Helping Entrepreneurs Grow

January 14, 1995|By Kevin L. McQuaid | Kevin L. McQuaid,Sun Staff Writer

Look beyond the dark wood, piped in classical music and ornate furniture of Frank A. Adams' Timonium office, and the true essence of Grotech Capital Group Inc.'s president and chief executive emerges.

In one corner of an end table, for instance, sits a small block inscribed with a paraphrase of Winston Churchill's famous "Never give in" speech. Tucked behind a door is a plaque extolling the philosophy of Vince Lombardi, entitled "What it takes to be No. 1."

"Working hard and not giving up have helped me in my life, and they're very much characteristics of Grotech at large," said Mr. Adams, a former PHH Corp. executive who founded the Timonium-based venture capital firm in 1984.

"Those who are smart, honest, work hard and are persistent tend to win. We look for those characteristics in the entrepreneurs we invest in," added Mr. Adams, 49, who in 1991 was named Ernst & Young's entrepreneur of the year for the Baltimore area, for his efforts to help companies grow. Those characteristics, together with operational experience, a series of shrewd investments and a desire to play an active role in what it describes as "partner companies," have allowed Grotech to double its capital under management in each three-year period since its creation, and have won praise for the firm from entrepreneurs and investors alike.

Grotech's latest partnership was completed earlier this week, when it announced it had led an investment team in a $20 million acquisition of A&W Restaurants, a 76-year-old, Detroit-based chain with 700 outlets and $300 million in annual revenues.

"I talked to a lot of different venture capital firms like Grotech on this deal," said Sidney Feltenstein, A&W's new chief executive and an investor in the acquisition. "But Grotech was head and shoulders above them all. They're decisive, supportive and good to work with, a lot different than many venture capitalists."

Grotech obtained the capital for the A&W investment, along with money to purchase a $20 million majority stake in Royal Optical last month, from a $126 million fund, its fourth, which closed in November. By comparison, Grotech's initial fund, which was financed by and later spun off from the predecessor of investment house Ferris Baker Watts Inc., contained $12 million.

In all, Grotech's partners -- Mr. Adams, Stuart D. Frankel, Deborah A. Smeltzer, Dennis J. Shaughnessy and Hugh A. Woltzen -- have raised $213 million from pension funds and foundations and invested in 56 start-up and emerging companies, mostly in the Mid-Atlantic region. Prior to founding Grotech, Mr. Adams had received a law degree from the University of Baltimore and run a firm called Telemanagement Systems Inc., while Mr. Frankel had been president of Abell Communications Co.'s radio division. The other Grotech partners also had business backgrounds.

"What sets Grotech apart is that they have all built and know how to run companies, they have sweated over payroll through late nights and have been very successful," said Erica C. Bushner, an official at the $13 billion Pennsylvania State Employees Retirement System.

Since investing $3 million in a Grotech fund several years ago -- the first venture capital commitment outside the state -- Ms. Bushner last year elected to increase Pennsylvania's stake in the ZTC company's fourth partnership to $25 million. Like most of Grotech's investors, Pennsylvania expects to receive annual compounded returns of between 10 percent and 15 percent over eight to 10 years. At the end of that period, companies in Grotech's fourth fund will either be sold, bought out by management or converted to public companies.

"Frank brings operational, managerial and legal experience to the table, which complements the other members of their team," said Charles W. Newhall III, general partner of New Enterprise Associates, the region's largest venture capital firm. "They've got a very good list of stable investors, which is the true gauge of success in this industry."

In addition to A&W and Royal, Grotech's investments include Medical Waste Associates, operators of a medical waste incinerator in Hawkins Point; Brigham's Inc., a New England ice cream manufacturer; and Plaid Holdings Corp., the $300 million parent to Owings Mills-based clothier J. Schoeneman Inc.

Another Grotech investment, Connecticut-based TriFoods International Inc., maker of Steak-umm products, is slated to go public later this year after increasing its sales from $2 million in 1991 to a projected $86 million this year. In all, nine Grotech-backed firms have gone public since 1991. But not all Grotech investments have turned to gold.

Its biggest failure came in 1986, when Grotech lost $1 million after purchasing a stake in Joshua Slocum, a Pennsylvania retailer, because the company had misjudged upcoming trends in women's fashions. "We have made mistakes, and we have seen others make mistakes," said Mr. Woltzen, a former MNC Financial Inc. executive vice president who joined Grotech in August 1993. "We hope we can help other firms avoid those mistakes."

But despite its tremendous growth, don't expect Grotech to evolve into another Wall Street buyout giant such as Kohlberg Kravis Roberts & Co. Mr. Frankel said Grotech's future will center on investing in computer software and communications

companies, and generating profits for investors rather than simply worrying about increasing size. "What's relevant is that we be perceived as smart people who help entrepreneurs pursue their dreams," said Mr. Adams. "Which makes sense, because when they do, we get a piece of it."

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