The Bank of Dell is now open

With his Dell Computer Corp. already one of the Internet's phenomenal success stories, Dell Chairman and CEO Michael S. Dell is increasingly putting his own money into a stream of Internet and electronic-commerce startups.

Dell's (Nasdaq:DELL) MSD Capital LP, a personal-investment firm formed last year, has quickly become one of the top investors in e-commerce and Internet startups, prized as much for its namesake's reputation as its fast-growing portfolio of companies. Backed by an estimated $1 billion of Dell's money, MSD Capital is buying stakes in companies aiming to transform industries as varied as automobiles and consumer marketing into online businesses, according to a review of public filings and interviews with venture-capital groups.

Among its hits: Cerent Corp., a tiny networking-equipment maker that Cisco Systems Inc. has just agreed to buy for $6.4 billion in stock.

MSD is "being very opportunistic in going after the hot deals and hot sectors. Michael Dell's cachet is successfully getting MSD into these deals," says Todd Dagres, a venture capitalist whose Batterymarch Ventures has invested with MSD Capital.

For instance, MSD has purchased stakes in e-commerce startup BeFree Inc., which helps electronic retailers increase revenue by adapting the store-within-a-store concept to the Web; and webMethods Inc., which helps businesses build electronic links to suppliers.

Another key investment: Greenfield Online Inc., whose online consumer surveys "are changing the whole area of marketing research and business intelligence," says Jerry Murdock, whose InSight Capital Partners has invested along with MSD. Greenfield one day may be able to instantly poll a million online consumers, compared with the more limited telephone and mail queries now used, Murdock says.

Dealing with buyers
Neither Dell nor Glenn Fuhrman, an MSD partner, agreed to be interviewed on the company's investments. But Nicholas J. Hanauer, an early investor in Amazon.com Inc. who has discussed Internet investing with Dell, says that "if there is a theme in his investments, it's (buying into) companies that share his view of how to successfully interact with consumers." Dell, he says, "has a unique perspective on what it takes to transform industries."

Dell's newest investments also involve companies that deal directly with buyers -- the hallmark of his Dell Computer. For instance, CarsDirect.com, based in Sherman Oaks, Calif., can deliver a new car directly to a customer's driveway -- unlike rivals such as Autobytel.com Inc., which refers buyers to dealers. MSD also put $5 million into Works.com Inc., an Austin, Texas, company that sells office supplies wholesale over the Internet. Unlike rivals such as Staples Inc.'s Staples.com and Office Depot Inc.'s OfficeDepot.com, it doesn't have storefront operations to support.

Previously, Dell had made successful bets on a range of chip and software companies, such as Jato Technologies Inc., Rambus Inc. and Knowledge Adventure Inc. But since forming MSD Capital last year, his investments have targeted e-commerce and Internet infrastructure companies.

That focus has given MSD a leg up in hotly contested deals. Gordon Hoffstein, chief executive at BeFree, of Marlborough, Mass., says his company "tried to align ourselves with investors who can take us into their Kieretsu. We saw Michael Dell as being involved in a lot of infrastructure plays that can open doors." (Kieretsu is a Japanese term describing a network of related companies.)

Venture capitalists say Dell's investments are largely "late-stage" purchases, meaning they are stakes in more-established companies that are just shy of making a public offering. The amount invested tends to be higher than at the early stages, but the risk is lower because the businesses ideally have a track record.

However, that strategy can backfire when markets cool. One of the fund's first investments, EXE Technologies Inc., a Dallas developer of supply-chain software, filed for an initial public offering shortly after MSD bought a 5.5 percent stake for $8 million last year. The IPO was canceled in March, a victim of the downturn in complex business software at PeopleSoft Inc. and Baan Co.

MSD's other late-stage investments include Cerent Corp. and Top Layer Networks Inc. Cerent, a highly regarded Petaluma, Calif., networking company backed by Cisco Systems, filed to go public shortly after MSD Capital purchased $30 million in convertible debt. Top Layer, of Westboro, Mass., was formed in 1996 and this past April shipped its first product, a network switch that can prioritize business data.

Early-stage investments
The investment company also has begun to tiptoe into early-stage funds and leveraged-buyout investments. MSD recently put some $20 million into an InSight Capital Partners fund that focuses on e-commerce startups. "It's a fund's way of leveraging its assets, to see more deals without a bigger staff," says Jess E. Reyes, a director at Thomson Financial's Venture Economics, which tracks venture investments and measures investment-company returns.

MSD, along with the private investment funds owned by Microsoft Corp. Chairman and CEO Bill Gates and Oracle Corp. CEO Larry Ellison, also put money into Silver Lake Partners, a high-profile $2 billion Menlo Park, Calif., investment fund that is pursuing leveraged buyouts of undervalued technology companies.

Banking on a turnaround, MSD last month purchased shares valued at $50 million in McKesson HBOC Inc., the nation's largest drug distributor and supplier to online pharmacies PlanetRX and Soma.com. McKesson HBOC's shares tumbled earlier this year after it said it had to restate revenue and earnings related to the acquisition of a computer-software company.