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Headhunters don venture capitalist hat

Hoping to move beyond collecting fees for placing top executives at tech companies, two prominent headhunting firms are getting into the risky venture capital business.

Hoping to move beyond simply collecting fees for placing top executives at technology companies, two prominent headhunting firms also are getting into the risky venture capital business.

In an effort to retain more of their own employees and strengthen ties with clients, Christian & Timbers and Heidrick & Struggles recently launched programs to invest in young companies.

The move takes Christian & Timbers beyond such high-profile CEO searches as placing Carly Fiorina at Hewlett-Packard. The same goes for Heidrick & Struggles, which placed Lou Gerstner at IBM.

"With the huge growth in technology start-ups and the need for these companies to get proven talent, search firms are playing a bigger role with these start-ups and want a bigger piece of the action," said Brian Lee, chief market strategist for Hunt-Scanlon, an executive search trade group.

Christian & Timbers started its venture operation, Access Ventures, last summer and expects it to close this month.

The fund will largely receive investments from outside investors and will focus on domestic technology investments, said Jeff Christian, CEO of the search firm.

He noted that Access Ventures is in a so-called quiet period and can't divulge much information.

Heidrick & Struggles, meanwhile, has created Heidrick & Struggles Capital, a venture fund seeded with $25 million from the company. It also is in the process of raising funds from employees who want to participate, said Tom Friel, president of Heidrick & Struggles Ventures, which oversees the fund.

"We made the decision to do this since we were already an equity holder in a number of companies and had a vested interest," Friel said. "The companies wanted us to have more skin in the game, and it gives our (employees) around the world a chance to participate in pre-IPO clients."

The fund, which is expected to be fully operational early next year, makes small investments of up to $1 million in companies in which Heidrick & Struggles already holds a stake that was acquired as payment for recruiting work.

The search firm also requires that another venture firm already back a company before receiving funds from Heidrick & Struggles Ventures.

Friel said the fund concentrates on participating in late-stage and mezzanine rounds, the last round before an initial public offering. "We're not trying to be a big fund and lead investment rounds," Friel added.

Heidrick & Struggles already has made investments in a few companies and tends to focus on telecommunications, software and Internet infrastructure companies.

"We're looking for high-growth companies," Friel said, noting that making an investment in a company is not necessarily a guarantee his firm will be the exclusive search firm for the company. "Our investments are based on normal investing rules. We're looking for a return on our investment."

Those returns, however, could be more difficult to come by considering the stagnant IPO market.

A venture firm typically earns fat returns when a company it has funded sells its shares to the public. But in recent months, numerous technology companies have been forced to withdraw their IPO plans because of lackluster demand.

The impact marks the troubles facing companies such as CMGI and Idealab, which act as incubators to young businesses and derive much of their revenues from selling stakes in the smaller companies privately or publicly.

Idealab in October pulled its own IPO, and CMGI shares are trading around $10, down from a 52-week high of $163.50.

In addition, Crosspoint Venture Partners last week suspended its plans to raise a $1 billion fund, citing the poor market climate and depressed valuations for many public technology companies.

Acknowledging the perilous conditions, Christian of Christian & Timbers said, "We started raising money in one of the most chaotic times of the markets."