December 4, 2000

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Family Values

Safeguard invests in tech companies for the long haul

By Jennifer Maselli

More on venture capital firms:

Computer Reseller News: SHUGART REINVENTS HIMSELF IN VENTURE CAPITAL ARENA (11/27/00) TechWeb Investor: Tradition, Policy Takes Toll On Japanese VC (11/17/00) Tele.com: Just a Pipe Dream (11/13/00)

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he long rows of tables in the conference room are littered with pamphlets, and the chairs draped with T-shirts, all boldly declaring the sponsor's name. As hundreds of executives file into the room, coffee in hand, they grab the pamphlets and T-shirts and take their seats. Unlike many modern executives who sport jeans and shirt sleeves, these attendees are all in suits.

Music blares and lights dance across the room as 73-year-old Warren "Pete" Musser, chairman and CEO of Safeguard Scientifics Inc., takes center stage. Outfitted in his trademark argyle sweater-vest and white shirt, Musser's smile beams out over the largest gathering ever of the "Safeguard Family"--more than 300 attendees from more than 100 member companies. On a large projector screen behind him flash the logos of all 300 companies in the Safeguard Network, interjected almost subliminally with the key words "strategy," "synergy," and "success." Musser's message to the crowd is summed up in a sentence: "Every company added to the network increases the power of the network exponentially."

That was the scene at Safeguard Scientifics' semiannual partner conference at the Plaza Hotel in New York last month. Along with Musser's speech, there were testimonials from a number of Safeguard Network companies, all with a familiar refrain. "If it wasn't for Safeguard, I don't know where we'd be," said Lucy Salhany, CEO and co-president of LifeFX Inc., a year-old company in which Safeguard owns more than 29 million shares, or 12%. "They have been an unbelievable partner helping with legal issues, business issues. We're very close to them. It's a true collaboration."

That's high praise for an investment company. But then Safeguard isn't your typical investment company; it has been a leader in developing and operating technology companies for more than 40 years. This year, Safeguard will evaluate approximately 5,000 companies and invest in about eight to 10 a month, either directly or through its nine equity funds or via its six holding companies. Safeguard invested directly in approximately six businesses last year; this year, it will invest in about 20 more. The company is on track to make more money this year than ever before; it posted about $2 billion in revenue for the first nine months. "We're more profitable now than we've ever been," Musser says.

That confidence belies a stormy market for Internet companies that has caused Safeguard's stock to drop precipitously. If the Internet high tide raised all boats, the opposite is true now, and Safeguard isn't the only technology investment firm floundering. But Safeguard has time on its side, analysts say, both in terms of its longevity and its long-range view of the markets. Safeguard's investment portfolio is diversified enough, and its management team savvy enough, to ride out the current market correction.

On a desk in a conference room at Safeguard headquarters in Wayne, Pa., near Philadelphia, sits a computer-indus-try novelty--a Novell-branded PC. It's a reminder of Musser's early ability to recognize significant industry trends. Musser invested his own money in Novell in the mid-1980s, after Safeguard's board cashed out its investment following the networking vendor's 1986 IPO. In the 1990s, Safeguard was an early investor in systems integration firms such as Cambridge Technology Partners and Sanchez Computer Associates. In 1995, it invested in Internet and E-commerce ventures such as US Interactive and the incubator Internet Capital Group (ICG).

Musser's ability to pick good investments has been apparent since he left his stockbroker job in 1953 to start Lancaster Corp. with fellow broker Frank Diamond. Together, they raised $300,000 to form Lancaster and soon after they invested in what later became Comcast Corp., a $5.1 billion communications company. In 1956, Lancaster launched Safeguard Business Systems, a provider of accounting services, which emerged as one of the company's most profitable ventures. Lancaster changed its name to Safeguard Industries in 1967 and went public on the New York Stock Exchange in 1971. Ten years later, it changed its name again to Safeguard Scientifics Inc. to emphasize its focus on technology companies.

Today, Safeguard has direct investments in 50 companies that span the technology spectrum--software, communications, E-services, business-to-business and business-to-consumer Internet companies, and services firms. In addition, Safeguard has more than 300 indirect investments via ownership stakes in venture firms and incubators such as ICG, Redleaf, and TechSpaceXchange.

