as bright as some other industries, such as high-tech.

“The amount of institutional money that’s come into biotech venture community is substantially down, not only in dollars but in the number of firms that are getting funded, compared to where it was five years ago,” he said.

Rather than investing in middle and later stage companies, Avalon Ventures, which is based locally and has more than $500 million in capital deployed, invests mainly in early stage and startup companies.

“We believe this is the most challenging and rewarding period of company creation,” said Avalon’s website. “We are former entrepreneurs driven by passionate people pursuing disruptive ideas in ever changing market environments.”

Avalon, founded in 1983 in San Diego, was an early investor in Zynga, a maker of social network games such as “Farmville” and other games played on Facebook. When the company went public in December, Avalon’s stake was valued at more than $400 million. Steve Tomlin, general partner, says the firm hasn’t cashed out and is in the process of raising new money for other promising targets.

“We’re very active. We’ve done several fund raises recently and will be doing more eventually,” he said, without providing actual dollar figures.

Venture firms don’t like to talk about the investments that failed, but it goes with the territory, several venture industry sources say.

Barber says JMI has lost money on several investments it made, usually on earlier stage companies where the market didn’t develop as expected. “It’s a small minority of the 100 investments that we’ve done over the years,” he said.

To increase the odds of investing in successful companies that either go public or are acquired for fat multiples on the stake, JMI and other venture firms try to limit the risk by considering later stage and more mature companies. But that doesn’t mean younger companies can’t find new capital, says Titus.

“Early stage companies are getting it, but it’s difficult,” he said. “You have to have a very solid business plan, a good management team and good execution.”

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