Wayne Embree is glad that so many early-stage venture firms have decided to return to their roots. His concern, however, is that most of them are not digging deep enough to discover seed-stage gems.
“Lots of firms are saying that they want to go back to basics, but they are still raising funds of $300 million to $400 million,” he says. “That really doesn’t allow them to do much in terms of true venture creation.”
Embree is a managing partner of Cascadia Partners, a Beaverton, Ore.-based firm that has invested in about 85 seed-stage companies since 1986. He also is one of the driving forces behind the firm’s latest venture: a seed-stage fund-of-funds that is being marketed to institutional investors with a $250 million target capitalization. The new effort is named the Technology Commercialization Fund (TCF), and Embree says he hopes to hold a first close within the next few months and a final close by year-end.
Once raised, TCF expects to act as lead investor – or at least the largest investor – in eight to 10 seed-stage funds based in North America. Unlike most traditional fund-of-funds, however, TCF plans to be an active investor. This means that it’s general partners will essentially be treated like a loosely-affiliated network of seed-stage funds, with experienced managers like Embree helping to source deal flow, vet investments and give operating advice to portfolio companies.
Embree acknowledges that some potential GPs see TCF’s day-to-day involvement as bordering on interference, but he says that it should be viewed no differently than Cascadia’s involvement with its direct seed-stage portfolio companies. “We’ve also run into entrepreneurs who basically want to be left alone, and we didn’t invest in them,” he says.
The larger question is whether or not institutional investors will give Cascadia the $250 million of support it’s looking for. Many pension funds and endowments have begun looking upstream for private equity opportunities, and Cascadia itself scrapped talk of a fifth direct investment fund because of poor prospects. Perhaps the best selling point comes from the TCF offering memorandum, which reminds large institutions that TCF’s network approach is one of the only ways for them to invest in seed-stage funds that would otherwise fall below minimum investment thresholds.
CalPERS Reveals Grove St. IRRs
Less than four months after it battled in court to keep private equity returns under wraps, the nation’s largest pension fund announced plans in March to fully disclose the returns of all of the funds it has invested in, even the returns of the 100 funds it was able to keep private through an earlier settlement.
The California Public Employees’ Retirement System (CalPERS) is scheduled to post fund performance data for each of the 250 private equity funds in its $6.7 billion alternative investment portfolio on its Web site by April 30.
The Web site at www.calpers.ca.gov will not only disclose fund performance information using both IRR and cash-in/cash-out metrics, but it will also include aggregate portfolio and performance information like a roster of general partners and links to their Web sites.
The site will include fund performance information for the 100 venture capital partnerships managed by advisor Grove Street Advisors of Wellesley, Mass., which had previously threatened legal action to prevent CalPERS from releasing the information, forcing the San Jose Mercury News to settle the case with nothing but macro-level returns for the three funds-of-funds Grove Street manages for the pension fund. The new site will include previously unreleased numbers from such firms as Aberdare Ventures, Apax Israel, Atlas Venture, Austin Ventures, Battery Ventures, Bay Partners, Jerusalem Venture Partners, MPM BioVentures, New Enterprise Associates, OVP Venture Partners and Tallwood Venture Capital.
Intersouth Nabs $205M for Fund VI
After seven months of fund-raising, Intersouth Partners recently held a first and final close on its fourth fund, Intersouth Partners VI, which brought in $205 million. Like its predecessors, the fund looks to fuel the growth of seed- and early-stage life sciences and information technology companies in the mid-Atlantic and Southeast regions, with an emphasis on the Research Triangle area of North Carolina and metro Washington, D.C.
“We were targeted at about $200 million so we are pleased. Early-stage investing is predominately a regional game, and the technology corridor between Washington, D.C., and Atlanta has a tremendous amount of untapped potential,” says Mitch Mumma, general partner with Intersouth. “We are keeping our strategy the same and we have assembled a collection of institutional investors who want to put their money to work in this region.”
Intersouth has historically invested 70% of its funds in North Carolina, which it will do again. The firm stays in the area because it is strengthened by the presence of Research Triangle Park, a technology cluster that is home to companies such as Bayer, Cisco, Dupont, Ericsson, GlaxoSmithKline, IBM, Nortel and Novartis. Additionally, research universities – including Duke University, N.C. State University and the University of North Carolina – are located there.
JGV Cuts Inaugural Fund
Bowing to investor pressure, Jerusalem Global Ventures recently agreed to reduce the size of its inaugural fund from $188 million to $156 million. The Herzelia, Israel-based firm also opted to cut its management fee, although it declined to reveal by how much.
