‘When You Fund a Company, You’re Dealing With a Human Being’

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Frank R. Kline


Managing Partner

Kline Hawkes & Co.



Age:

56


Residence:

Pacific Palisades


Education:

B.S., commerce, Rider University; M.S., statistics, University of Massachusetts, Amherst


Previous Jobs:

Prior to starting Kline Hawkes in 1994, was with Lamda Capital for 10 years, which funded Super Shuttle in Los Angeles, among other companies. Before that, was at International Data Group, publisher of Computer World, PC World, etc.


Venture Capital Start:

At International Data Group when he was given responsibility for the group’s investments. “My first L.A. investment was in 1984 in MagneTek, which turned out to be a home run.”


Target Markets:

“We’ve always had information technology infrastructure; also fund health care services companies, outsourced business services, environmental services, industrial manufacturing.”


Financing:

Mostly expansion stage capital; institutional A companies and above; rarely do startups. Range is generally $5 million to $15 million. About 90 percent of capital comes from pension plans. Calpers is limited partner in all funds.


Investment Philosophy:

“We’re looking for a type of entrepreneur who has the stuff to make it happen, even if at first they don’t succeed. One guy we funded lost everything in his prior deal and was nearly broke. But there was something about him that was special; we put a team around him and it turned into a home run.”



Recent Fundings:

Santa Monica-based CaseStack Inc. (Web-based logistics provider), Rent.com (online real estate listing sold to eBay); Gardena-based Advanced Products Corp. (plastics/composites); Cyalume Technologies Inc. (Springfield, Mass. military glow-stick maker.)


Boards:

“At one point last year, I was on four boards. Recently, I have lightened the load.” Plans to remain on boards of Cyalume Technologies Inc. and Rayne Corp., a Ventura water softener company.


Gripe:

“When someone comes to you with a business plan that says they are going to go from $10 million to $100 million in five years. They have no idea what it takes to build a business plan. Another pet peeve is when they give a value to their company that has no relation to anything, like one time when a pair of businessmen said their company was worth $500 million.”


Exit Strategies:

Changed over time. Lamda 3 fund several years back, 50 percent exited via IPOs. About 20 percent of the original Kline Hawks fund exited through IPOs. “With our current funds, the majority of our exits have been trade sales, mostly strategic buys. The sale of Rent.com to eBay is a perfect example. There have also been a fair number of companies that have had offerings on the London Stock Exchange. They are more liberal in terms of regulation no Sarbanes-Oxley requirements. We’re also seeing some selling to private equity funds.”


L.A. Market Outlook:

“When I did the first fund in 1994 for Kline Hawkes, it was post-riots and post-earthquake and post defense collapse. I could just feel in the environment that there was something cooking; that feeling proved right given the boom in the late 1990s. I sense something similar now, a renewed excitement. That said, like every area, L.A. goes through boom and bust cycles with venture capital. The big negative for L.A. when I started here was the spread-out geography; it’s still somewhat of an issue.”


Biggest Challenge:

“When you fund a company, you’re dealing with a human being who’s at the beck and call of higher power. I’ve had a CEO who died on me. Others engaged in, shall we say, ‘extracurricular activities.’ We’ve had two IPO’s pulled because of health: one CEO got throat cancer. Once the CEOs get cancer, they are very hard to replace. They are the heart and soul of the company. We’ve had several failures because of this.”


Biggest Winner:

Above Net Inc. A $5.7 million initial investment yielded $116 million in 18 months during the dot-com boom. Rent.com also was a huge hit, selling to eBay for $540 million, about seven times the initial investment.


Biggest Bust:

Carlyle Systems. “Maybe not dollars wise, but I wasted a year running it. But that was in the 1980s, when you had to fix the ventures that went sour. UCLA did a case study on them.”



Howard Fine

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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