CHICAGO – Dan Phelps of Opus Capital recently sat down with the Illinois Venture Capital Association to discuss his firm’s investment strategy and his take on the overall investment landscape.

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Illinois Ventures Capital Association: You recently joined Menlo Park, Calif.-based Opus Capital. What motivated you to join that firm?
Dan Phelps: My primary motivation to join Opus was the team. The Opus team has a long history of successfully managing venture funds at Weiss, Peck & Greer and Lightspeed Venture Partners.

Collectively, the team has invested in more than 350 companies during the last two decades resulting in 80 successful outcomes including 50 IPOs. Some of the previous successful outcomes include Adaptec, Airgate, Brocade, Ciena, DoubleClick, FileNet and Harmonic.

In addition to being very successful venture investors, the Opus partners have strong operating experience. Gill Cogan was the CEO of Formtek before becoming managing general partner of Weiss, Peck & Greer and a founding general partner at Lightspeed Venture Partners.

Dan Avida was a founder and CEO of Decru, which was sold to Network Appliance (NASDAQ: NTAP) in 2005 for almost $300 million.

Before that, Avida was a founder and ultimately CEO of Electronics for Imaging (NASDAQ: EFII). Carl Showalter was previously vice president of marketing at Juniper. This operating experience and perspective is enormously helpful to our management teams.

Lastly, the team believes strongly in being actively involved with portfolio companies and works hard to be supportive of entrepreneurs. This was the approach we took at Duchossois Technology Partners and it’s one I’ll continue at Opus.

 

IVCA: You previously served as a partner and founding member of Duchossois Technology Partners. Please describe how you will continue to work with that firm moving forward.
DP: I’ll continue to maintain a close relationship with the Duchossois organization going forward. I’m very proud of the portfolio we built there and am committed to continue serving as a director on all of my Duchossois portfolio companies.

In fact, we were fortunate enough to have Lucent acquire one of the Duchossois portfolio companies (Mobilitec) at the end of 2006. Mobilitec provides a software platform to mobile carriers that enables and manages content downloads such as ring tones, wallpaper and Java games.

IVCA: Where will you be based? Will you be looking at Illinois- and Midwest-based deals?
DP: Opus’s office is in Menlo Park on Sand Hill Road, which is where I spend a considerable amount of my time. I will continue to look at Midwest-based companies and our firm considers investments across the U.S. and in Israel.

We believe it is most helpful to be geographically close and very engaged with our companies especially with earlier-stage investments. I would expect our applied technology investments to be more geographically dispersed and very likely in the Midwest.

IVCA: Opus Capital invests in early and seed-stage companies. What is the typical investment size per deal?
DP: As early stage investors, our approach is to be the first institutional investor and to serve as the lead investor throughout our involvement with portfolio companies.

Our fund has made six early stage investments to date – some of which have been seed investments of less than $1 million – as well as leading a $10 million financing for Kidaro and a $7 million financing for Spock. Kidaro provides desktop virtualization software and Spock is a search engine for people.

Our applied technology strategy focuses on mature service businesses with $50 to $200 million in revenue and positive EBITDA. We acquire majority stakes in companies that we believe could operate more efficiently through a greater use of technology.

We see a large gap between the productivity-enhancing software and systems available today and what middle-market companies have adopted. We are looking to partner with management teams to reexamine business processes and to help drive efficiency through leveraging IT tools.

We’ll compete with traditional buyout groups in this approach but with much more emphasis on operational change and how leveraging IT can impact the business. These investments will be considerably larger than early stage investments with equity checks of $15 to $25 million. We’ll also use debt in these investments.

IVCA: Which industries do you target?
DP: On the early stage side, we focus on the networking, software, semiconductor and Internet sectors. On the applied technology side, we are focusing on the business and consumer services sectors.

Examples include employer services (payroll, benefits administration and staffing and recruiting), third-party logistics along with customer care sectors like direct marketing, warranty administration and promotions management. We intend to take a broad approach to service businesses.

IVCA: Opus Capital has a strong history in investing in Israel. Please describe that market as compared to North America.
DP: Israel’s culture is very supportive of entrepreneurship and the government supports technology development in a number of ways. Through the required military service, many Israelis are exposed to the development and use of a broad range of technologies from wireless communication to IT security.

The ideas for new companies are often developed during military service, which is also a time when strong bonds among members of a unit form the basis of a start-up team. Immigration of scientists to the country and strong technical universities have created a workforce with a concentration in technical talent.

These are the ingredients for new companies built on technology. Those companies then need to develop markets for their products in Europe, Asia and the U.S. The Opus team has extensive experience assisting in the transition from development in Israel to accessing markets around the world.

IVCA: What is your opinion of the venture capital industry in 2007?
DP: We continue to see strong deal flow and high-quality investment opportunities. On the west coast in particular, though, the best deals are very competitive.

Our approach is to begin working with strong entrepreneurs at the earliest stages by providing seed financing. We believe this is the best approach in the current competitive market rather than competing for access when companies seek subsequent financings.

Given the low numbers of venture-backed companies reaching IPOs, we are also sensitive to capital requirements to reach profitability for each company. M&A transactions in 2006 averaged $50 million for venture-backed companies. Given this likely outcome, we believe finding more capital-efficient businesses is important.

IVCA: What are your thoughts specific to the Illinois venture community?
DP: I continue to believe there will be good early stage opportunities in Illinois in certain sectors. Duchossois was an early investor in SmartSignal, which provides software for monitoring and predicting when heavy equipment will fail.

The core technology was developed at Argonne National Labs. The customer base includes Caterpillar and Detroit Edison, which explains why this company should be based in Illinois.

In addition to software development, there are likely to be good opportunities in wireless technologies, Internet and financial services technologies in Illinois based on local talent and larger resident companies in these areas.

IVCA: What local organizations do you view as most supportive to the industry?
DP: I’m a big believer in the IVCA. I think it plays an important role in the local venture and private equity industry.

At Duchossois, we were founding members and early supporters of the IVCA. The recent IVCA awards dinner with more than 500 attendees is a good example of how this organization has grown over the last several years and the level of involvement from the community it has.

I’m currently chairing the IVCA Events Committee. We’ve done successful events in collaboration with the Illinois IT Association and TiE (The Indus Entrepreneurs). These groups are both important to the local technology and entrepreneurial community.

As an alumnus of the University of Chicago Graduate School of Business, I also get involved with various entrepreneurship events there and feel they are very supportive of the community. While there are certainly others, these are the ones with which I’ve been personally involved.

IVCA: What do you do when you’re not investing?
DP: I have a son and two daughters who keep my wife, Eileen, and me pretty busy with their sports and other activities like Irish dance. I also like running and completed my fourth Chicago marathon this past fall along with my wife.