Finance and Commerce

September 28, 2008

by Arundhati Parmar, Staff Writer

Upwind Capital's O'Reilly, now working with Manchester, targets mid-market companies

It's called "sailing upwind" --- referring to the first, most challenging leg in sailboat racing, when small decisions and adjustments can determine whether the boat will have a commanding position in the race.

That's exactly what Jim O'Reilly had in mind when he named Upwind Capital Partners, which advised tech firms and other fledgling companies on startup issues involving corporate finance and venture capital.

Now, ironically enough, as a principal at Manchester Companies' investment banking group, O'Reilly finds himself guiding Manchester's own foray into the uncharted waters of providing investment banking services for early stage companies --- a sector typicallly ignored by large investment banks. O'Reilly merged Upwind Capital into Manchester Companies when he joined the latter's wholly owned subsidiary, Manchester Financial Group, in early September.

"We haven't done a whole lot of equity (and debt) financing and refinancing of companies," said Mark Sheffert, CEO of Manchester Companies who brought in O'Reilly. "I told (Jim) that I would like to see our investment bank move more into that area than we had done in the past and ultimately I guess I made him an offer he couldn't refuse."

Now, the goal is to do about 10 transactions a year, with the focus on smaller, mid-market companies looking to raise $2 million to $10 million, O'Reilly said. Sheffert said the deals could even be smaller --- as little as $500,000. O'Reilly's former experience in technology companies means that he will look for promosing information technology, health care and medical device firms, though he'll consider other sectors, as well.

"We want to be the investment bank for the little guy," O'Reilly said. "Our target client profile for the investment banking business is a company with an emphasis value of $5 million to $25 million."

That's a lot smaller than the type of public company that an investment bank like Minneapolis-based Craig-Hallum Capital Group LLC typically works with. Those companies tend to have a valuation --- an estimation of what a business is worth by taking into account its tangible and intangible assets --- of $100 million, said Rick Hartfiel, director of investment banking services at Craig-Hallum.

Private companies that the bank works with do have lower valuations, he added. Last year, his firm underwrote deals ranging from $5 million to $200 million, Hartfiel said. That's a lot larger than Manchester Financial Group's goal of doing deals from $500,000 to $10 million.

Not everyione is convinced that Manchester's aim to help earlier stage companies raise capital is going to pay off --- either for them or the company trying to raise money --- especially given the current economic uncertainty where liquidity has by and large dried up.

"It's a tough thing to do because the companies are small, which implies a higher risk for investors and the amounts of money they need is small, which means the fees are lower for the investment banker and which means it's harder to make a living doing that," said Doug Johnson, director of the Venture Center at the University of Minnesota.

O'Reilly knows the way ahead will not be easy, but believes that his past experience --- both as a venture capitalist and as someone looking to raise money --- will be valuable in his new role. Previously, he was a vice president at Space Center Ventures, a venture capital firm in Roseville. He was also on the other side of the venture capital table, having raised $7.5 million over a three-year period as an executive vice president of VisionShare, a health care IT firm.

"One of my strengths has been taking very complicated ideas, which is most of what goes on in IT, and kind of translating that into human speak and being able to clearly communicate with (investors) the value proposition," O'Reilly said.

One person who appreciates this is local entrepreneur and angel investor Mac Lewis, who is part of the Twin Cities Angels.

Lewis said that oftentimes, business plans come in cold and land on investors' desks and the investor may not always fully understand what it is the company does or can provide. He added that many companies are turned down even before investors meet the management teams.

In those cases, having some representation through O'Reilly may help.

"Somebody like Jim can call and say, 'You know you take a look at a lot of plans, here are two or three things that make this company special' (and) that could potentially help with anybody's screening process," Lewis said.

Neither Lewis nor Johnson of the University of Minnesota worked on deals with O'Reilly but both said he has deep contacts with the venture capital community. Joy Lindsay, president of StarTec Investments LLC, whose firm co-invested with Space Center Ventures when O'Reilly worked there, agreed, saying that "Jim is very well networked within the venture capital industry."

Whether it be angel investors, private equity firms or hedge funds that O'Reilly approaches on behalf of Manchester's clientele in the future, he won't be able to do so unless he crosses the first hurdle in sailing upwind --- getting licensed.

That will happen in the end of October when he will take the Series 7 of the General Securities Representation exam.

"Right now, I am helping three companies for Manchester, but I can't do any investor presentations or go to collect checks," O'Reilly said. "It's against the law to do that."

For now, then, he is busy cramming.