Talk of a JGV fund cut first surfaced last year, when certain limited partners began complaining that the firm would be unable to invest its remaining capital by the end of 2003, as had been promised in the fund’s 1999 offering memorandum. Such concerns were heightened by year-end, when it became apparent that JGV would not add a single new portfolio company in 2002.
“They weren’t investing any of the money, but they refused to cut the fund size or reduce the management fee,” says a source familiar with the situation. “It’s not surprising that some people got upset.”
JGV didn’t budge, however, and instead maintained its right to hold onto the money until the last reasonable moment. In a letter to LPs dated Jan. 30, 2003, firm founder Shlomo Kalish wrote, “Due to the care that we took in selecting our initial investments, it is possible that over the life of the funds we will not call the entire amount of the funds’ committed capital. If, at any time, we reach the conclusion that a reduction in fund size is justified, we will not hesitate to do so.”
The letter also referenced unnamed investors who expressed difficulties in meeting future capital calls, and stated that JGV would not let such firms out of their commitments.
Around the same time, three JGV LPs sent a letter to JGV once again asking for a fund size reduction, plus a suspension of capital calls unless approved by a majority of LPs. The LPs that authored that letter are Alpenside International Ltd., Eurocom Communications Ltd. and Koonras Technologies Inc. (a venture capital group operated by Israeli investment firm Polar Investments Ltd.).
“From our discussions with other limited partners,” the LP letter reads, “we believe that a clear majority of limited partners wish for a significant or total cut in committed capital, but you continue to assert that our view is supported only by the minority.”
Micah Avni, a partner with the firm, declined to discuss LP relations.
The JGV fund in question is actually made up of three smaller funds: one for software, one for communications and one for life sciences. The reduction comes from the first two, which are only about 35% invested, whereas the life sciences fund has called down approximately 60% of its commitments.
In all, the combined fund will invest in approximately 18 companies and be fully committed by year-end. JGV will then begin the process of marketing its next investment vehicle. “If you asked me about the next fund a couple of years ago, I would have said it would be twice the size of this fund, but really the right size is between $75 million and $150 million,” Avni says.
Other JGV investors include Bank Hapoalim, Bank of America, China Development Industrial Bank of Taiwan, Comverse Technology, HarbourVest Partners, Motorola and Telecom Italia.
U.S. Firms Keep Cutting
New World Ventures has cut the size of its $78 million third fund-named William Blair New World Ventures-nearly in half. The tech-focused firm also reduced its management fee by approximately 70%.
“Most of the commitments made into this fund came in early 2000,” explains Chris Girgenti, a managing partner with New World Ventures. “Over the last three years, we’ve seen a lot of changes and we decided to relieve LPs of some of their commitments so they could redeploy their capital elsewhere.”
Girgenti adds that the firm will make new deals, and that the firm is moving along with plans to merge certain procedural operations with Philadelphia-based consultancy Katalyst. “Together, we’d hope to try to raise a fund of around $100 million sometime in the middle of 2004,” he says.
Siemens Mobile Moves Into U.S.
Siemens Mobile Accelerator has opened its first U.S.-based office, and a pair of domestic deals are right around the corner. The group was founded in July 2001 to make early-stage investments in the wireless, mobile communications and mobile data transmission sectors, and claims to be the most active early-stage wireless investor in Europe. Global location include Oberhaching, Germany, Beijing, Stockholm, Shanghai and, now, San Jose, Calif.
“We strongly believe that this is a very good time for wireless investments,” says Dietrich Ulmer, president and chief executive of Siemens Mobile Acceleration. “There are some huge funds with billions, but they are not willing to invest. We are willing to invest.” The venture group has a budget of $20 million for the 2003 fiscal year and usually invests approximately $1 million per deal. All of its investments so far have been in Europe and Asia.
He adds that each potential investment must be wedded to the strategic goals of parent company Siemens.
In a separate move, Siemens Venture Capital effectively laid off at least two of its most senior investment professionals. Sources say the venture unit, which makes later stage investments and has approximately $542 million under management, will likely have more layoffs by April.
Homeland Defense Spawns New Fund
With war drums beating in the background, Paladin Capital Group has launched a new private equity fund devoted to investing in homeland security-related businesses. The firm, whose Pennsylvania Ave. offices are located just blocks from the White House, has already held a first close and hopes to reach (or exceed) its $300 million target sometime in the third quarter.
“We think of the framework for this [fund] as prevent, defend, cope and recover,” says Ken Minihan, a principal with Paladin and former director of the National Security Administration (NSA). “We need to think about homeland security in a global operating environment.”