When Safeguard makes a direct investment in a company, it appoints a team of its own executives to work with that company. Partner companies have access to Safeguard's finance department, legal counsel, and IT resources--in particular, Aligne Inc., a technology management consulting firm founded by Safeguard president and chief operating officer Harry Wallaesa, which Safeguard owns outright.

Safeguard encourages interaction among its investment companies, according to Santiago Pujadas, CEO and co-founder of Zer0 to 5ive Inc., a public relations and branding company in which Safeguard took a 33% stake last year. Safeguard encourages its partners to look to Zer0 to 5ive for PR services: Of its 28 clients, 17 are from the Safeguard network, Pujadas says.

The dawn of the new millennium has Musser and his Safeguard faithful preaching a new gospel: pervasive computing and Internet infrastructure. "There's a clear path to profitability, and we see the Internet as a tool to create new opportunities and profits in the marketplace," says Wallaesa. It's a three-pronged approach: the company will invest in startups that focus on integration between offline and online communications--for example, companies that offer the ability to send data to cell phones. Investment in supply-chain integration companies is next on the list. Then there's investments in startups that offer the infrastructure and skills required to host applications for businesses.

This last point doesn't mean Safeguard will dump money into the application service provider market, senior VP and chief technology officer Stephen Andriole is quick to point out. "It's very hard to differentiate yourself when you're an ASP," he says. Managed service providers are better targets, Andriole says. "The MSP is a virtual extension of the business and many of these companies are able to form strategic partnerships with companies such as IBM and Compaq," he says. Wallaesa likes the steady revenue stream from the service provider model and says his company has the gumption to make it happen. "We understand how to architect industrial-strength IT architecture and are a strong believer in outsourcing," he says.

Earlier this month, Safeguard launched its own company, Safeguard Global Services, which, according to Wallaesa, is a true "virtual MSP." Although 100% owned by Safeguard, Safeguard Global Services, which was created from the recent acquisition of Data Center Direct, will leverage other companies in the Safeguard network to actually perform many of the services a customer wants.

Safeguard boasts an experienced IT management team. Andriole, former chief technology officer of Cigna Corp., left the insurance carrier in the fall of 1997 to tackle a new type of CTO position at Safeguard. "I used to manage all of the internal systems at Cigna; now I don't deal with implementing IT at all," he says. While at Cigna, Andriole would routinely take calls from VC firms--including Safeguard--and advise them on what IT investments made sense. Now, that's all he does for Safeguard. Andriole says he's pursuing 15 to 20 "sweet-spot areas" of technology to see which companies make the best investments for Safeguard.

Wallaesa was CIO and VP of MIS at Campbell Soup Co. before leaving in 1996 to start Aligne. He's been with Safeguard since it bought his company in February 1999.

Despite the dot-com nose-dive, Andriole and Wallaesa aren't concerned about the faltering stock prices of their Internet ventures, such as ICG, which has seen its stock price fall from a 52-week high of $212 a share to a low of only $5.63 (see story below). Nor are they concerned about Safeguard's stock price, which has fallen from its 52-week high of $99 to a new low last week of $10.06. "We've seen our stock go from $5 a share to $200 a share. There are always ups and downs. We're used to it," Andriole says. Wallaesa says many of the Internet firms were overvalued anyway, and that's why they're suffering--and Safeguard along with them. "I never understood how the market could show such exuberance over these pure-play dot-com companies and offer up greater valuations than those companies that weren't pure-plays," he says. "It never made any sense."

As badly as Safeguard's stock has behaved, it's still in better shape than that of competitor CMGI, which has depreciated more than 90% in the last eight months. "CMGI has a heavier concentration of Internet companies, as opposed to the more diversified holdings of Safeguard," says Dan Renouard, VP of research for Robert W. Baird & Co. "CMGI has a very large portfolio of consumer dot-com companies, and they're currently trying to pair off some of those, close others, and sell off some as well."

Illustration by Jamie Hogan
Photos by Bruce Katz

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