Venture Capital

The Securities and Exchange Commission has ordered the Pennsylvania state workers' pension system to hand over records of its relationship with a troubled Philadelphia venture-capital firm that is the subject of a government investigation. "They want some documents dealing with the Keystone IV, V and VI [venture-capital funds] in reference to their pursuit of the principals of Keystone," Nicholas Maiale, the Philadelphia lawyer who is chairman of the $20 billion Pennsylvania State Employees' Retirement System, said after learning of the SEC subpoena yesterday.

In a sign of the times, a company that thinks of mice as pests - not computer accessories - has reported raising the largest amount in private equity investments in the Philadelphia area in recent months. GCA Services Group Inc., of West Conshohocken, is in a business few would immediately associate with the technology-focused world of venture capital: It provides janitorial services. Year after year, only 10 percent of the deals funded by venture funds involve non-technology companies.

If officials' most optimistic scenario comes to pass, in two years, Camden will be home to a venture-capital fund that will have $75 million to invest in emerging-technology companies in the region. A down payment of $850,000 was delivered yesterday by officials of the U.S. Economic Development Administration to Rutgers Camden Technology Campus Inc., a small-business incubator that was launched in October. About $750,000 will go toward groundwork for the fund, including legal expenses and a search for professionals to manage it. The incubator is an arm of Rutgers University's School of Business at Camden, and the university raised $550,000 to qualify for the EDA grant.

Like a doctor consoling a patient, Gerald A. Schaafsma emphasizes the positives in the state of private investing in the Philadelphia region. "I can't say our region is suffering any more than any other part of the country," said Schaafsma, chairman of the Greater Philadelphia Venture Group, one of the area's largest associations of private investors and related professionals. Schaafsma, general partner of Anthem Capital L.P., of Rosemont, even detects signs of a possibly quick return to health: More than 30 percent of the region's private financing went to "early stage" companies last year, versus about 20 percent nationally, suggesting a renewed appetite for these investments, which are considered riskier than financing company expansions.

Get big fast and then implode was the trajectory of many Internet-related companies that gained momentum during the tech bubble. But some, such as Refinery Inc., of Huntingdon Valley, Montgomery County, managed to avoid that fateful arc. Unlike competitors, the Web-site-design firm did not seek venture capital that would have allowed it to grow quickly. It grew more slowly than most and did not veer from its core business. "We tried to be more grounded," said Andrew Sullivan, the company's cofounder and chief executive officer, who has a degree from New York University's film school.

When it comes to private investments in new technology companies, the Philadelphia region is doing better than the nation. Such investments, a barometer of economic risk-taking, decreased by more than 25 percent from the second quarter to the third nationally - to $4.5 billion. They increased slightly in the region during the same period, to $86 million, according to a survey by PricewaterhouseCoopers/Venture Economics/National Venture Capital Association Money Tree. Nearly 200 fewer companies were funded nationally.

Venture-capital funds returned more money to their investors than they took in during the second quarter of this year, according to a survey by the National Venture Capital Association. In a reflection of the uncertain investing environment, some venture funds raised about $1.8 billion while others returned about $2.7 billion. This is the first such role reversal since Venture Economics, the New York research firm that conducts the survey, began keeping such data about 20 years ago. Venture funds take money from large investors, such as state pension funds, and invest it in young companies that hold out the promise of rapid growth and high returns.

The amount of venture capital invested in start-up and other young companies in the Philadelphia region grew sharply last quarter even as total venture investment here continued to subside. That is the key finding of the quarterly survey of venture-capital activity by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association. Early-stage and start-up investment - some of which goes to companies that are little more than ideas - grew 55 percent in the eight-county Philadelphia region from the first quarter of this year to the second.

In the last two years, the pension plans for Pennsylvania's state employees and teachers have lost nearly $15 billion - about a seventh of their total value. Now, like a gambler doubling his bets, those plans are wagering that big, risky investments in small, unproven companies will help recoup the losses. If they're right, everyone wins: This strategy will pay for the pension increases that legislators approved last year for themselves and other future retirees, without boosting taxes.

During 1999-2000, the height of the tech boom, venture capitalists plowed a staggering $157 billion into nearly 10,000 companies nationwide, many of them Internet-related start-ups. According to data from firms that track such investments - PricewaterhouseCoopers L.L.C., Venture Economics, and the National Venture Capital Association - that was 60 percent of the total venture capital invested in the last two decades. As investors quickly learned, enormous financial backing was no guarantee of success.