To that end, Minihan and company (including former CIA director James Woolsey), intend to invest in companies across a broad spectrum of industry sectors-from computer network security infrastructure all the way to antibacterial products. The fund’s minimum transaction size will be $5 million, with its sweet spot between $15 million to $30 million.
One type of company that will be largely absent from the Paladin Homeland Security Fund, however, is startups. This is largely because of Paladin’s belief that the market opportunity is now due to the lingering post-9/11 atmosphere and recent formation of the Department of Homeland Security.
The firm’s investment staff will grow as the fund grows, and many of its investments will continue to be made alongside a $208 million Paladin Capital Partners fund raised in 2000. Minihan was unwilling to discuss fund-raising details, but an SEC document dated Nov. 22, 2000, lists $40 million in LP commitments, with a minimum investment size of $5 million. More money is said to have come in since that filing.
Radius Closes Fund II with $73.5M
Radius Venture Partners has closed its second fund with $73.5 million in its coffers. The New York-based firm’s fund, Radius Venture Partners II L.P., will follow the path of its predecessor and focus on health and life science investments. Since its founding in 1997, Radius has been dedicated to investing in the health and life science industry including medical devices, biotechnology, pharmaceutical, healthcare information technology and healthcare services.
“Our focus is consistent with our last fund, just bigger. We had set out to raised about $75 million to $100 million. I would have liked a little more, but we are very pleased,” says Daniel Lubin, co-founder and managing partner of Radius. “This fund was hard to raise, but we did it.”
Radius had been pounding the pavement touting this fund for 18 months and wrapped up fund-raising efforts toward the end of the 2002 fourth quarter. The firm’s limited partners are geographically widespread, with U.S.-based investors as well as international players. While Lubin would not disclose who the firm’s LPs are, he did say many of them sit on the firm’s advisory board, which includes Beckman Coulter Clinical Diagnostics Division, Columbia University, Banc of America Securities LLC, JP Morgan & Co. and Bain Capital. Additionally, the fund has been matched two to one by the Small Business Administration.
To help invest its newfound capital, Radius last month added longtime Pfizer executive Dr. George Milne as a venture partner.
Boeing Lets $10M Ride
In its first Canadian investment, Boeing Phantom Works, the research and development unit of aerospace giant Boeing (NYSE: BA), has invested $10 million in Montreal-based venture capital firm TechnoCap. Boeing Phantom Works made the investment to take advantage of TechnoCap’s access to technology north of the border.
The investment is typical for the Boeing Phantom Works’ venture capital program, which expects to have approximately $300 million invested in venture capital funds by the end of 2003. The program has been allotted between $50 million and $70 million per year since its inception in 1998 and does not make direct investments.
“We were very interested in Canada,” says Miller Adams, director of Technology Planning & Acquisition with Phantom Works. “We were interested in TechnoCap, because they were focused on technology parallel to what we’re doing.
“Our goal is to bring good technology into the company,” says Adams, adding that he expects Boeing to make another investment in a Canadian venture capital fund active in the manufacturing sector before the end of 2003.
Boeing Phantom Works has increased its focus on Russia and Eastern Europe, Latin America and Spain. Stateside, Boeing hopes to increase its VC activity in the Chicago and Northern Midwest region. Venture capital funds it has invested in include Alexander Hutton Venture Partners, Inspire Corp., Jerusalem Venture Partners, Moscow-based Mint Capital and the UOV Venture Fund of China.
Other investors in TechnoCap include Bombardier Trust, CDP Capital – Technology Ventures, Desjardins Pension Fund, Solidarity Fund QFL, National Bank and Technoange.
TechnoCap focuses on investing in hardware and enterprise software companies. Its portfolio includes Edmonton, Canada-based BigBangwidth, which provides technology that employs single mode fiber optic nanotech devices at its core to enable secure protocol-independent data delivery; Ottawa-based FreeBalance, a provider of software for government business processes and Monttreal-based Hyperchip, which is developing a high-capacity, carrier-class router.
Amphion Tries To Reverse Its Fate
When Harry Newton opened his mail on Feb. 11, he had what experienced venture capitalists are calling “sticker shock.” In Newton’s mail was a letter from Bob Bertoldi, the managing member of New York-based Amphion Venture Partners LLC, informing him that as of Feb. 7, his $1 million investment in Amphion was worth precisely nothing, or as Newton wrote in his newsletter, Harry Newton’s Technology Investor, “$0. That’s ZERO. Niente, Nothing. Nix.” Newton was pissed. And for the next three days, Amphion’s letter was headline news in Newton’s Web newsletter.
