MENLO PARK, Calif. – Convergence Partners is angling for an initial close on its $130 million-targeted Convergence Ventures III fund during the first quarter of the year, said Russ Irwin, general partner. The first close will be on approximately $100 million, Irwin added. Convergence planned to launch the vehicle at the beginning of the first quarter, Irwin said.
The new vehicle is targeted at about the same size as the Convergence’s previous fund, Convergence Ventures II, because of the current state of the venture capital marketplace, Irwin said. “There is no question that the market has cooled off recently,” he said, adding “it is done.” Fund II closed on slightly more than $130 million in September 1999 and is now fully committed to 12 portfolio companies, he said.
Despite a cooled-off VC market, Irwin said Convergence is not worried about finding opportunities to put its capital to work or potential liquidity events.
“We are not hesitant to put money to work, because we are not looking for 12 month to 18 month turn-arounds for our portfolio companies,” he said, noting “because we invest early, we are looking at opportunities that will not be liquid until at least the first half of 2003.”
Fund III will focus on early-stage Internet infrastructure plays, communications systems, service businesses and vertical Web application companies, Irwin said. The vehicle should back about 12 companies with an initial investment ranging between $4 million and $6 million, he added. Follow-on investing should push most deals to about $8 million to $10 million in size, he noted.
As a result of the Convergence’s focus on developing businesses that require a lot of hands-on involvement and guidance, the majority of the firm’s deals tend to be located on the West Coast near the firm’s offices, Irwin said. However, the firm will invest outside of the West Coast on an opportunistic basis, he added.
The firm will put up 5% of the fund’s total capital, Irwin said. The vehicle’s management fee and carried interest structure should come in at industry standard levels, he said.
The firm is discussing including some performance-based accelerators that could increase the general partner’s percentage of the carried interest split, he added. Irwin declined to provide a rate of return for one of Convergence’s previous funds. However, he did say that according to Venture Economics the publisher of Venture Capital Journal, the firm’s first vehicle was among the top 10% of funds in terms of performance when compared to funds of comparable size. Convergence Ventures I closed on $60 million in 1997, he added.
The firm’s existing limited partners include NEC Corp. and the Sema Group PLC, Irwin said. Other LPs are drawn from the ranks of public and private pension funds and fund-of-funds, he added. Irwin declined to identify any potential LP candidates.