RADNOR, Pa. – Back in 1998, Irish entrepreneur Gerry McCrory came to visit venture capitalists in Silicon Valley and Boston to sell them on his idea of a strategic partnership between a seed-stage fund based in Ireland and a U.S. VC firm. McCrory believed there was a developing entrepreneurial community in Ireland whose growth was being stunted by a lack of access to capital. He also believed the U.S. venture firm could provide additional capital and introductions to investment bankers and corporate investors crucial to the success of nascent Irish information technology companies.
The VC’s McCrory met with didn’t bite, but Donald Caldwell, who, at that time, was president and chief operating officer of Safegaurd Scientifics Inc., did. Together with Glenn Rieger, the former senior vice-president of business development at Safeguard, the two men left their jobs and in early 1999 launched Cross Atlantic Capital Partners to be the U.S. VC firm with which McCrory was looking to partner.
Up and running for over a year now, Cross Atlantic Capital Partners engages primarily in B and C round venture capital deals, said Rieger, Cross Atlantic’s president. The firm focuses on e-commerce, Internet infrastructure, enabling technologies and IT professional services companies. “Entrepreneurs want value-added investors, not just a bump on the log,” explained Rieger, adding “in the venture business it is critical to focus on what you know. I won’t do a bio-tech deal and we have people in our fund with know how in these fields.”
The firm’s deal flow comes from the areas around its offices in Dublin, London and Radnor, Pa., though within the U.S. Cross Atlantic pays special attention to the Boston to Washington corridor.
“The key to a successful fund is proprietary deal flow, which is the whole reason behind our strategy,” Rieger said. He pointed to the firm’s investments in The Crucible Corp., an existing family of seed- and early-stage funds in Dublin founded by McCrory – who is now a managing director at Cross Atlantic, and Brainspark Ltd., a British incubator for, and seed investor in Internet and e-commerce companies, as how his firm is establishing that proprietary deal flow. Cross Atlantic has put approximately $10 million to $12 million into Crucible for a 30% to 35% ownership stake in the company and made a $6.5 million investment in Brainspark. “Being in these nascent venture markets gives us a formalized deal flow and we have a right of first refusal on potential deals coming out of Crucible and an early, educated look at potential deals out of Brainspark,” he noted.
So far, the plan has worked to perfection, Rieger said. Of the nine investments made by Crucible to date, Cross Atlantic has participated in seven follow-on rounds of financing. One example is Interactive Enterprise Ltd., a Dublin-based company developing a software solution for the rapid deployment of broadband and cable modems. Interactive was initially funded by Crucible, received a second round of financing from Cross Atlantic and a third round of funding from Motorola Inc. Interactive’s story also illustrates what Rieger likes to refer to as “The Cross Atlantic Network” – his firm’s ability to make connections for portfolio companies on both sides of the Atlantic ocean.
Cross Atlantic considers itself to be a good partner and does not mind co-investing with other VC firms, Rieger said. However, the firm does prefer to be the lead investor in any financing round in which it participates, because the firm wants to make sure it is in a position to add value to its portfolio companies, he said. To that end, Cross Atlantic almost always takes board seats, even when it invests as part of a syndicate of VCs, he noted. The firm currently has 17 employees spread among its three offices. In order to keep tabs on Cross Atlantic’s far flung operations, its five managing directors have a two-and-a-half to three-hour conference calls every Friday, Rieger said. Once a month all of these partner level professionals meet at one of the firm’s offices for a face-to-face meeting, which covers every aspect of the firm’s business.
Cross Atlantic has raised two funds since its founding. In March 2000, the firm closed on $120.6 million for its freshman vehicle, Cross Atlantic Technology Fund. The vehicle was launched in March 1999 and has backed 20 companies, for a total of about $60 million. Rieger anticipated the fund would back an additional five to six companies before it is completely committed. The Technology Fund’s sweet spot in terms of investment range is between $2 million and $7 million in size, with a maximum of $10 million.
