Flush with Cash, Industry Ventures Adds Staff

Last month, VCJ reported that San Francisco-based Industry Ventures had closed on a $400 million Fund VI—its largest to date—bringing capital under management to $1 billion.

With the new fund, Industry plans to continue following its longstanding strategy of buying private company shares from limited partners, founders, VCs winding down funds and other sellers, across all venture sectors.

What we didn’t note, however, is that the firm has also been on a hiring spree.

In June, it added Robert May, former CFO at the Founders Fund, as CFO and chief compliance officer, as well as Jay Ganatra, who formerly worked in M&A at Sabre Holdings, as associate. In September, the firm appointed Victor Hwang, founder of growth investor Agile Capital Partners, as managing director.

Most recently, Jim Jones, a former Scale Venture Partners managing director, joined as a venture partner focusing on IT infrastructure, an area out-of-favor with traditional VCs that he believes holds promise for Industry.

“As investors we say you can never follow the exact same strategy at all points in time,” Jones says. “Sometimes you should be an earlier stage investor. Sometimes you should be a later stage investor. And sometimes, you should be a secondary investor to make the best returns.”

One thing that’s different this time around for Industry, whose motto posted on its website reads: “focusing on inefficiencies of venture capital,” is where it’s expecting to generate the best returns. A few years ago, the firm, like other secondary investors, profited nicely by scooping up shares in Facebook and other hot consumer Internet companies. That’s tougher to do now, says Industry founder and Managing Director Hans Swildens.

Valuations for top names have increases several-fold in the past few years. Meanwhile, other sectors, such as cleantech, infrastructure, medical devices and pharmaceuticals are seeing comparatively lower valuations.

Currently, life sciences and medical devices accounts for only about 10% of investments, Swildens says, but about 25% of deal flow. In particular, he says, existing investors short on capital for follow-on rounds are turning to secondary funds to structure deals involving existing equity and future follow-on needs for portfolio companies.

Seeing potential for stepped up investment, he says, the firm is close to adding a venture partner with health care expertise. Previously, Industry has purchased direct secondary stakes in Access Closure, a medical device developer focused on vascular closure, CellzDirect, a developer of drug testing products sold to Invitrogen Corp. for $57 million three years ago, and Epocrates, a provider of online and mobile computing systems for doctors that went public earlier this year.

“Today these market sectors are out of favor by both the general partner community as well as the capital markets, and are interesting sectors for us to take a closer look at,” Swildens says. “Once the sector is deemed in favor by the broader investment community, we have already looked at and invested in what we consider to be the most promising companies and funds.”

In addition to sectors of interest, the mix of sellers is shifting, as well. Swildens says that the Industry is seeing a larger number of financial institutions needing to sell their venture portfolios as well as GPs looking to wind down 2000-vintage venture funds.

Deals are also commonly including a mix of sellers for a particular portfolio company. In recent weeks, for example, Jones says he has looked at three component companies considering an IPO in the next year, with investors and former employees looking for early liquidity. Some companies are also looking to combine a later stage round with secondary share purchases from individuals and investors.

Investment size is typically in the $5 million to $10 million range, although Industry will do transactions as low as $1 million, or in the case of portfolio purchases, up to $40 million.

Not all investments will be secondary transactions. CFO May, along with Managing Director Roland Reynolds, will oversee a fund of funds within the firm focused on venture funds with less than $250 million. The portfolio includes stakes in .406 Ventures, a Boston-area early stage investor; Foundry Group, which stands to reap significant returns from its early investment in Zynga Game Network; and Lowercase Capital, a family of funds currently being invested by entrepreneur and early stage angel investor Chris Sacca.

The fund-of-funds strategy follows Industry’s broader thesis of focusing on out-of-favor areas. Last year, funds-of-funds raised $14.1 billion, down from $24.1 billion in 2009, according to Thomson Reuters. And so far this year, 52 funds-of-funds have raised $9.7 billion.

Reynolds says Industry’s focus is on sub-$250 million funds in part because historically it is smaller funds that have produced the largest venture returns. Moreover, there are many limited partners who would like to invest in smaller venture funds and emerging managers but, due to staffing constraints, have limits on the number of partner relationships they can maintain.

Currently, Industry is exploring a fund-raise for a follow-on fund-of-funds, after having invested a $30 million fund, originally known as Little Hawk, which Industry acquired partway through its investment cycle.

Judging by interest in its latest secondary fund, Industry shouldn’t have trouble lining up LP meetings.

In a March meeting of the New Mexico Educational Retirement Board, in which the board discussed a proposed investment in Industry Ventures Fund VI, attendees saw promise for the secondary strategy. The staff of the $9.6 billion retirement fund had recommended a $45 million investment in the fund. They said that they liked that in the current environment, in which venture capital-funded companies are taking longer to reach liquidity, secondary deals can offer a faster pace to exit.

Industry, according to the minutes, is targeting a 25% to 30% gross IRR with a 2x multiple for investors.

The pension fund staffers also had favorable things to say in about fund terms, noting “Industry Ventures is very LP friendly in terms of their legal structure as well as their economic structure,” with a 1.5% management fee and a 17.5% carry.

Joanna Glasner can be reached at joanna.glasner@thomsonreuters.com and on Twitter at @jglasner.