Venture capital firms often become actively involved in the management of companies in which they invest. Typically, that means joining a firm’s board of directors, but once in a while it means actually becoming CEO of a portfolio company.
On June 1, Dan Hoversten left his position as a managing director in SJF Ventures’ Philadelphia office to become the CEO of Salvage Direct Inc., an online auction business for high-value cars and motorcycles, recreational vehicles, and boats. Located in Titusville, about 45 miles southeast of Erie, Pennsylvania, the firm handles the entire salvage process, including towing, storage, and titling, for major insurance companies, financial institutions, and other businesses. Hoversten, who had been a managing director since 2000, will continue to work at an advisory level with SJF Ventures by referring investment prospects from western Pennsylvania to the firm.
Salvage Direct’s founder, Robert Joyce, started the business in a one-bedroom apartment in 1998. A car enthusiast who worked as an estimator and physical damage manager for the car insurance industry, he thought that an Internet auction could bring together buyers and sellers of vehicles that would otherwise be scrapped. Titusville, which has a population of 6,000 people, had been devastated when the local steel mill closed in 1990, eliminating 1,000 jobs. Joyce relocated the business to the mill with savings of $15,000 and a loan from the Ben Franklin Technology Development Authority.
SJF Ventures I, L.P. (SJF), had been the lead investor in a $1.1 million financing round to Salvage Direct in 2002, when it had 27 employees and revenues of about $2.5 million. Hoversten joined the board at the time of SJF’s investment and later became its chairperson. The company currently has 87 employees and annual revenues of about $16 million and.
Hoversten observed: “Companies struggle to find the proper management for the various stages of the company. You need an entrepreneurial CEO to start a company, and yet a totally different skill set is needed to build that company beyond $15 million or so in revenues. When the company gets to around $100 million or ready for a public offering, it takes an even different type of CEO to handle that.”
SJF Ventures, which operates from offices in Philadelphia and Durham, North Carolina, invests in rapidly growing businesses in the eastern U.S. that have sales of at least $1 million in business services, consumer products, or “clean technologies” (reducing energy use and toxic waste). The firm – which expects repayment and investment gains in five years or less – strives to invest in companies that will create entry-level jobs and demonstrate environmental or workforce innovation.
Hoversten said: “In the venture capital model, out of 10 deals, you normally make almost all your money in one or two deals and might lose everything in three or four, and you just try to get your money back in the rest. Our investment ‘sweet spot’ is between the angel round and the first large institutional round.”
SJF, originally called the Sustainable Jobs Fund, was formed in 1999 as a 10-year limited partnership with $17.1 million in capital from eight banks and other institutional investors. Hoversten estimated that the internal rate of return would be 7 percent to 9 percent at the end of the 10-year term. About 1,600 jobs have been created or retained through SJF’s investments, according to the firm’s Durham office.
Two of SJF’s success stories are:
On the other hand, SJF also invested in Allegheny Child Care Academy, a Pittsburgh-based firm that operated day care centers. It went through a Chapter 11 bankruptcy and was reorganized as Brightside Academy. Hoversten explained: “SJF was fortunate enough to have invested using a senior note with warrants, instead of traditional equity. As a result, we were able to come out of the Allegheny bankruptcy almost intact. We did, however, renegotiate our note with a lower interest rate and longer maturity in order to help the company survive and turn itself around.”
SJF Ventures has commitments of over $16.3 million for a second 10-year partnership fund expected to close by the end of 2006, Hoversten said. He noted that the Community Reinvestment Act (CRA) “appeared to be the primary motivating factor in the decisions of banks to invest in our first fund, but financial return and CRA are equally important in bank investment decisions in the second fund. Similarly, SJF Ventures is giving equal emphasis in our second fund to both financial and social objectives.”
Investors in an SJF Ventures fund become limited partners with a partnership interest based on the amount of their investment divided by the total size of the fund. Proceeds from dividends or sale of a business are distributed on a pro rata basis to all limited partners. Prospective investors can obtain a confidential offering memorandum. Investors receive a limited-partnership agreement.
SJF Advisory Services, a nonprofit affiliate in Durham, provides technical assistance to businesses, especially in underserved rural and urban areas, helps the businesses identify grant sources for employee training, and promotes asset-building tools such as broad-based stock options. A report on these tools, “Beyond Paycheck-to-Paycheck,” is available at www.sjfund.com. The nonprofit also showcases CEOs of clean technology companies at an annual event.
According to the Community Development Venture Capital Alliance, SJF Ventures is one of 68 active community development venture capital funds that have $870 million under management.