ONE-ON-ONE
- November 1999
by Ed G. Lane “The Velocity
of Change in Our Society
and Economy is Rapidly Accelerating…”
Mayfair Capital Inc.’s chairman discusses venture
capitalism, the economy of Louisville and Kentucky
politics
 J. David
Grissom
J.
David Grissom, chairman of Mayfield Capital, Inc. in
Louisville, is a graduate of Centre College and the
University of Louisville School of Law. Grissom was
engaged in the private practice of law until March 1973,
first as an associate of Wyatt Grafton & Sloss, and
later as partner of Greenebaum Grissom Doll Matthews
& Boone.
From
August 1969 until March 1973, Grissom served as executive
vice president of Humana Inc., and then joined Citizens
Fidelity Bank & Trust Company in March, 1973 as vice
chairman and chief operating officer. In April 1977, he
was named chairman and CEO of Citizens Fidelity
Corporation and Citizens Fidelity Bank & Trust
Company. Following the acquisition of Citizens Fidelity
by PNC Financial Corp. in 1987, Grissom was named vice
chairman of PNC. On March 31, 1989, he retired from
Citizens Fidelity Corporation and PNC Financial Corp. and
formed a private investment firm, Mayfair Capital.
Ed Lane: If someone asked what you do for a living –
how would you answer?
J. David
Grissom: I would say that I am a value-added investor
in new, young and growing companies. By value-added
investor, I mean that I attempt to help the
management of the companies in which I invest. A
helpmate in the sense of advising with mergers and
acquisition activity, assisting the company in
developing relationships with commercial and
investment banks, and being a resource to the CEO as
he goes about building and growing his company.
EL: What are
the criteria that you use in deciding whether or not to
invest in a business?
JDG:
First and foremost is the quality of the management
team. I would rather have excellent management
running an average kind of business than vise-versa.
Secondly, is it a business that is scalable and
therefore can create large value over time. Those are
the two primary criteria. There are businesses that I
stay away from. I try to possess some expertise in
the type of business in which I invest. I have been
heavily involved in media, entertainment and
information technology businesses. Information
technology is one of the more promising areas.
EL: When you
use the term scalable – does that refer to a company
that can be expanded and perhaps have an initial public
stock offering?
JDG: I
want to invest in a company that can ultimately be
large and meaningful.
As you
might imagine, I see business plans from time to time
that will produce sufficient net income to reward the
sole proprietor with a good living, but it is not of
such magnitude that it could become a public company.
EL: How do
you obtain funds for venture capital investments?
JDG: All
the investments are made with my capital. I
don’t manage other people’s money – I
don’t have a fund. Mayfair Capital is the
vehicle through which I make private investments in
private companies.
EL: Do you
invest outside of Kentucky?
JDG: I
have no investments outside of the United States
although I am seriously considering one at the
present time. Unfortunately, the majority of the
investments I have made are located outside of
Kentucky. I am always anxious to find investments
that are based here in Kentucky for obvious reasons
of proximity, as well as, trying to help grow
Kentucky’s economy; I would say that only 20-25
percent of my investments are located in Kentucky.
EL: Have you
ever invested in a company starting from ground zero?
JDG: I
have invested in start-ups on a number of occasions.
In each of those cases, however, the people who were
heading the start-up had a demonstrated and
successful record in that industry.
EL: Have you
invested in Internet companies?
JDG: Yes.
High Speed Access is a company that provides
high-speed access to the Internet using cable
technology. Darwin Networks is a spin-off of High
Speed Access and it provides high-speed Internet
access using DSL technology. I am chairman of a
company in Atlanta called Primis, Inc., which
provides all types of real estate information, such
as appraisals, flood reports and title reports over
the Internet. A company based here in Louisville,
Aperture, provides physician credentialing and does
much of its value-added services to the managed care
industry using Internet technology.
EL: Are the
criteria for investing in e-commerce different from those
for a conventional business?
JDG:
E-commerce is a rapidly growing field. It is complex.
There are a lot of players. The criteria for
appropriate investment in any or all of those
variables depends on the channels of distribution, as
well as, the products or services being offered.
EL: Making a
profit will ultimately be critical to the success of an
Internet company. Have you invested in primarily
business-to-business e-commerce?
JDG:
Business-to-business is the most promising. There is
more value added, more ability to build brand equity,
more stickiness to the provider of e-commerce
services.
EL: How
closely do you monitor the operations and financial
conditions of the companies in which you invest?
JDG: I
serve on the board of directors of the majority of
the companies in which I invest. In those companies
where I am not a director, I have observation rights.
