Interactive Minds Closing Second Venture Catalyst Fund

With record amounts of venture capital flooding the Internet market space, you’d think start-ups seeking seed funding could do lunch and walk away with a grocery bag filled with used hundred-dollar bills.

According to research firm VentureOne
VCs invested a record $3.59 billion in the first quarter of this year, a 31.8% increase over first quarter 1998.

About half of that — $2.1 billion– went to .com firms, but ironically, the capital glut has made it harder to find launch money as a relatively small number of venture capitalists are going after larger and larger deals. A $500,000 investment, they explain, requires almost the same amount of attention and due diligence as a $5 million deal. Thus when the cash cow gets as fat as it is today, few VCs have time for appetizers when they can gorge on the 16-ounce prime rib.

Angels and a small number of “venture catalyst” firms have stepped up to the salad bar, but until recently their resources were scant, finding them was difficult and actually making a deal next to impossible.

One of the most successful of these firms, Interactive Minds of Pleasanton, Calif., is finalizing its second fund, Interactive Minds II which plans to invest $50 million in early stage Internet companies. This new fund is 10 times larger than the original one of $5 million that closed in 1997 and invested in a number of home runs including Wit Capital and

President and co-founder Randy Haykin said he plans to invest $500,000 to $1.5 million at a time compared with the first fund’s $100,000 to $500,000 range. He’s looking for e-commerce, applications, tools and other .coms. The only areas he is bypassing is hardware and pure content because their capital requirements are so large.

The investor base of the second fund is significantly different as well. The first fund was financed by 39 high net worth individuals and Silicon Valley Bank. This second one has 35 investors who are founders/CEOs of technology companies or partners at major venture capital firms who have already put in $32 million. The remaining $18 million is reserved for institutions and should close in August.

“You could say we’re acting as an advance scout for these venture capital firms,” Haykin said. The relationships also won’t hurt Interactive Minds’ portfolio companies when they look for follow-on capital as well.

While Haykin says the equity stake they get in return “varies all over the board” depending on risk and overall valuation, a typical start-up might give up a third of the company for $1 million at this early stage.

Haykin said his firm brings a lot more to the table than just money.

“Sure, most VC firms get involved with the companies in which they invest, but we have 25 to 30 individuals — I call them catalysts — who we can call on to work with our portfolio companies, to fill gaps in their management teams where they need it most: marketing, business development, sales, finance.”

Haykin called these people a “virtual management team” which he said, “accelerates our startups to the next round of financing, the next challenge, helps them develop their products and get them to market faster.” He said that one or more of his “catalysts” are involved with each company they fund. Some of them are limited partner investors who may perform their services for equity while others are consultants that perform their services for portfolio companies for less than traditional consultants would.

The value-added investing seems to have paid off for Interactive Minds and its investors. The company’s materials show an internal rate of return of 198.5% for Fund I compared with the VC mean of 22.3% and the top quartile of VC funds of 40%.

Haykin and his Brown University,and Harvard Business School classmate Carl Nichols founded the company in 1995 as consulting firm to help Fortune 500 companies create Internet opportunities. But with the overwhelming success of the venture capital business, the two partners are spinning off the consulting operation to be run by a new manager, a position they are currently recruiting for along with a new venture associate — two new someones, perhaps with hyperactive minds to fit the interactive ones with whom they work.

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