Irwin to idle failed foray into venture capital: $20 million fund formed during dot-com boom, focused on financial software

March 13, 2006

Indiana's sixth-largest venture capital fund is winding down.

Founded in 1999, Irwin Ventures LLC is a subsidiary of Columbus-based Irwin Financial Corp. The fund, which in recent years reported assets of $20 million, focused on seed and early-stage investments in startup firms that create financial services software and technology.

But Irwin Ventures' speculative investments didn't pan out as expected.

"Based on the results since inception, this line of business was a financial disaster," said Ross Demmerle, an analyst with Louisville-based Hilliard Lyons.

Irwin Financial is the parent of Irwin Union Bank and Irwin Mortgage, which it recently put up for sale. Steep losses in the mortgage business have squeezed Irwin Financial over the past year, sending its stock tumbling.

Irwin Ventures debuted with high hopes during the dot-com boom. Irwin Financial's 1999 annual report said the venture fund would concentrate on investments in Internet-based companies "where the financial services experience and expertise of Irwin Ventures' management team can add superior value."

Irwin's most-recently disclosed portfolio listed a half-dozen firms, all based outside Indiana. They included New Yorkbased Zoologic Inc., which provides financial education online; Bellevue, Wash.-based NetUpdate Inc., a Webbased mortgage software-maker; and Palo Alto, Calif.-based PayCycle Inc., an electronic-payroll-management system.

Irwin Financial's financial statements logged significant losses in connection with Irwin Ventures during four of the last seven years, Demmerle noted. It booked its largest annual loss, $6.5 million, in 2001.

At the end of 2002, Irwin Ventures had investments totaling $12.6 million in six companies, according to a filing with the U.S. Securities and Exchange Commission. The estimated value of those investments had declined to just $4.5 million.

Irwin Ventures' manager, Senior Vice President David Meyercord, said the fund has not shut down. Several of the companies in its portfolio remain active, he said.

But as a company, Irwin Financial has decided to focus elsewhere, Meyercord said. Irwin Ventures will continue to review unsolicited business proposals, he said, so long as they fit the fund's focus on financial services technology.

"We still have the ability to make additional investments, should we choose. But our corporate focus right now is in other areas, so we're not applying a lot of resources to it," Meyercord said.

Irwin Ventures' activities in the Indianapolis area appear to have always been limited. Meyercord said most of the Indiana-based business plans it has seen were not in the financial technology area.

"The vast majority of inquiries we get from within the state are from folks that don't meet our criteria," he said. "We get a lot of folks trying to open hair salons and stuff, which isn't what we do."

Jean Wojtowicz, president of Indianapolis-based Cambridge Ventures LP, said the local venture market is not likely to be much affected by Irwin Ventures' decision to curtail its activity. Cambridge Ventures is tied with Irwin Ventures and Carmelbased Spring Mill Venture Partners as the state's sixth-largest venture firm, according to IBJ's 2006 Book of Lists.

In 1999, when Irwin Ventures formed, Indiana had a dearth of venture capital, Wojotowicz said. Since then, a number of funds have entered the market.

"We're very fortunate to have a lot more venture and high-risk lending going on today than we did back then," she said.

Indiana Venture Center President Steve Beck has a more pessimistic view. Even though Irwin Ventures wasn't active locally, it's always a loss when Indiana startups lose a potential investor, he said, especially since the state's list of active venture capital firms remains short.

"What's that tell you about Indiana, if they were the sixth-largest?" Beck said. "We have such a minimal supply of capital that early-stage companies are beside themselves. That's probably our single biggest dilemma right now."
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