The crux of Newton’s story is that the $70 million raised by Bertoldi for Amphion in 1995 is, from an accounting point of view, gone. Not quite, says Bertoldi. There are assets, represented by shares in Firestar, Axcess, and Biocentric Solutions, the three remaining investments of the fund. And, he insists, Amphion will continue to manage its investments in these firms until such time as the holdings in these firms are disposed of, which is unlikely in the immediate future.
Apart from the hurdles faced in realizing any returns from the three firms (Axcess, for example, was de-listed from the Nasdaq), there is an issue of debt that Amphion took on to keep its portfolio companies alive-some $15 million worth of loans, that has a preference over the return of limited partners’ investments. In short, Newton has reason for his concern that he may never see a single penny return of his original $1 million, let alone a healthy return for the use of his money over several years.
As for Amphion and Vennworks (Bertoldi’s incubator firm, which also has investments in the three companies), one is torn between praising Bertoldi for coming clean about the state of his LPs’ investments and the desire to make of Bertoldi a poster child for disastrous investing.
The truth is that Bertoldi is trying to make good on his goals for Amphion. His year-end letter to investors, announcing his decision to dissolve the fund, rather than extending its life by another two years-as allowed in the funds’ covenants-tells Amphion’s investors that only half of the management fees owed for 2001 were paid, and that no fees are to be taken for 2003, beyond out-of-pocket expenses. The letter also points out that Bertoldi has made personal investments into Amphion’s portfolio companies.
Amphion, founded in 1997 and named for a Greek god (who ironically destroyed himself after receiving a cruel blow during a battle), may in the end, be most important as one of the first venture capital firms from the boom times to publicly disappear. One typically hears of the difficulty of VC funds from the vintages of 1998 through 2000. If Amphion loses money, which Bertoldi vehemently denies will happen, it may represent the likely outcome for dozens of other funds that invested in even less substantial firms than those represented in Amphion’s portfolio.
CalSTRS Gives Cambridge Top Honors
After a year of bids, appointments and negotiations, the California State Teachers’ Retirement System (CalSTRS) has made one final shuffle to its roster of consultants by replacing longtime gatekeeper Pathway Capital Management of Irvine, Calif., with Cambridge Associates LLC of Cambridge, Mass.
Cambridge Associates will recommend private equity partnerships, perform due diligence and assist and advise the pension plan’s staff on investment opportunities. Its contract will be valid for three years, plus two one-year extensions.
Although Pathway Capital Management had played the role of both advisor and gatekeeper for the last five years, the Sacramento-based pension fund said in November 2001 that it would separate those roles and hire one manager to be its advisor and another to serve as an independent fiduciary. It named McKinsey & Co.’s San Francisco team to the advisory role in July, making it responsible for strategy and other macro-level issues.
CalSTRS’ private equity portfolio accounts for $4.3 billion of the fund’s $92 billion total market value. The fund invests in direct equity, private equity and venture capital partnerships.
In other CalSTRS news, all but 10 of the general partners in its private equity portfolio have agreed to waive confidentiality agreements to allow the pension fund to disclose investment performance data.
CalSTRS released an updated list of internal rates of return (IRRs) at the March 5 meeting of its investment committee. Although the public pension fund disclosed IRRs for about 150 of its portfolio’s private equity funds during the last weeks of December, it is continuing to negotiate with the holdouts, including Apax Partners, Austin Ventures and Mayfield.
LPs Fight Over Viventures
Limited partners of Viventures Partners are in negotiations to take over its management from Vivendi Universal Net (VU Net), the Internet subsidiary of telecom and media company Vivendi Universal. So far VU Net has rejected separate takeover bids by individual investor Albert Frere of Belgium and California-based private equity firm Global Asset Capital.
The talks come after Vivendi’s decision to give up its 40% share of Viventures II. Viventures II was valued at $683 million until Vivendi missed a capital call in December, excusing the company from future financing commitments and excluding it from future returns. Vivendi’s bailing out cut the value of the fund by 20%, which leaves it with approximately $547 million in commitments. Though it no longer has a financial stake in Viventures Partners, Vivendi still controls the management company, leaving other LPs and portfolio companies in limbo.
The negotiations concern whether or not to reduce the fund further, which partner will manage the fund if it is continued and distribution of such assets to the different limited partners if the fund is cut or wound down. Both Frere and Vivendi want Viventures II to continue.
