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Spinoff Doctors

VC firm frees and rehabilitates small tech firms languishing inside large companies.

One of the great dramas of the 1990s was watching large companies race to get larger through mergers and acquisitions. The lure of hot new technologies and plentiful cash from the public markets combined to create a tidal wave of M&A activity, especially among the new-technology giants like Cisco Systems, Intel, Microsoft and Network Associates Technology.

Many of those acquisitions, of course, did not work out as planned. And now those acquisitive parent companies are finding themselves burdened with underperforming divisions or product lines.

Fortunately, both the unhappy parent company and the languishing technology business inside it have a new champion. Garnett & Helfrich Capital, a new private equity firm, is actively seeking out such companies. Unlike traditional VCs that prefer freshly minted companies and eager young entrepreneurs, Terry Garnett and David Helfrich, both 47, are looking for companies that may be "broken and orphaned" within a larger organization.

By bringing in new management, new technology and, of course, new capital, Garnett & Helfrich hopes to revitalize these orphans into full-fledged independent companies. This unique approach to investing has garnered them a war chest of more than $250 million from investors, including Harvard and Stanford universities. "It's a venture buyout process," says Garnett. "It's a buyout on the front end, but it's also a venture process in terms of growing the business."

Helfrich says the firm may invest as much as $30 million into each deal. Nearly all the investment is used to "spin it out" from the parent company; ideally, very little is spent on development. "Unlike ventures where you have multiple rounds of financing, this is a single investment-we want to buy and run the company," Helfrich says.

The highest value the firm brings to a "spinout" is finding new management. Garnett is proud of the firm's hands-on approach to working with portfolio companies. "The typical [buyout fund's] approach is to back an existing team," he says. "But that may not be the case here. We're not afraid to step in and recruit that team." Both partners have deep operational experience in technology companies.

The ideal target for Garnett & Helfrich is a technology company with revenue of between $20 million and $100 million. The company should have a solid customer base and a reputation for great technology. They aren't looking to risk money on unproven ideas. "The hardest part of the startup process is getting customers," says Garnett. "There's a lot of great technology, but some customers just don't buy from startups. We're looking to buy businesses that are doing $30 [million] or $50 million now and can grow to $100 million and beyond."

This story appears in the November 2004 issue of Entrepreneur. Subscribe »