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 Picking winners takes patience, nerve

Venture capitalist doesn't fit typical business model
Bill Husted -  AJC Staff
Sunday, June 12, 2005

J. Leland Strange, chief executive officer of Intelligent Systems, says it with a smile, but he's not joking: "We would not be a good MBA study." 

"It's hard to say what business we are in," explains Strange. 

Whatever you want to call it, the Norcross-based company is a rarity among technology firms. It's been around since 1973, weathering the tech boom, the tech bust and the return to semi-normalcy --- staying in the black all the while. 

Strange's hestitation to label Intelligent Systems is understandable. It started as a company that made color graphics monitors and now is --- pick one --- a venture capital firm that invests in companies; a high-tech incubator designed to nuture start-ups as well as invest in them; a consulting firm; an operating company with a majority interest in smaller technology companies; a place where companies can lease some space. 

The easiest way to picture how Intelligent Systems makes money is to think of a farm. During planting season, the farm operates with more money going out than in as seeds and fertilizer are bought and the fields tended. When the harvest comes --- and if the weather has been favorable --- money comes in. 

That's why Intelligent Systems has years like 2003, when it operated at a loss of $4.8 million on revenue of $13.3 million. And why it also has years like 2004, when it had a $2.6 million profit on revenue of $22.3 million. 

"We are always investing in companies that are not making money," Strange said. "It's the nature of what we do." 

The weather has been good for Intelligent Systems. Unlike some venture capital funds, there's no huge rush to turn a new investment into an IPO or a sale. Investments can last years. And instead of accepting dozens of failures in a search for one long shot winner that pays big, Strange said his company settles for smaller payouts and a reduced failure rate. 

Most experts put the failure rate of the type of start-up that Intelligent Systems takes on at 80 percent or so. Intelligent Systems does much better, according to executives. 

Bonnie Herron, Intelligent Systems' chief financial officer, said the company has had stakes in 35 companies over the past eight years. Twenty-three emerged from the start-up phase, and half of those were profitable for Intelligent Systems. 

"We averaged a five times return on our aggregate investments," she said. "Not bad --- given that this period includes the dot-com bubble which we avoided for the most part," she said. 

Intelligent Systems still has about one-third of the 35 companies in its portfolio. The others either failed or went their own way. 

"We don't make predictions of future values ... but we would expect to achieve a similar result: that 50 percent of them will be profitable for us," said Herron.

Despite years of picking winners, Strange said he has "no formulas" for deciding which companies in which to invest. It isn't simply a matter of looking at a business plan.

"We are not big on having sophisticated business plans," he said. "It's intuitive gut-type stuff."

However, selecting the right company isn't as random as Strange's comments makes it seem.

"We differ from most venture capital firms in that we believe the product is the key, vs. management being the key," Strange said. "Give me a product with great potential [and] I can put in some good management and have an excellent company. Give me a lousy product, and I can put in excellent mangement and it will fail."

Strange is quick to tell the management of companies under consideration when the product isn't right.

Often, the new company is the love child of the founder and love can be blind to the realities of the marketplace.

"We try to be pretty blunt," Strange said. "We don't let the guy leave the room too much in love."

One of the companies in the portfolio that excites Strange the most is CoreCard Software. Intelligent Systems not only owns about 85 percent of the company, but Strange also is its chairman and managing director.

CoreCard is a spinoff --- founded in 2001 --- from PaySys International. It offers software used in credit card issuing and is sold to banks, credit unions and retailers. It is designed to take care of back-office functions such as new account setup, account management and authorizations.

Although Strange is willing to step in when management of a new company doesn't seem up to the task, he said he especially enjoys tutoring a company's leaders so they can stay in charge. "We'll give you a shot," Strange said.

Strange would be considered a workaholic by many. Aside from his management tasks, he can often be found doing odd jobs around the company's facility on Shackleford Road in Norcross.

When a new countertop was needed for an employee snack area, Strange --- who has a bachelor's degree in industrial management from Georgia Tech and an MBA from Georgia State University --- made it himself. The finished product is a trendy-looking slab of colored concrete.

Strange is the largest shareholder in Intelligent Systems with 16.5 percent, followed by the Omaha investment firm Wallace R. Weitz & Co., with 14.5 percent. Management and directors hold 23.8 percent of the company's stock.

Shares have been fairly stable over the years in the $2 range, although they have traded as high as $14.50 in 2000, and as low as 75 cents in 2003.

Strange, 64, has no retirement plans. Over the years, the company has become more than a job.

"I don't separate work and play," he said. "I enjoy being immersed in what I do."

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