Heizer a pioneer in field of venture capital
December 13, 2004
BY MICHAEL KRAUSS
Ned Heizer Jr.'s father
didn't want him to go to Yale Law School. It was the McCarthy
era, and Heizer's father feared there were too many communists
enrolled anyway, and sure enough, he met card-carrying communists
at Yale. But his studies there set him on a course to become one
of Chicago's most esteemed practitioners of free market economics.
half a century after graduating from Yale, Heizer, 75, was honored
last week by the Illinois Venture Capital Association for his
pioneering efforts in venture capital in Illinois. He was presented
with the association's Stanley C. Golder Medal.
of the purest forms of free enterprise capitalism, venture capitalists
raise money from investors, identify fledgling companies run by
entrepreneurs, and make investments in those companies. Returns
can be high but so is the risk.
It's a business
Heizer helped invent for the entire nation.
Heizer is an innovator, an absolutely brilliant guy, and the father
of venture capital, not only in Chicago but nationwide,"
said David Coolidge, vice chairman of William Blair & Co.
and a junior executive when Heizer began his career. "He
invested in some amazing companies over the years."
to 1968 Heizer created the venture capital arm of Allstate Insurance
Co., establishing Allstate as an investment industry innovator.
got intrigued with the idea there were great opportunities in
things that weren't investment-grade securities," Heizer
said. "We invested in start-ups and turnarounds, things that
were considered crazy by most people at the time.
had great upside. The program wasn't supposed to be high risk.
It was high return. We wouldn't go into anything unless we thought
it would be successful. We had very few failures. Nine out of
10 of our deals turned out pretty well.
for cash-flow growth. That was a winning formula for years. Our
program at Allstate did very well. At the end of 1968, we managed
4 percent of Allstate's assets but delivered 50 percent of the
In 1969 Heizer
formed Heizer Corp. with the aim of continuing to invest in young
companies and gain high returns. With the help of John McDermott,
of McDermott, Will & Emery, and investment banks White Weld,
Hayden Stone and William Blair, Heizer turned to the capital markets
to raise $80 million to $100 million.
Heizer's track record at Allstate, within weeks, the partners
were subscribed to the tune of $131 million. Then a legal opinion
came out that nearly sunk the firm.
was in its infancy, and the offering became controversial.
Cutler, then as now a leading Chicago law firm, advised that an
investment in Heizer Corp. would violate the "prudent man
rule," a standard regulation that requires trustees and portfolio
managers to make financial decisions in the manner of a prudent
man with intelligence and discretion.
said that lawyerly decision almost sunk Heizer, because "any
fiduciary who made an investment in Heizer Corp. could be personally
responsible for losses." Harris Bank pulled out of the financing
because of the opinion.
already had 35 other sophisticated investors signed on, McDermott
Will & Emory and Sidley & Austin took a chance that the
"prudent man rule" was being followed, and the initial
fund raising went ahead.
McCormick Blair had an interesting solution to the prudent man
problem," McDermott said. "He told the Art Institute
of Chicago he would give them $1 million, but only on the condition
it was invested in Heizer Corp. That solved that problem."
raised, Heizer said he proceeded on a 16-year run that generated
compound annual returns of 26 percent.
In the process,
he backed companies like Amdahl, Computer Consoles, Federal Express,
Fotomat, IDC Corp., Intel, Material Science Corp., Spectra Physics
and Vacation Resorts.
missing out on a couple of major winners because he didn't like
computer company EDS set an investment threshold at a hefty 50-times
earnings. "We didn't invest," Heizer said. "Ross
Perot liked to tell everyone how stupid Heizer Corp. was. I turned
down Apple, too, because they wanted too high a price. That's
part of the business. You can't get them all."
to McDermott, Heizer Corp. was the largest independent venture
capital firm in the United States in the 1970s. Today McDermott
estimates the private equity business has grown to $80 billion,
meaning that Heizer Corp. operated with one-tenth of 1 percent
of what's sloshing around today.
himself early for a career as a venture capitalist. While at Yale
he was tapped to teach economics to undergraduates. With labor
troubles in the steel industry, he conducted a ground-breaking
financial analysis of U.S. Steel Corp. Based on Heizer's assessment,
the company was in poor condition. His work brought him to the
attention of Leonard Spacek, the legendary head of Arthur Andersen
who recruited Heizer out of law school in 1954.
years with Andersen, Heizer joined Kidder Peabody for two years
to learn the investments business. From there, it was on to a
four-year stint as a management consultant at Booz Allen and Hamilton,
where Allstate was his client. He joined Allstate in 1962, and
became assistant treasurer of the company.
changes in the tax laws, Heizer Corp. was liquidated in 1985.
Individually, Heizer continued to make venture investments, and
he founded the Heizer Center for Entrepreneurial Studies at Northwestern
University's Kellogg School of Management. He also funded the
creation of the Heizer Award with the Academy of Management, which
recognizes top academic scholarship in the entrepreneurship arena.
me to do work on entrepreneurship," says Kellogg professor
Morton Kamien, head of the Heizer Center for Entrepreneurial Studies.
"A whole generation of people got into the venture capital
business because of Ned Heizer."
At the IVCA
awards ceremony, Heizer couldn't resist telling a story that compared
Chicago's culture with that of California. When he announced to
friends in Lake Forest he was leaving Allstate to start Heizer
Corp., his neighbors expressed grave concern. Confided one close
neighbor: "If it doesn't work out, you can always come live
Heizer described a kitchen discussion at a West Coast dinner party
where the wife of the controller of Memorex sought Heizer's advice
about her husband. "I don't know what's wrong with him,"
Heizer reported the woman saying. "He's the only man on the
whole West Coast who doesn't want to start his own company."
"We've come a long way from the days of the pioneers. Ned
Heizer is one of the great pioneers of this industry."
Krauss is a Chicago-based tech writer and consultant.