From the November 2006 issue of Wealth Manager Web • Subscribe!

VC the Hard Way

"I spend 90 percent of my time on 5 percent of my clients' portfolios," says Dale Stevens, president of Grasswood Partners Inc., a Malibu, Calif. investment consultancy he founded in 2000. "But it's a critical 5 percent," he notes--a reference to the venture capital (VC) allocation that consumes the lion's share of his managerial schedule.

A tiny slice of VC demands so much attention because Stevens is no passive investor in the world of embryonic companies. That's by design. There were more than 1,500 VC funds in the United States at 2005's close, according to the National Venture Capital Association, which cites numbers from Thomson Financial. Buying a pre-existing VC fund run by someone else would be a more time-friendly approach for tapping the asset class, but Stevens prefers to do it the hard way.

Such are the options when managing money in the upper echelons of wealth management. Grasswood boasts an enviable client base comprised of the highest strata of high-net-worth individuals in addition to some institutional clients, says Stevens, who worked at Wilshire Associates from 1977 to 1990. The minimum for new accounts at Grasswood is a cool $100 million.

The firm's VC policy is to invest directly in companies and become actively involved with management. "In order to oversee and protect my clients' interests, I sit on the boards" of the VC investments, explains Stevens, who was a partner for 10 years with institutional investment consultancy Wurts & Associates in Los Angeles prior to opening his own firm in 2000. Working closely with entrepreneurs is a gratifying experience, he says, and one that he also believes will benefit his clients. But it comes with the responsibility of supervision, and lots of it.

Although it would be easier to let someone else sweat the details, he's wary of anything less than direct involvement in this high-risk corner of the private equity market. He estimates that 70 percent of VC deals are losing propositions. Among the early warning signs that trouble may lie ahead: A lack of clarity with the companies and/or management, he counsels. "My complaint with a lot of the VC deals brought to me is that I have no idea who the people are or what they're going to do with the money. Far too often, the money's mismanaged." For the handful of deals that look like they can beat the odds, he prefers to stay close to the companies and their management.

Stevens has been investing in start-ups on behalf of clients for 10 years, the last six at Grasswood. Several VC deals have passed muster at the firm, and Stevens was recently sitting on the boards of five start-up companies, with several more firms under consideration.

One of the more promising companies that he was analyzing was a tire recycling project. "A couple of guys came to me, and they had this really good idea," he says. "What they needed is working capital. And because we don't want to be the only contributor to their operating budget, what they really needed more than anything else is for me to show them how to put together a business plan that other venture capitalists would sign off on."

His preference for VC stands in contrast to a more conventional approach that dictates asset allocation for his well-heeled clients. A large amount of the $2 billion under advisement at Grasswood is in munis, an asset class that requires minimal hands-on management, he admits "When they come due, we buy more," Stevens says of the strategy for tax-free bond holdings. There's also a sizable investment in Vanguard's index fund that tracks the S&P 500, in addition to other portfolios that he describes as fairly conventional. Hedge funds, too, are part of the mix.

On balance, a relatively conservative mix of stocks and bonds dominates strategy on a dollar-weighted basis at Grasswood, whose office is located within walking distance of the scenic Point Dume State Beach just north of Santa Monica on the California coast. That frees up time for monitoring the VC corner of the portfolios--a corner that courts a level of risk that only the upper strata of wealthy individuals can tolerate.

Grasswood's clients "are all very concerned about social issues, particularly about the environment, and they want at least a portion of their portfolio sensitive to these issues," says Stevens. That includes pursuing some of the loftiest goals in health care. For example, three of Stevens' clients are invested in Oncologic Inc. (Oncologic.net), a Berkeley, Calif. biotechnology firm that's pursuing a cure for so-called solid cancers, such as those that afflict the prostate, lungs and breast. Although Oncologic's technology faces several more years of research, initial testing has been encouraging, says Stevens who has a master's degree in epidemiology. "We intend to petition the FDA for permission to begin what's called first-stage clinical trials, and it will be for breast cancer."

It takes money to cure cancer, even though the odds for success at any one company are less than persuasive, as any veteran biotech investor knows. For those who pony up the dollars, expectations of extraordinary returns are typical in exchange for harboring extraordinary risk relative to, say, owning shares of larger, established pharmaceutical giants such as Johnson & Johnson or Pfizer. There are no shades of gray in the world of the pure biotech shop, warns Stevens. "Either they'll put a product to market, or they'll lose it all."

