Banking companies interested in getting in on the technology boom have been using their venture capital units to invest in Internet-related firms.
In the first half of 1999 banks invested $79 million in Internet-related companies. Six years ago they invested $750,000.
Though the amount seems relatively tiny, the profits can be magnificent.
"Some of the recent Internet deals have offered very high returns" in a short amount of time. "This is attractive to anyone willing to invest money, bank-affiliated or not," said John Taylor, director of research at the National Venture Capital Association in Arlington, Va.
The activity is striking: In the first six months of this year, investments by banks' venture capital units in Internet-related enterprises were 155% higher than in all of 1997.
Chase Manhattan Corp., BankBoston Corp., Wells Fargo & Co., Bank of America Corp., and Citigroup Inc. are among the largest players. Each has its own style of choosing dot.com investments.
Chase's private equity arm, Chase Capital Partners, generally relies on outside venture capital firms to guide its choices. Some 11% of the company's $10 billion venture capital fund is in technology, including the Internet.
In one of its more successful transactions, Chase, with the help of Flatiron Partners, a New York-based venture capital boutique, invested $29.5 million in StarMedia Network Inc., which runs a Web site for Spanish- and Portuguese-speaking users.
StarMedia went public this year, bringing Chase about $240 million in paper gains.
"Our Internet strategy is to invest in as many good companies as possible," said Bob Greene, managing partner at Flatiron. "Think of us as an outsourced extension of Chase Capital Partners' practice."
Chase's venture capital unit contributed $1 billion to the banking company's total revenues of $18.66 billion in 1998.
Banks are also using their in-house technology expertise to help them make investment decisions. Three years ago Citigroup's Citibank unit created a joint venture between its investment group and its technology group. Citibank Venture Capital invested $30 million in the Internet last year, 0.43% of its total portfolio.
Venture capital investments of all sorts have done well for banks. Returns on all U.S. venture capital investments average 25% to 35% annually, according to PricewaterhouseCoopers.
Technology investments are particularly lucrative.
"In the past, we had a broader strategy, but three years ago we honed down to the venture capital tech sector because we found the greatest opportunities there," said Promod Haque, co-managing general partner of Norwest Venture Partners, a unit of Wells Fargo.
Norwest Venture recently earned more than $750 million on a $12 million investment in optical transport manufacturer Cerent Corp., which last month agreed to be bought by Internet equipment provider Cisco Systems for about $7 billion.
Given banking companies' relatively conservative approach, they are more likely to be interested in late-stage financing of Internet firms, said Kirk Walden, national director of venture capital research at PricewaterhouseCoopers. "The investment levels become substantial but they are less risky."
Mellon Bank Corp., which has operated a venture capital unit since 1996, allocates 25% of its investment portfolio to high-growth technology and start-up Internet companies.
"We're investing in several tech funds, like Grotech Partners" of Baltimore, said Lawrence E. Mock Jr., chief executive officer of Mellon Ventures Inc., the Pittsburgh-based banking company's venture capital unit. "We leverage off their expertise and mitigate the risk on early stage technology," he said.
Banks are also making investments in Internet-based financial services firms. Besides generating returns, this type of investment "can be a much cleaner way to get credit for e-activity," said Michael Poulos, a director in the e-commerce practice at Oliver, Wyman & Co.