Far From Wall Street and Silicon Valley, a Focus on Family Ties

MILWAUKEE — When the hedge fund manager David Einhorn was just another investment analyst in the mid-1990s, his family gave him $500,000 to get his fund, Greenlight Capital, off the ground. Now that he is a billionaire after a career of doing battle with large corporations, he has returned the favor.

A world away from Wall Street and the tech money culture of Silicon Valley, the Einhorn family started a venture capital firm here, which raised a $40 million fund last year.

David Einhorn is the largest investor in the fund, run by his brother, Daniel, and their father, Stephen. The firm, Capital Midwest Fund, also led by another partner, Alvin Vitangcol, aims to tap the Midwestern work ethic and has ambitions of changing the way early stage investments are run.

“This isn’t Silicon Valley, where you’re almost encouraged to fail a couple times, and your next opportunity is in walking distance,” said Daniel Einhorn, who is 40.

Capital Midwest, however, is still a smaller player in the sector. Located in an office building across the street from a strip mall near the edge of the city limits, the company got started years after prominent venture firms in the region and around the country had established themselves. Its fund is about a fourth the size of the industry average, according to Thomson Reuters and the National Venture Capital Association.

But the company has its own views on how to manage investments. Instead of merely serving as an angel investor that provides money but little hands-on support, Capital Midwest pays close attention to a company’s ability to chart a path to generating revenue. And if a company financed by the new fund doesn’t provide the investors an exit within five years — through an acquisition — then Capital Midwest requires the company to buy back its shares.

Daniel Einhorn doesn’t hesitate to put executives on the spot. Last month, surrounded by Brewers memorabilia in his office, he questioned the chief executive of one of his portfolio companies. It was a start-up based in Ann Arbor, Mich., called CytoPherx, and the firm was discussing clinical trials of a medical device that were not going smoothly. At one point, with the receiver on mute, Mr. Einhorn said the chief executive was making a “poor me” excuse.

So far, Capital Midwest has benefited from a scarcity of venture capital in the region. Its current fund had an internal rate of return of about 43 percent through late August, according to Daniel Einhorn. In March, the firm sold its stake in one company, Therapeutic Proteins, which manufactures generic versions of biological drugs, for double its initial investment.

David Einhorn, 43, sits on the advisory board but is not involved in the day-to-day operations of Capital Midwest. While they work in different sectors of finance, the two brothers share a contrarian spirit when it comes to investing.

Unlike many hedge funds that prefer a low-key, almost invisible, approach to their holdings, David Einhorn rose to prominence with short-sale bets against Allied Capital and Lehman Brothers. He has mastered the art of harnessing the spotlight to hammer away at firms he views as troubled.

Family ties were enough to persuade David Einhorn to invest in Capital Midwest. He and his family committed $15 million out of $40 million to a second fund the firm started.

“My parents were big supporters when we launched Greenlight,” David Einhorn said in an e-mail. “When Dad and Danny started Capital Midwest, I was thrilled to support them and the firm.”

Daniel Einhorn sees little need to measure his track record against his brother’s, whose comportment with corporate management is the stuff of Wall Street legend. Pictures of David Einhorn decorate Capital Midwest’s office, but here, the hedge fund manager is just family.

“You can’t live your life trying to compete with your brother,” Daniel Einhorn said. “I wish him all the success in the world. I don’t need to get to that level.”

And certainly, a good portion of the investors for the second venture fund were local foundations and dozens of individuals, many of whom were drawn in by longstanding relationships with Stephen Einhorn rather than by a need to chase after a star Wall Street hedge fund manager.

The family has been based in Milwaukee since 1976, when Stephen Einhorn, 69, left New Jersey with his wife and two young sons and started an investment banking business, a firm that became Einhorn Associates, from a bedroom office. Daniel Einhorn, whose career began in country club management and took him to a Texas hedge fund and a position overseeing an investment portfolio at an insurance company, joined the firm in 2004.

Only recently did the family move into venture capital, when Stephen Einhorn, who had a long career advising specialty chemical companies, opted to try something new. In 2008, tapping Stephen Einhorn’s local connections, the firm raised its first venture fund, of just $4.5 million, and became known as Capital Midwest.

With few competitors in the region, the new fund was able to invest in 11 young companies. One went bankrupt last year, and the others, though they have yet to provide a hoped-for exit, are still in business.

“The bottom line is, there’s a lot of low-hanging fruit here — a lot of great opportunities and very few funding sources locally,” said John Neis, managing director of Venture Investors, a competitor firm based in Madison, Wis., that manages about $200 million.

Daniel Einhorn has focused on companies in the biomedical sector. After his daughter, Emma, received a diagnosis of leukemia at age 3, Mr. Einhorn raised more than $50,000 for cancer research and was honored by the Leukemia & Lymphoma Society in June. Emma, now 7, has been in remission for 19 months.

Family connections have helped the venture capital firm, but not all have proved fruitful. Sheryl Sandberg, the chief operating officer of Facebook, is Daniel and David Einhorn’s cousin. She arranged a meeting this year with one of Capital Midwest’s portfolio companies, LiquidCool Solutions, to discuss using the company’s technology to cool Facebook’s computer hardware.

The meeting did not go particularly well. Soon after, for broader reasons, Capital Midwest replaced LiquidCool’s entire management team. Such a move might seem unusual in Silicon Valley, where founders are often chief executives and are closely identified as crucial to the success of the firm.

Capital Midwest tends to keep its distance from flashy young companies. A frequent target of Daniel Einhorn’s scorn is Groupon, a Midwestern company that became a darling of Silicon Valley but has suffered since its public debut last year. Daniel Einhorn says he advised David to bet against Groupon when it went public. The hedge fund manager declined. (A representative of Groupon declined to comment.)

“He still owes me for that one,” Daniel Einhorn said with a laugh, adding, “It was one of the best ideas I’ve had.”