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Novak and Biddle, The Worrywarts of Venture Investing

ยท Though investments in venture funds have fallen back to pre-bubble levels, there is still too much venture money chasing too few good companies. Biddle said his firm is getting beaten out on deals by other venture firms that put a higher value on a company than Biddle thinks it's worth.

Novak Biddle's partners can console themselves with money, of which they've made a fair amount. About a half dozen deals have been home runs. They include NEW Customer Services Cos. , a consumer electronics warranty company; Matrics Inc ., a radio frequency identification company; and Blackboard.

Fund I, begun in 1997, had an annual net return to investors of 79.5 percent, its biggest winner. Altogether, an investor in each of the firms' four funds would have earned a 46 percent annual return over nine years.

For Novak Biddle, being small is the sweet spot. The firm has only three partners in addition to the two founders: Andrea S. Kaufman , Philip L. Bronner and Tom Scholl . The firm will probably add a sixth partner in the next year. In an age of the mega-fund -- locally, New Enterprise Associates is raising a $2.5 billion monster for its 12th venture fund, and Carlyle and Grotech Capital Group are each in the midst of raising large funds -- Novak Biddle's funds have been relatively small. Its 1997 fund was $23 million, and its latest was $150 million.

Most of Novak Biddle's investments come at the earliest stages of a company, usually in the software, telecommunications or information security business, and almost all of them are in the mid-Atlantic region.

Of the 48 companies it has invested in, 21 came out of university or government research labs. Biddle said Novak Biddle's contacts among emerging technologists in the region are one of its more important advantages.

This type of investing is highly risky. It involves hand-wringing and hard work and intense involvement with, and coaching of, a company's management team. Mathias said Novak Biddle has proved it does it well.

"It's become the dominant early-stage investment firm" in the region, he said.

Biddle likes to quote the Private Equity Intelligence research service, which last year showed that the top-performing 25 percent of fund managers account over time for virtually all of the profits of venture investing. The research service put Novak Biddle among the 20 most consistent performers, in the company of legends such as Kleiner Perkins Caufield & Byers and New Enterprise Associates. Biddle fiercely aspires to be recognized as a member of that club, because such funds get the most prestigious investors and attract the most promising start-ups.

"I'd like to think we've entered the realm of 'The Franchise,' " said Biddle, dropping for the moment his low-ball persona.

Second Fund for Winning Firm

Arlington Capital Partners , the District-based corporate buyout firm, raised its second fund, a $575 million pile of cash.

It took nearly two years of work and some big fees paid to UBS to market the fund, but Arlington now has enough capital to do deals for at least another five years.

"The target was $500 million," said partner Perry Steiner . "We were pleased to be oversubscribed at 575, and in the end, we had to cut back a number of investors who wanted in."

Arlington was formed in 1999 by former Bell Atlantic chief executive Raymond W. Smith , Paul G. Stern , Jeffrey H. Freed and Robert I. Knibb . Stern has since left the firm. For this fund, Smith is chairman and senior adviser, not a managing partner. Steiner and Peter M. Manos joined the firm as partners after 2000.

After some early hiccups investing in money-losing early-stage companies, Arlington found its stride in recent years buying and building companies in core areas: radio stations, aerospace and defense, government contracting, business services, health care, and education companies.

One of the big wins for its first, $450 million fund was Apogen Technologies Inc ., a defense technology contractor that was an assemblage of Arlington acquisitions. It sold to British defense firm Qinetiq Ltd . for more than $300 million last year.

Steiner declined to disclose the investment return on the first fund, though he said it's in the black and in the top quartile of 1999-vintage middle-market buyout funds.

Arlington invests in companies valued at between $50 million and $250 million. At that size, using borrowing, the new fund will allow 10 to 15 investments. Steiner said the firm's investment strategy won't change. "There's a local angle to everything we've done, being close to the seat of government," Steiner said. "We love to invest in the mid-Atlantic. It's terrific to be based here and part of the Washington fabric."

Terence O'Hara's e-mail

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