Let the Next Wheelock Whitney Step Forward-May 2011
early 1961, a young broker named Wheelock Whitney—a man who would one day run for U.S. senator and governor of Minnesota; who would play a key role in attracting to Minnesota our pro baseball and hockey teams, the Twins and the North Stars; who would become a part-owner of the Minnesota Vikings, a widely recognized philanthropist, and an all-around great citizen—approached his boss at J. M. Dain & Company (today, RBC Wealth Management) with an idea.
It was 50 years ago, and several iterations of everything ago. Whitney was 35 and JFK was president. Now 85, Whitney describes himself at the time as a “young whippersnapper” salesman “trying to sell stocks and bonds.”
His idea: In 1958, Congress passed the Small Business Investment Act, a law that allowed for the establishment of Small Business Investment Companies (SBICs)—professionally managed private equity and venture capital firms. Whitney had become “somewhat informed” on the subject and wondered if Northwest Bancorporation—which would later become Norwest Corporation and after that, Wells Fargo—might have an interest in sponsoring something like this.
His boss, Merrill Cohen, told him to take a run at it, and before long, Whitney found himself pitching his idea to Goodrich Lowry, president of Northwest Bancorporation and grandson of Thomas Lowry, the man who built the Minneapolis streetcar system (thus Lowry Tunnel and Lowry Hill).
Lowry said yes, and set Whitney off to find someone to run the new business and to raise money from wealthy individuals who would invest alongside Northwest.
I know all this because (full disclosure) I just spent the better part of the past half year at my day job being paid to help compile a history of Norwest Equity Partners, which turned 50 on April 1.
In the five decades since Whitney put together the initial $100,000 from private investors to launch what was then called the Northwest Growth Fund (NGF), the firm has completed around 400 deals and has become a national force in venture capital and private equity investing. Over its long history, the firm’s capital—all but a small fraction coming from its primary limited partner, Wells Fargo—has created hundreds of thousands of jobs and billions of dollars of wealth. Along the way, it has helped build communities and launch industries.
For his part, Whitney rounded up a who’s who of the Minnesota business community. To run the new firm, he recruited Thomas M. Crosby, one of the scions of the Washburn and Crosby families that had founded General Mills (and WCCO, as in Washburn Crosby Company).
Crosby’s first board of directors (and investors) included any number of individuals who have played a key role in shaping Minnesota—Lowry, Donald McNeely of St. Paul Terminal Warehouse, Bill Norris of Control Data Corporation, George Pillsbury, David Winton, Jr., of Winton Lumber, and Robert Westbee of 3M, to name just a few.
“I persuaded them that this is a way to help the Minnesota economy,” Whitney recalls. “And it was appealing to help Minnesota’s economy along and to put money into venture capital.”
It was anything but an easy decision, however. “We knew it was something off the beaten track,” Whitney says. “We knew it . . . was no slam dunk.”
The SBIC Act launched a new investment vehicle within the financial services industry, one that eventually would make “venture capital” a household phrase and create a massive new alternative asset class—private equity. It was a good opportunity, and within a few years of the act’s passage, the U.S. was blanketed with more than 800 SBICs chasing deals. NGF slogged through the 1960s with essentially flat returns. On a relative basis, however, the firm was a huge success by just hanging in there and not blowing up, as did the vast majority of the SBICs formed at that time.
The firm survived and went through several name changes, finally becoming Norwest Equity Partners (NEP). Over the years, under the successive leadership of people like Bob Zicarelli, Dan Haggerty, John Lindahl, John Thomson, John Whaley, and Tim DeVries, NEP played a critical role in the formation and growth of a long list of manufacturing, technology, health care, distribution, business services, and consumer products companies.
Among them: Cray Research, the pioneer in supercomputers for which NEP was one of the original backers; Network Systems, whose technology helped enable the connectivity of the Internet; VEE Corporation, producers of Sesame Street Live; International Dairy Queen; Avia, the athletic shoe company; National Computer Systems, whose optical reader technology revolutionized the way standardized tests, such as the SAT and ACT, are scored; PeopleSoft (NEP was the sole venture firm in that deal) and Documentum; Tivoli Systems; Life Time Fitness; and Rosetta Stone.
While NEP provides a rich lesson in Minnesota business history, from it also emerges a cautionary tale. The firm is an object lesson in the perilously fragile and complex physics that create a critical mass of entrepreneurship and innovation.
Norwest Venture Partners (NVP), the firm’s business segment dealing exclusively in VC deals, split off from NEP at the end of the 1990s, moving all its operations to Palo Alto, California. NEP moved forward with its well-established private equity business, launching a mezzanine debt fund in 2000.
Why did NVP move? It followed the deals, and in doing so, it turns out, was the canary in the coal mine for Minnesota venture capital. In the past dozen or so years, venture capital investment in the state has been in an inexorable decline, with firms drying up, moving, or focusing on deals elsewhere in the U.S. Minnesota venture capitalists last year did just 26 deals for a total of $139.5 million, according to the National Venture Capital Association and the accounting firm PricewaterhouseCoopers. The vast majority of that money went into medical device companies.
To be sure, NEP and other private equity firms in the state are still doing deals here, creating wealth, and supporting our community, but the venture space in Minnesota is clearly in decline. Venture-backed enterprises are companies that can create great fortunes, generating money to fund the arts, universities, social services charities, and other worthwhile endeavors.
Let the next Wheelock Whitney step forward.