DALLAS – Since founding CenterPoint Ventures in 1996, Bob Paluck has adhered to one fundamental piece of advice he received from L.J. Sevin, co-founder of Sevin Rosen Funds, and H. Berry Cash, a general partner with InterWest Partners: Hunt elephants.
“L.J. said that if you look back at all of the investments that he and Ben Rosen [co-founder of Sevin Rosen] made, there are only a few that really moved the needle, things like Compaq and Lotus, all the rest barely moved the needle or they went out of business and those don’t count,” said Paluck. “In the investment process, you really have to look for the elephant, and in fact, L.J. and Berry said don’t even waste your time with all of the nice and little companies, just be very selective and go for the big ones.”
And that’s exactly what CenterPoint has done. By combining its strategy of hunting elephants with its distinctive collaborative investment approach, CenterPoint has come up with a formula for success.
In its five-year history, CenterPoint has invested in over 30 portfolio companies and states on its Web site, that it has an “uncommonly high rate of return” on those investments. Paluck declined to divulge the firm’s IRR.
While most of the firm’s investments are located in the Dallas and Austin areas, Paluck said the firm is not limited to Texas. “We go where the elephant is,” he said.
Some of CenterPoints’ “elephants” include Active Power, an Austin-based provider of uninterrupted power solutions, and Silicon Laboratories, an Austin-based developer of mixed-signal integrated circuits. Active Power went public in August 2000 and has a market capitalization of nearly $680 million, while Silicon Labs went public in March 2000 and has a market cap of about $946 million.
Paluck said CenterPoint predominantly invests in early-stage companies with a focus on the information technology sector. “Once a company has its strategy and management team, it’s very hard to make changes. At that point, there are incremental changes, rather that sweeping changes,” he explained. “By getting involved in the early stage, we get to help select the management, build the team and, most important, work on the strategy to make sure it’s right. Once all of those are in place, companies need help as they grow, but at least 90% of the ability to win is set in place if you can get the right management in place.”
CenterPoint goes about accomplishing this by looking for entrepreneurs that have a technology that can make a dynamic change of some sort in the marketplace. “That change could be anything from changing the cost structure to changing the functionality, but in some way having a big market to begin with and then making a dynamic change. That’s the key thing that we keep reminding ourselves of and keep looking for,” said Paluck.
As a sub-set to its IT focus, Paluck said CenterPoint is “very comfortable” with a product focus as opposed to a service focus. “That doesn’t mean we don’t build products for the service industry it’s just that we are used to developing a product, putting in distribution channels, then bringing it to market and growing it,” he said.
Two Heads are Better than One
Paluck said that CenterPoint is quite different from other venture firms in a few ways. Since all of the firm’s partners are serial entrepreneurs, they can step in and help a company initially and then later on when it gets into trouble, which Paluck noted all companies eventually do.
Secondly, he said that other VC firms that have hundreds of millions of dollars under management have built a big hierarchy of partners, associate partners, venture partners, analysts and so on.
“We’ve all been through building companies with thousands of people and we are not looking for that,” noted Paluck. “We approach it entirely differently.”
To be sure, CenterPoint has adopted a model of collaborative VC where it co-operates instead of competes with several other entities that the firm help put in place.
The first of which is the 16th Floor of the Galleria in Dallas. Paluck said the 16th Floor is like a commune for venture capitalists, and is headed up by Sevin Rosen and includes CenterPoint, InterWest and some new funds such as HO2 Partners.
Stephen Bowsher, a general partner at InterWest, said the communal arrangement is a throwback to a time 20 years ago when the venture industry was much smaller and clubby, and syndication was a big part of how business got done.
“The rule of thumb we have is that anybody on the floor is invited to join in a meeting. If you’re in the meeting, you’re in the deal. If you miss the meeting, however, you may miss the deal,” he said.
In CenterPoint’s Austin office, the 16th Floor has been replicated with CenterPoint sharing deals and office space with such firms as ARCH Venture Partners, Sanchez Capital Partners and Triton Ventures.
“We’re all on the same floor, no locks on the doors, we share the same conference rooms, same coffee pot and we work together on various deals when it makes sense,” explained Paluck. “One of the key aspects is that all of the people allowed on the floor all have this entrepreneurial experience and can help each other evaluate and, in fact, bring deals in.”