Even so, it's not solely about the money, he continues. "When we got involved with Oncologic, no one said we needed X return. The investors simply said, 'Cure the disease.' It'd be great if we made a lot of money, but that's not the issue here. My mandate as a member of the company's board is to get the job done. Whatever the scientific team needs, we've got to get. It's a marvelous story: The scientists saying, 'We need this,' and the board saying, 'Ok, we'll raise the money.'"

Sitting on Oncologic's board with Stevens is Winston Salser, who is also a Grasswood client and someone who's more than a little familiar with turning a biotech start-up into a corporate success. Salser was a guiding force at the birth of the biotech industry as the founding president and CEO of Amgen in the early 1980s. Today, Amgen is an S&P 500-member company with more than $12 billion in sales.

For every Amgen, there are many failures and one unifying motivation for all: Invent blockbuster drugs that cure disease or other ailments, a triumph that would generate huge financial rewards for investors. Oncologic strives for no less. But success on the commercial front would also bring satisfaction on a personal level that can't be measured with financial ratios, Stevens emphasizes.

One Grasswood client has invested $1 million into Oncologic, although "it represents zip" relative to her overall wealth, he notes. "The daily fluctuation of her portfolio is a million dollars. She has a ton of money with big-name management firms you'd recognize. What she wants is a cure for cancer." Stevens adds that Oncologic's CFO has put $500,000 in the company. "Both of his sisters have breast cancer...he wants a cure."

Salser, too, notes that "quite a number of Oncologic's investors have said, 'I don't care if I lose this money--I just want to make sure these ideas are tested thoroughly. If there's any chance that the ideas would work, it's obvious that they would totally change the world. I just want to make sure that the ideas are tested by extremely bright people. And that's what we're doing."

The essence of Oncologic's approach, Salser explains, is one of targeting cancer cells directly in order to kill them without damaging the healthy surrounding tissue and organs. "That sounds like an incredible thing, and I was incredulous when I was first told that. However, it has a model that should be able to work."

But hitting pay dirt is still years away, assuming it comes. "We're still in animal trials; we're nowhere near clinical trials," reports Salser, who met Stevens through a mutual friend in the money-management business in the mid-1990s. But within 10 years, he predicts the company will have a product on the market. "I would certainly hope that within five years we'll have some very successful human trials," which is a critical step in gaining FDA approval. "If [Oncologic's] successful, it'll be enormously profitable," he admits.

Salser says he doesn't need the money that Oncologic would bring if the company fulfills its mission. He's already wealthy, thanks to his association with Amgen. Part of what motivates him now is a dedication to his profession and trying to make a difference in the real world. "I've been a cancer researcher for my whole career. When this opportunity came up, I just dropped everything I was doing. This was much more attractive."

Finding success in biotech is invariably driven by the science, but keeping a company afloat until achievement can pay the bills requires a fair amount of financial savvy. The realization inspired Salser to introduce Oncologic's management to Stevens, who brings an academic background and financial know-how to the firm. "He's the bridge between the science and the financial world," Salser says. "That's pretty rare."

Another Oncologic board member agrees. "Dale's got a good grasp of the whole financial side of the business," says William Gibson, who's also the managing partner of Crossroads Venture Capital LLC in San Francisco. "He's both a scientist and someone who's very knowledgeable about raising funds. He's on the board of numerous companies, and I think he's been one of the most-effective members on Oncologic's board."

Stevens, who predicts that Oncologic will go public in the next couple of years, says its board "is populated mostly by egg-head scientists. I'm the one person there who really does know how to talk to Goldman Sachs."

By investing directly in Oncologic and other start-ups, Stevens is effectively running his own VC fund. In fact, he's put some of his own money into the ventures, including Oncologic, and has advised clients accordingly. But like his clients, Stevens has more than just profits on his mind. "I lost my mother to breast cancer a few years ago," he says. "Two of the clients involved with this deal knew her well. I told management a couple of times: I want revenge. I want them to cure this disease."

James Picerno (jpicerno@highlinemedia.com) is senior writer at Wealth Manager.

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