Encompass Readies Funds, Founder Quits –

BELLEVUE, Wash. – Encompass Ventures, a Japanese-backed firm that invests in United States information technology companies, is adjusting to the recent departure of its founder and preparing to raise two follow-up funds at the start of this year.

Craig McCallum, who quietly resigned in the fall after expressing disappointment with the group, was expected to take up a new post at another venture firm by the end of January or to make a transition to an operating role.

Mr. McCallum and Encompass Partner Wayne Wager were reluctant to comment further because the two sides were still discussing unresolved issues surrounding the departure.

“I, quite frankly, decided that it wasn’t going to work out for me,” Mr. McCallum explained. “It wasn’t going to be as financially lucrative for me as I had hoped.”

Mr. Wager and another partner, Scot Land, who were hired by Mr. McCallum, will remain with Encompass. It is unclear what impact Mr. McCallum’s departure will have on future fund raising, but there are no immediate plans to replace him.

Founded in 1997 with support from Nikkos Securities and Trans Cosmos, a Japanese computer-services company, Encompass backs all stages of information-technology companies, with an emphasis on the Northwestern U.S., and helps them enter the Japanese market (VCJ, July 1997, page 8). The venture group’s L.P.s, all Japanese operating companies, also help American portfolio companies establish business relationships in Japan. Kanematsu Electronic is another investor.

Encompass closed a first fund, the $30 million Encompass U.S. Information Technology I, in mid-1997. The group, however, has about $75 million under management, including additional capital provided by Nikkos Securities and Trans Cosmos. Encompass had nearly finished investing its first fund in January and was already talking to existing L.P.s about fund raising for two follow-up vehicles.

The firm decided to raise two separate follow-up funds, one for Japanese corporations and another for American institutions, after talking with institutional investors in the U.S., some of whom expressed a preference for a separate institutional fund.

Encompass U.S. Information Technology II, a corporate fund that aims to help investors gain access to American companies with enticing technologies, will be raised in Japan but denominated in U.S. dollars.

The fund will seek some $30 million to $50 million from Japanese operating companies, which were less affected by the country’s economic crisis than Japanese financial institutions, Mr. Wager said. Like its predecessor, the second fund will back a broad range of seed-stage to mezzanine information technology deals in the U.S.; however, the firm will concentrate its earlier-stage investments closer to its Northwestern U.S. base.

Encompass U.S. Information Technology III, a more traditional venture fund geared toward generating high returns rather than strategic opportunities, will seek $30 million to $50 million from mid-tier American institutions.

Terms for both funds had not been set at press time.

Emcompass will emphasize to American institutional investors that the firm’s connections to Japan are a benefit, not a drawback. With the help of Encompass L.P.s, the group’s portfolio companies can enter the Japanese market early in their development and generate significant revenue in Japan.

“We have companies that are private that are getting 25% to 30% of their revenues from Japan, and usually you don’t see that in a pre-IPO company,” Mr. Wager said.

The first fund has backed about 10 companies, about half of which are in the Northwestern U.S., but the firm has yet to exit any of them. In Northwest-based deals, Encompass tends to take the lead, but the firm is interested in co-investing with VCs in the San Francisco Bay area or with other firms along the West Coast. Messrs. Wager and Land might bring in another partner before the institutional fund is launched, Mr. Wager said.