This means I am entitled to attend board meetings and
have regular interactions with management. I receive
monthly financial information from all the companies,
and I have regular conversations with management from
time to time regarding the company’s progress or
other issues with which management may be dealing.
EL: In order
to be successful, what return on capital should a venture
firm earn?
JDG: The
business of venture capital is a risky one. An
investor tries to generate returns designed to
compensate for the investments that don’t
succeed. It used to be that the venture capital
community was looking for annual returns of 25 to 35
percent. That has changed with technology and the
Internet-based economy. Venture capitalists are now
thinking in terms of a multiple of their investment
within a two to four year period. The return
expectations for people who are investing in the
places where I invest are substantially higher than
the historical 25 to 35 percent growth rate.
EL: Is
Louisville a good place to operate a venture capital
business?
JDG: It
is getting a lot better. There are several of us now
engaged in venture capital.
Chrysalis
Ventures headed by David Jones, Jr., as well as Irv
Bailey, former chairman and CEO of Providian, are
both active. As was Doug Cobb, before he went to the
Greater Louisville Partnership. We regularly
co-invest with each other. If I find something that
is appealing, I invite Chrysalis and Irv Bailey to
take a look at it.
They’ve
been kind enough to do the same thing with me. There
is clearly the ability in Louisville to fund any
promising venture capital opportunity that should
come about.
EL: Have you
been pleased with the efforts over the past few years to
consolidate economic development efforts for greater
Louisville?
JDG: It
was something that I felt very strongly about for
years. I am very pleased with the job that Doug Cobb
has done in bringing order to the whole economic
process conducted in the greater Louisville area. He
has done a superb job.
EL: What are
the strong and weak points of consolidating economic
development efforts?
JDG:
Consolidating economic development activities
eliminates duplication of effort and brings a greater
focus on both new business attraction, as well as,
retention and support of the existing business
community.
EL: What does
the greater Louisville market need to do to become more
competitive in attracting new business development?
JDG:
Louisville’s economy, like every other one in
the country, is a full employment economy. Attracting
qualified people is a big challenge for all local
area employers. It is an even greater challenge for
those employers in the information industry trying to
attract people who are computer literate. Competition
for that talent set is fierce all across the country;
there is no difference in the Louisville market.
EL: Problems
in the health care sector have affected the financial
condition of several Kentucky based health care
providers, such as Vencor, Humana and the Lexington
Clinic. Do you blame government legislation, poor
management or other factors for these problems?
JDG: The
Balanced Budget Act of 1997 has inflicted severe pain
on certain sectors of health care delivery –
notably nursing homes, home healthcare and physical
therapy – just to name three. The policy makers
and Congress have made a very serious mistake. What
they have done unwittingly is to penalize, if not run
out of business, the lower cost providers of care for
the elderly segment of our population. It forced
those very patients from the cheaper home health care
or nursing home environment back into the more
expensive acute care hospital environment. Yes, they
have been effective in reducing nursing home
expenditures and home health care expenditures, but
the acute hospital expenditures have ballooned. The
Balanced Budget Act has worked severe hardship on the
providers in that sector of healthcare. A train wreck
is about to happen in this country as it relates to
the care of the elderly.
EL: Being a
venture capitalist, does that mean you would steer away
from investing in healthcare because of unknown market
conditions?
JDG: I
would not be an investor in any healthcare provider
where the government was my primary customer. The
government has fundamentally changed the rules of the
road. The Clinton administration and the healthcare
policy makers in this country strongly prefer to have
a national healthcare system. The policies which have
been enacted and implemented over the last three to
five years have been designed to put the for profit
providers of healthcare at great economic risk.
EL: Has
technology in health care reduced the demand for
hospitals by increasing outpatient services and reducing
the recuperation time needed for surgical procedures?
JDG:
There have been enormous strides made in medical
products, services and procedures so that the quality
of healthcare in this country has improved
substantially. Improved health care has increased the
demand by the population for access to this
technology and has put a burden on the healthcare
delivery system and the economic costs of that system
as well.
EL: Have you
noted any significant trends in the stock market?
JDG: I am
not smart enough to make any predictions about the
stock market. I’ve never tried to be a market
timer. There are an awful lot of positives on the
horizon. We have low interest rates, virtually no
inflation and a global economy. Our economy is not
dependent on selling goods and services just within
the confines of the 50 states. We have a benign
federal reserve policy. Earnings are coming through
– there are huge gains in productivity largely
brought about by the technology we discussed earlier.
On balance, if one looks at the fundamentals, the
stock market has a solid foundation, and one should
feel reasonably comfortable. What could change that
– probably an external event that we have no
reason to anticipate today. The outbreak of war of
serious proportions could be such an event. If one
looks at the underlying fundamentals – interest
rates, fiscal policy, inflation, increased
productivity, global economy – one can feel
reasonably optimistic.
