The Good Seed
Alan Ruvelson has been backing entrepreneurs since before it was fashionable -- and before the term venture capitalist existed
Supporter of Entrepreneurship
An individual whose assistance or encouragement fosters the creation of entrepreneurial companies
First Midwest Capital, Minneapolis
Founded in 1959
Intercounty Appliance, Commack, N.Y.
Founded in 1972
Emergent Group, Greenville, S.C.
Founded in 1968 as NRUC Corp.
It's Wednesday, September 21, and Alan "Bud" Ruvelson is on his way to meet the manager of Minnesota Technology Inc.'s equity fund for lunch. It could be pretty much any lunchtime meeting between money mavens in Any City, USA, except that Ruvelson will turn 80 on his next birthday.
The topic of discussion will be Ruvelson's plan to roll out local venture-capital firms for the state fund. The venture is vintage Ruvelson -- a deal that amply illustrates the man's concern for more than just the highest return. It is intended to finance start-ups primarily among the agriculture-based communities outside the bustling Twin Cities area by having state funds augment those raised by local corporations. It's an idea that Ruvelson has been championing for five years in the thick of intense bureaucracy.
The local venture-capital concept is just one of many pioneering ways this financier continues to support entrepreneurship. The son of a diamond broker, Ruvelson has spent more than three decades devising innovative techniques for financing entrepreneurial ventures. In 1959 he started one of the first small-business-investment companies (SBICs) in the United States -- First Midwest Capital Corp. He made the first SBIC investment in the country, to Pride Seed Corp. of Glen Haven, Wis., a player in hybrid-corn seed -- an industry that, at that time, was as potentially lucrative (and as desperate for cash) as biotechnology is today. Ruvelson also was one of the first financiers to invest in a software company. And although his own company has never made the big leagues -- First Midwest has invested $15 million in 63 companies since 1959 -- Ruvelson is credited with pioneering the concept of tax-free returns for venture-capital investors. That idea alone greatly encouraged the growth of the U.S. venture-capital industry, which in 1993 had almost $35 billion under management.
To fully understand the magnitude of Ruvelson's achievements, you have to step back and think of the world before venture capital. It was a world in which America's richest families -- the Rosenwalds who started Sears, the Bessemers who started U.S. Steel, the Vanderbilts and the Rockefellers -- doled out seed money in the form of loans to a few members of their own privileged class.
The value Ruvelson brought was that he helped make the business of financing start-ups more of a meritocracy. If an entrepreneur had a good idea and a good track record, and the numbers added up, he or she could be in the running for some of the new money available through the SBICs, such as Ruvelson's First Midwest.
Ruvelson himself was a small-business man -- he'd worked with his father in the diamond business. After campaigning for Eisenhower, Ruvelson heard about Ike's proposed Small Business Development Act. An SBIC sounded promising as an entrepreneurial opportunity, so he left his father's business to start one. The notion of money for entrepreneurs of every stripe appealed to the humanitarian in him, too; his father had preached the value of a strong community conscience and taught him that while loyalty to his Jewish community was crucial, a broader embrace of society was also important.
One of the first people Ruvelson invested in was Chris Possis, the son of a Greek immigrant who grew up in a working-class section of St. Paul. It wasn't just Possis's bid to better himself that impressed Ruvelson; it was that Possis was taking almost no salary from his new company because he was determined to make his fortune by driving up the value of his stock -- music to a venture capitalist's ears. Says Dan Haggerty, a partner at Norwest Venture Capital, in Minneapolis, "Ruvelson bet on people. He wasn't a technology investor."
Today the financial instruments that Ruvelson pioneered to make it possible for risky ventures to receive equity financing rather than debt financing are taken for granted. Not so at the time. "When we first started," recalls Ruvelson, "the banks and high-rate secured lenders thought we were going into competition with them. We tried to convince them we weren't interested in taking collateral, and that we were interested in taking a risk, and for that risk we would be compensated with a piece of the action that would give us a return with no preset limits. No one knew what we were talking about."
The equity mechanisms didn't work smoothly to begin with. "We made a lot of mistakes and figured out ways to protect our investments as we made more and more deals," says Ruvelson. In one of his first SBIC investments -- this one in another corn-seed business, called O's Gold -- the owner, a very canny farmer, sold his shares in the company to a major corn processor for a bundle. But there was no clause insisting that when an owner sold his shares he would also have to sell First Midwest's shares on the same basis. As a result, First Midwest's minority stake in O's Gold was frozen for five years until the new owners finally decided to buy its shares.
Ruvelson also engineered the first tax-free return on capital for investors. When it came time to distribute the earnings from Possis Machine Corp. -- the stock, bought for $15 a share, had shot up to a high of more than $250 -- he issued to First Midwest stockholders 4 shares of Possis stock for every 100 shares of First Midwest stock owned. (If First Midwest had cashed out of Possis and the earnings distributed had been construed as a dividend, those moneys would have been taxed.) "The theory was that this was a return on capital invested. We got a ruling from the Securities and Exchange Commission saying it was a no-action [in effect, legal], and it was never questioned by the IRS," he says. That tax-free-distribution concept, which was widely copied by other venture capitalists, was wiped out in 1984 and 1986 by capital-gains-tax legislation.
Ruvelson also was one of the first venture capitalists to back a software company -- Comserv Inc. -- in 1971. Says Comserv founder Richard Daly, "Bud had the vision to see the value of software. He rounded up several other firms to invest in Comserv as well." By 1981 Comserv had gained enough momentum to go public. "Piper Jaffray was willing to take us public in large part because we were a software company with venture-capital backing," says Daly.
As laudable as some of Ruvelson's financial innovations are, it's even more noteworthy that he has spent almost 40 years helping entrepreneurs in his local community -- a result of his father's teachings. His thinking was straightforward: rather than having his dollars chase the best bets across America, Ruvelson stuck to local deals that would help build a strong Twin Cities community. He has served on the Board of Economic Development for four Minnesota governors. He calculates that in 1969 there was $15 million in venture capital circulating in the Twin Cities region. By 1994, he believes, that had ballooned to $2 billion.
Another development with Ruvelson's energy behind it was a trade association for SBICs that represented venture capitalists' interests on Capitol Hill. Says Pat Cloherty, a national Entrepreneur of the Year judge and a principal at Patricof & Co. Ventures, in New York City, "He took the time to make his voice heard on national policies that would assist entrepreneurs and help foster a venture-capital industry. "* * *
Now it's Thursday, September 22, and Ruvelson is on his way to another business lunch. This time he's off to meet Comserv founder Rich Daly, who is starting a nonprofit software-development center for the Twin Cities. Ruvelson is helping set up the center -- still working his Rolodex and rustling up funds to help another generation of entrepreneurs. Evidently, he figures that retirement can wait.