Convergence II Nets $95M First Close –

MENLO PARK, Calif. – Convergence Partners in October held a first close on $95 million for Convergence Ventures II, said General Partner Russ Irwin.

Marketing for the latest fund began last Spring as the firm was winding down making new commitments from the $60 million Fund I, which closed in Spring 1997. Having had just two limited partners in Fund I, this marked the group’s first marketing effort to the traditional limited partner base.

The initial work bore fruit as the firm drew commitments from Grove Street Capital, SEMA, a European systems integrator, existing investor NEC and other unidentified limited partners. Irwin said these L.P.s included traditional venture investors such as pensions, endowments and foundations.

The firm already has $10 million committed for its next close, ensuring that the fund will exceed the $100 million target set at its launch. Irwin said the group will not actively market the fund further, and it has set a hard cap of $125 million.

Following the final close, expected for November, Convergence’s three general partners – Irwin, Paul Dali and Eric DiBenedetto – will add a commitment equal to 3% of the final capitalization. Irwin described Fund II’s fee structure as falling in line with standard practices for the industry.

The firm does not plan to add new investment professionals to manage the larger fund, but last month Chen Tang joined Convergence as chief financial officer, Irwin said. Previously, Tang spent seven years at Coopers & Lybrand as a tax adviser and auditor to venture capital funds.

Convergence does not intend to vary its investment strategy because of the larger fund. Rather, Irwin said the firm expects to use the greater capital resources to maintain the 15% to 25% stake generally taken in initial investments longer into portfolio company’s venture cycles.

“We only do early-stage, and we were unable to maintain pro rata stakes in later rounds,” Irwin said. “Now we can take 25% and maintain pro rata in later rounds.”

Fund I portfolio companies that have brought realizations include publicly traded iVillage, AdForce, which went public in the spring and was subsequently acquired by CMGI in September, and Decisive Technology, which was acquired by MessageMedia Inc. Other portfolio companies include Adauction.com, Chameleon Systems Inc., CollegeClub.com, Entegrity Solutions, FreeGate Corp., HiFive.net, Magnifi, Modulus, PaymentNet and Tropian.

Two-thirds of Fund I portfolio companies were involved in the Internet space, primarily as application service providers and other business-to-business services, with the remaining one-third landing in telecommunications infrastructure companies. The firm anticipates keeping that same structure in Fund II’s portfolio.

Irwin said Convergence Ventures I is now fully invested with remaining funds slated for follow-on investments.