Another CenterPoint endeavor is the RHK Infrastructure Fund, a collaboration of RHK, a global telecommunications analysis firm, CenterPoint and InterWest.
The $60 million fund takes advantage of RHK’s analyst capabilities, and then uses the analysis to find potential deals, evaluate them and recruit staff for portfolio companies.
Lastly, CenterPoint operates STARTech, an Austin-based for-profit high-tech accelerator that is run by entrepreneurs for entrepreneurs. “STARTech consists of an organization that evaluates start-up deals that are in their seed stage and provides them with money, but more importantly provides them with mentorship,” said Paluck.
To date, CenterPoint has raised three funds bringing its funds under management to $450 million. CenterPoint Ventures Fund I closed on $50 million in 1996 with no institutional investors. In 1999, the firm closed its second fund, CenterPoint Ventures Fund II on $100 million and attracted the interest of Horsley Bridge Partners.
For its latest fund, the $300 million CenterPoint Ventures Fund III LP, the firm garnered commitments from a mix of wealthy individuals as well as Commonfund Capital, Scudder Venture Partnership, Rho Management, the University of Illinois and Horsley Bridge.
Paluck said he expects Fund III to do about 30 deals with investments ranging from $10 million to $15 million per deal over several rounds of financing. CenterPoint tends to be the lead investor in 60% of its deals and sits on the boards of more than 90% of its investments.
“We are very active investors,” said Paluck. “If you’re not active in the company, chances are it’s not going to work out.”
The firm’s latest vehicle will be invested by its general partners: Terry Rock, Kent Fuka, Cam McMartin and Paluck.
As for any additions to its investment team, Paluck said the firm would only add a partner very selectively and it would have to be one with extensive entrepreneurial experiences and one that the firm was familiar with.
Following are some of CenterPoint Ventures portfolio companies:
Active Power (Austin, Texas) is a developer of commercially-viable flywheel energy storage systems used to provide backup power to a range of customers in commercial data centers, Internet services and industrial facilities.
Other investors include Austin Ventures, SSM Ventures, Advent International Corp., Rho Management, and Stephens Group Inc.
Applied Science Fiction (Austin, Texas) develops and licenses proprietary direct-to-digital photo-imaging technologies that provide a bridge to traditional film and photography industries.
Other investors include InterWest Partners, Sevin Rosen Funds, Technology Crossover Ventures, Amerindo Investment Advisors and J&W Seligman.
Chorum Technologies (Richardson, Texas) designs, manufactures and markets advanced optical solutions for ultra-high-capacity dynamic optical networks.
Other investors include InterWest Partners, Sevin Rosen Funds, Austin Ventures, Sycamore Ventures, Amerindo Investment Advisors, J&W Seligman, Bowman Capital, Azure Capital Partners, Octane Capital Management, Crown Advisors International and Rho Management.
Globe Ranger Corp. (Dallas) is a provider of supply chain visibility and asset management services for business-to-business operations.
Other investors include Sevin Rosen Funds, HO2 Partners and Marsh McLennan.
Medical Present Value (San Antonio, Texas) is a developer of software technology and services that provide Internet-based insurance claims verification services to doctors, hospitals, insurance companies and employees.
Other investors include Rho Management.
OraMetrix (Dallas) develops laser scanning and computer-based 3D modeling system used to improve care to orthodontic patients.
Other investors include Brentwood Venture Capital, Star Ventures Management and Coral Ventures.
Scale8 (San Bruno, Calif.) develops Internet-based, data storage networks optimized for the needs of large corporations.
Other investors include Oak Investment Partners, InterWest Partners and Crown Advisors International.
Silicon Laboratories (Austin, Texas) designs, manufactures and markets high performance mixed signal integrated circuits for the wireless, wireline and optical communications industry.
Other investors include Austin Ventures.
CenterPoint Ventures is located at Two Galleria Tower, 13455 Noel Rd., Suite 1670, Dallas, Texas 75240. Tel: (972) 702-1101, Fax: (972) 702-1103. The firm’s Web site is www.cpventures.com.