August Eyes Late-Stage Deals with New Fund –

August Capital has never invested along sector themes. Increasingly, it won’t confine itself to its tradition of early stage investing, either. In a fairly dramatic shift, the 10-year-old firm has assembled its biggest fund to date-a $550 million fourth fund that closed in mid-February. It’s nearly $100 million bigger than it’s previous fund, with an eye toward investing in some bigger, later-stage and, most notably, buyout deals.

Early stage interest in the opposite end of the investing spectrum isn’t surprising, particularly with so much money flowing into late-stage and buyout funds. Consider that 17 LBO firms garnered $7.4 billion through March 31, three times the $2.4 billion assembled by nine such funds in the first quarter of last year. Private equity firms, boosted by low-interest debt and ballooning funds are buying and taking public their larger portfolio companies at a more aggressive rate than VCs. Ten venture-backed companies went public in Q1 of this year, the lowest level of activity since the third quarter of 2003. Meanwhile, 15 buyout-backed companies went public during the same period.

August has done just two buyouts in its history, but one paid off big. It put up $130 million (or one-third of its previous fund) in Seagate Technology in 2000, along with co-investors Silver Lake Partners, Texas Pacific Group, J.P. Morgan Chase Partners, and Goldman Sachs. They took the disk drive maker private, then public again.

At the time of the IPO, the five investors divided a $250 million distribution. They also saw a $167 million distribution from the recapitalization of Seagate prior to the IPO, plus $820 million in cash and stock from the sale of Seagate spin-off Crystal Decisions to the French company Business Objects. August hasn’t publicly discussed its return on the investment, but a source close to the situation says a “5X return is very conservative” and that the investment is still returning money to the firm, which continues to hold Seagate stock.

“Early stage IT remains our bread and butter, but we want to be able to take advantage of bigger deals,” says August General Partner Andy Rapport. He notes that the firm previously talked to its LPs about its strategy to do larger deals.

Rappaport will manage the new fund with firm co-founders David Marquardt and John Johnston and recently appointed general partners David Hornik and Vivek Mehra. Hornik, who has made a name for himself with his VentureBlog, was promoted from principal. Mehra was formerly a venture partner. Mehra pushed for August’s $10 million investment in the $26 million Series B raised by Iridigm Display last June. Five months later, Qualcomm bought the company (which had raised $46 million altogether) for $170 million in cash.

“When Vivek came into our partners’ meeting, talking about this display company, we all did the [sign of the] cross,” laughs Rappaport. “But he did a bunch of work to determine that, in this case, there were a number of attributes that made the company particularly attractive. We trusted his due diligence, and we made a very nice multiple on our investment.”

No one at August likes to discuss the technologies he finds most interesting. “We don’t decide in advance what sectors we’ll go after,” says Mehra. “We decide once we meet with entrepreneurs.” He points out that in the past year August has invested in considerably different companies, including $10 million in blogging software company Six Apart, RSS startup Technorati (August put $500,000 into the company), as well as semiconductor memory startup TZero, which August backed along with Lightspeed Ventures, U.S. Venture Partners and VentureTech Alliance.

Despite the ongoing lawsuit launched by five founders of Epinions against August, Benchmark Capital and BV Capital earlier this year, it did not put a crimp in August’s fund-raising. The firm’s LPs have a “long history in dealing with us, and the historically excellent returns that we’ve had” made the process relatively quick, Rappaport says.

August added “a couple” of new LPs, but the majority of the fund came from returning LPs. Investors in August’s previous fund include Duke Endowment, Cornell University and Horsley Bridge Partners. August did not invite any public pension funds to be limited partners in its fourth fund. “We’ve scrupulously avoided any [disclosure] issues,” Rappaport says.

He adds that the new fund’s carried interest structure and annual management fees are identical to the terms of all of August’s prior funds. He declines discussing the terms, however.