In February, the firm closed the $150 million Co-Investment 2000 Fund. Some $135 million of that capital was invested by the Pennsylvania Public School Employes’ Retirement System (PSERS), which is also a limited partner in the firm’s Cross Atlantic Technology Fund. The remaining capital was invested by privately held conglomerate American Manufacturing Corp., investment bank Janney Montgomery Scott LLC and Cross Atlantic. The purpose of the Co-Investment Fund was to capitalize on the co-investment deal flow PSERS sees as a LP in other VC funds. “PSERS did not have the staff to handle doing due diligence on all the deals it was being offered, so it was not doing anything with its co-investment rights. So we came up with this model,” Rieger explained, adding, ” John Lane [chief investment officer at PSERS] assigned us the co-investment rights PSERS has from being an LP in 25 other funds. We harvest those relationships.” Cross Atlantic manages the fund for a less than 2% fee, he said, adding the fund also has a preferred return and a traditional carried interest structure. Rieger refers to the vehicle as a proof of concept fund. “If we prove this is a good idea, we can do a second co-investment fund and go to other pension funds and pursue a similar opportunity,” he explained. The Co-Investment Fund has made eight investments for approximately $15 million so far. This fund also makes investments ranging in size from $2 million to $10 million and Rieger expected it would ultimately back 20 to 25 companies.
Cross Atlantic has no preferred exit strategy, Rieger said. “We are open to whatever will create the best value for our portfolio companies: initial public offerings, trade sales or sales of intellectual property. Plus, with our Cross Atlantic Network we can access trade sales across the Atlantic or consumer capital in any number of stock markets,” he added.
Following are some of Cross Atlantic Partners portfolio companies:
Brainspark Ltd. (London) is an incubator focused on developing United Kingdom and European Internet-related businesses.
Co-investors included Top Technology Ltd., Inverness Capital Corp. and Diamond Technology Partners Inc.
GAIN Capital (Warren, N.J.) is an online exchange for small and middle market foreign exchange contracts.
Blue Rock Capital was a co-investor.
iKimbo Inc. (Herndon, Va.) is a development stage, e-commerce community builder.
Co-investors included Draper Atlantic, MRW Enterprises and Steve Walker & Associates.
Interactive Enterprises Ltd. (Dublin, Ireland) has developed a mediation product which is capable of integrating multi-source and multi-level content, broadband communications and computing power to provide a reliable and flexible management and delivery medium for interactive services.
Co-investors included The Crucible Corp., C-COR.Net, Allied Irish Bank, Motorola Inc. and Yeoman International.
Marrakech Ltd. (Dublin, Ireland) is a European digital marketplace serving large corporations and their suppliers for the coordinated procurement of non-production goods and services.
Co-investors included MCM Ltd., Davy Nominees Ltd. and Doughty Hanson & Co.
MetaPack (London) will provide software packages and consulting services for online commerce transaction and supply.
Co-investors included Brainspark Ltd., Scient Corp. and Top Technology Ltd.
MobileAware Ltd. (Dublin, Ireland) is developing an enterprise platform which companies and third parties can use to develop new mobility solutions.
Co-investors included Intel Corp. and Island Capital.
Openet Telecom Ltd. (Dublin, Ireland) is a telecommunications software company focusing on internet protocol mediation.
There were no co-investors.
TradeAcess Inc. (Cambridge, Mass.) is a Marketplace Service Provider which creates a software application that manages the iterations of multi-variable negotiations for complex online sales.
3I Group plc was a co-investor.
Cross Atlantic Capital Partners is located at Five Radnor Corporate Center, Suite 555, 100 Matsonford Road. Radnor, PA 19087. Tel. (610) 995-2650, fax: (610) 971-2062. The firm’s European offices are located at 3006 Lake Drive, Citywest, Dublin 24, Ireland, Tel. (+353) 1-241-6100, fax: (+353) 1-466-0170 and 7 Cavendish Square,London, England, W1G 0PE, Tel. 44 (0) 20 7436 0475. The firm’s Web site is http://www.xacp.com/.