Clearstone Tightens Ties with TIE with Fund III –

Clearstone Venture Partners’ third fund, which closed in late April with $200 million, sports a slightly different lineup. Erik Lassila will not be a managing partner in the 7-year-old firm’s fund III, although he retains his Clearstone board seats and plans to do so throughout the life of fund II, says firm founder and Managing Director Bill Elkus.

In addition to working with Clearstone, Lassila is “working with a large private investment firm” making China-related investments. Details about Lassila’s new venture are expected to be announced soon.

Clearstone anticipates that it will be introduced to China-related opportunities for fund III as a result of Lassila’s endeavor. His work complements Clearstone’s emphasis and experience in emerging opportunities in India and China.

Besides Elkus, the managing directors for fund III are Jim Armstrong, William Quigley and Sumant Mandal. Mandal, who joined Clearstone in 2000, was promoted from principal.

The firm hopes that Mandal will boost its flow of India-related deals, along with Vish Mishra, who has been working with Clearstone for the past three years as a venture partner and has been named senior venture partner.

Mandal and Mishra are charter members of The Indus Entrepreneurs (TIE), which represents a worldwide network of entrepreneurs, investors and other professionals of South Asian descent. Mishra is the chair of TIE’s conference committee, and Elkus says that the organization has “been the source of half our Northern California deal flow.” Though it’s not unusual for a venture firm to have close ties to TIE, Elkus also points out that the firm attends a lot its conferences and acts as a sponsor for various TIE events.

Clearstone’s ties to TIE have resulted in a number of investments, too, he says, including wireless LAN infrastructure provider Meru Networks; Mimosa Systems, which sells email recovery software and services to enterprises; and semiconductor company SiNett.

“We recognize that there are a lot of VC firms in Northern California,” Elkus says. “We’re not so arrogant to think that [entrepreneurs] will put us at the top of their list, so we’re always looking for an edge.”

Stressing Differences

The new fund took nearly a year to assemble. As of a filing with the SEC on Jan. 10, when Clearstone listed $186.2 million in commitments, it showed that eight LPs had committed a minimum of 10% each, or at least $149 million combined. Those LPs are 552 Fifth Avenue LP of New York; CalPERS; the California State Teachers’ Retirement System; JP Morgan Pooled Venture Capital Institutional Investors II LLC; JP Morgan Pooled Venture Capital Private Investors II LLC; the State Treasurer of Michigan as Custodian for Public School Employees, State Police and Michigan Judges Retirement Systems; the Commonwealth of Pennsylvania State Employees’ Retirement System; and the Regents of the University of California.

The firm-formerly known as Idealab Capital Partners-says that accepting LP commitments from funds that are subject to Freedom of Information Act disclosures is only one way of differentiating itself. Another way that it is trying to set itself apart is by offering entrepreneurs a financial reward. To wit, unlike so many in Silicon Valley who maintain that they invest in people, not in trends, Clearstone is reaching out to entrepreneurs and technologists. “We have some ideas and some money to invest and we’re calling on entrepreneurs to realize those ideas,” says Managing Director Jim Armstrong, who runs Clearstone’s office in Santa Monica, Calif.

Armstrong isn’t exaggerating about this shout-out. In January, he told Business 2.0 magazine that he was willing to invest in “a company that is Plaxo meets Evite meets LinkedIn.” Clearstone doesn’t appear to have invested in anything like that just yet. Its latest investments include DiVitas Networks, which unites wireless, office and video communications in a common infrastructure; management software startup Integrien; enterprise compliance software company Certus; and SupplyFX, which develops software to match buyers and sellers of electronic parts.

Armstrong says that he’s currently prowling for someone who can create a better solution to Microsoft Exchange. “It’s doubtful that we’ll find a fully formed company, so we’re talking to individuals about how to get all your information in your email yet process it in other applications. I’m talking with someone in Atlanta [about the idea] right now, in fact.”

Also, Clearstone is stressing its ties to Southern California, which has an enormous economy but a nascent venture industry. Armstrong says that Clearstone has “excellent contacts in the aerospace, government and mobile applications” communities, including in San Diego, and that the firm’s presence gives it a competitive edge in getting in deals. “There aren’t a lot of VCs down here,” he notes. “We can make introductions that Silicon Valley investors can’t make.”

Neither Armstrong nor Elkus would discuss the terms of Clearstone’s new fund, but they conceded that fund-raising took about a year, in large part, they say, because of the formal and extensive due diligence process institutional investors are conducting these days.

Also, Elkus says the firm had to negotiate with the public pension investors to “safeguard our requirements about keeping specific companies’ information confidential.”

Perhaps its next go round will be easier, though Clearstone will need some big wins. Its first fund ($105 million), which was raised in 1998, did well in spite of its emphasis on Internet deals, with payoffs coming from the IPOs of GoTo.com, MP3.com and NetZero. Its $350 million second fund, which closed in 1999, has had just one standout winner so far: PayPal, which went public in 2002 and was later acquired by eBay.

Clearstone Venture Partners

www.clearstone.com

Founded: 1997

Locations: Santa Monica, Calif., and Menlo Park, Calif.

Fund Name: Clearstone Venture Partners III

Fund Size: $200M

Previous Fund: Clearstone Venture Partners II, $364M, 1999

Under Management: $650M

LPs: Universities, pension funds and institutional investors, such as affiliates of the State of California, JP Morgan, the University of California, the State of Michigan, the State of Pennsylvania, the University of Pittsburgh and Moore Capital.

Focus/Strategy: Early stage investments in software, enterprise infrastructure, storage, communications, security, wireless, chips, optics and consumer and business Internet.

Managing Directors: Bill Elkus, Jim Armstrong, William Quigley and Sumant Mandal.

Key man: Bill Elkus founded the firm as Idealab Capital Partners in 1998. He sits on the board or is an observer at Certus Software, Cooking.com and WeddingChannel.com.

Additional reporting by Lawrence Aragon.

Email: constance.loizos@thomson.com