EL: What are
the interest rate trends?
JDG: I
don’t feel qualified to predict what Mr.
Greenspan is going to do. I am surprised that
inflation hasn’t reared its ugly head in view of
the fact that the U.S. has a full employment economy.
I would have looked for wage pressure because of full
employment. I suspect what has happened is that we
have had such increases in productivity that those
wage pressures have not yet developed.
EL: How would
you rate economic activity?
JDG:
Economy activity in this country is extremely robust.
You travel to any middle or large size city and there
are building cranes on every corner. Look at the
shortages in drywall and basic building materials.
This country is engaged in an expansion phase unlike
anything I’ve seen in recent years.
EL: What
recommendations would you make to a recent college
graduate about how to be successful in business?
JDG:
First of all, I would say that one’s work ethic
is really important in being successful. Today’s
young people do not have to be rocket scientists in
order to be successful. Work ethic is being willing
to make the commitment to one’s career both
through application of his or her skills in the
immediate job, as well as, seeking external education
and further training. Those are important
characteristics for one to be successful in business
today. I also think it is important to look in the
directions of where promise is the greatest. You can
go toward the obvious areas - technology, computer
skills - which are the fastest growing sectors of our
economy. That field could become crowded. Therefore,
one might argue for being a contrarian and going to,
for example, the rust belt of the Midwest. Great
wealth has been built in the Midwest in the last
20-25 years.
EL: If you
were mayor of Louisville or judge executive of Jefferson
County, would you recommend merging city and county
governments?
JDG:
Absolutely. Just look at the cities with merged
governments within 250 miles of Louisville –
Lexington, Nashville and Indianapolis. You will see
how well they operate and how much more responsive
the government has turned out to be with respect to
all of its constituencies. You’ll find merged
government very compelling.
EL: How would
you rate Paul Patton’s first term as Governor?
JDG: He
has been an excellent governor and works really hard
at doing the right thing. Like his efforts to
reorganize the higher education system of this
Commonwealth. It took a lot of courage to take on the
University of Kentucky as far as the community
college system; we are already seeing a lot of
results and benefits from that. It also took a lot of
courage for Governor Patton to effect reformation of
the worker compensation laws and to do so in the face
of the labor support which he traditionally enjoyed.
EL: If you
were Governor, what would be your top priority for
Kentucky?
JDG: My
top priority would be education. Education is the
fountain of promise for every young person in this
Commonwealth. Without a quality elementary and
secondary education, the foundation of a
person’s life has not been built. Without the
access to quality higher education, so many positive
things spreading from an educated population and work
force will be lost.
EL: How would
you rate Kentucky’s effort to attract new business
development?
JDG:
Governor Patton and his team get very high marks. The
quality of the state’s economic development
efforts is much more professional than in the past.
The economic development program is focused and
relatively free of politics. As a result, it has been
very effective.
EL: You have
served as chairman of the board, made substantial
financial contributions to and helped establish Centre
College’s goal to be a top 20 liberal arts college.
Why have you invested so much financial and personal
effort into Centre College’s future?
JDG: The
college made a huge difference in my life more than
40 years ago and so some of my support of the college
is trying to repay the institution for what it did
for me. I am also a firm believer in the value of a
liberal arts education. I also feel that having a
high quality liberal arts institution in the state is
important for Kentucky, as well as, for the region.
By focusing my giving in higher education to one
institution. I have a greater chance to significantly
help that institution.
EL: In your
early business career you served as corporate counsel for
Kentucky Fried Chicken. Did this entrepreneurial
experience and working with John Y. Brown, Jr. create a
positive influence on your future business success?
JDG:
Absolutely. I’ve been blessed by the quality of
people with whom I have been given the opportunity to
work. My early years as far as my business career was
enormously influenced by David Jones, the founder of
Humana, and John Brown, who with Jack Massey headed
up Kentucky Fried Chicken. I learned the joy, as well
as the pain, of being associated with a fast growing
enterprise. I should have paid John Brown and David
Jones to be associated with them because I learned an
awful lot about entrepreneurial activity, the
importance of moving quickly and the importance of
the first mover advantage.
EL: As we
approach the new millennium, what advice or suggestions
would you give business managers in Kentucky?
JDG: The
velocity of change in our society and economy is
rapidly accelerating and virtually every business, in
order to stay ahead of these winds of change, must be
organized and operated in a lean and extremely
focused fashion. To operate otherwise is to invite
pretty unpleasant results.
Ed G. Lane is
chief executive of Lane Consultants Inc. and publisher of
The Lane Report.
edlane@lanereport.com
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