Limited partners in Viventures that reportedly support Frere’s effort to wrest control of the venture firm include Societe Generale Asset Management and firms from Singapore. Other Viventures limited partners include Cisco Systems, Donaldson Lufkin & Jenrette, SG Asset Management, Siemens Venture Capital, Singapore Press Holdings, SP Capital and TIF Ventures. Frere invested in the fund through his holding company, Compagnie Nationale a Portefeuille, and GBL Finance.
Utah Wants To Get Into VC Act
Utah’s state legislature is working through a bill that would create a local fund-of-funds program modeled after similar efforts in Ohio and Oklahoma. The proposal is named the Venture Capital Enhancement Act (HB 240), and was introduced in the Utah State Assembly by State Rep. Peggy Wallace. If it becomes law, the legislation would create a $100 million Utah fund-of-funds to invest in between 10 and 15 venture capital funds that are Utah-based or the fund-of-funds will invest directly in Utah companies. The state government hopes to attract new venture capital firms to Utah and support the handful of VCs already there.
“Utah, like most areas of the country, has seen a steep drop in venture investments,” says Todd J. Stevens, a managing director with Wasatch Venture Fund and supporter of the proposed legislation. “We’re trying to reverse that trend.” According to Venture Economics (PE Week’s publisher), Utah companies received $714 million in 2000. But hard economic times sent VCs beating a hasty retreat back to Silicon Valley: Utah took in $250 million in venture capital investments in 2001 and $95 million in 2002.
Similar to a 10-year-old venture capital program in Oklahoma and Iowa and a recently established program in Ohio, Utah’s Venture Capital Enhancement Act would encourage large companies and financial institutions to invest in the fund using “contingent tax credits” to cover potential losses. The state will use a local venture capital or private equity fund to manage the fund-of-funds’ investments. If these investors do not receive their principal plus 5% or 6%, they can present this loss to the state for tax credits. The legislation restricts the amount that may be claimed to $20 million per year.
3i Says Sayonara to Tokyo
3i Group is closing its Tokyo office, and the London-based investment company will be reassigning its employees affected by the closure. Any further Japanese investments will be made through 3i’s Hong Kong division, which oversees Chinese and Korean investments.
After opening the six-person 3i Asia Pacific Japan Ltd. office in July 1999, 3i said it expected to make several investments in the region per year. But despite a plethora of companies left in distress by the Asian economy, the group did one deal, the $125 million purchase of a 67% share of Vantec Corp., the logistical arm of automaker Nissan Motor Co., in January 2001.
3i says it wants Asian investments to comprise 5% of its portfolio by 2006. Additionally, it wants its investments in continental Europe to make up 30% of its portfolio and the United States to make up 10% of its portfolio. 3i was founded in 1945 and has approximately 900 employees in 35 offices worldwide.
Reed Elsevier Coasts Into U.S.
Reed Elsevier Ventures, the investment arm of U.K. publisher Reed Elsevier PLC, has extended its reach into the United States by opening a Silicon Valley office. Rakesh Sood, a newly appointed partner, will run West Coast operations and oversee investments from the firm’s $100 million fund.
Sood left Sprout Group last summer after two-and-a-half years of managing enterprise software and software infrastructure investments. Prior to his time at Sprout, Sood was an Internet analyst with Goldman, Sachs & Co. in New York after 12 years of sales, marketing and business development experience at AT&T, Hewlett-Packard and Intel Corp.
Reed Elsevier’s investment team has five members, headed by managing director Diana Noble in London. It will add more to its Silicon Valley group depending on the opportunities it finds in the region. The group also has 13 venture associates, who really are representatives from the publishing house that have been placed at the venture unit to insure that the group is aligned with the company’s strategic interests. The group has identified three strategic areas for investment: business process management, risk management and search capabilities. Moreover, these areas include fraud detection and anti-identity theft programs, disaster recovery services, content management and revenue optimization software.
The firm typically invests $1 million to $10 million in each portfolio company, favoring later-stage deals that it can lead. It often takes a seat on a company’s board of directors. The fund plans to invest in three to four new deals this year.
Brightstar Gets Switched On
Collar Capital CEO Jeremy Collar sees opportunity in technology development where many corporations have failed. “They set up these incubators, which have turned into incinerators,” says Collar. Such was the opportunity when Collar Capital purchased investment portfolio of Lucent in late 2001 for about $100 million. Collar holds an 80% share of Bell Lab’s venture portfolio, currently being managed by New Venture Partners (formally know as Lucent New Ventures).
Collar sees the same opportunity now as Collar Capital joins with New Venture Partners and BTexact Technologies, the research and technology development unit of British Telecom (BT) to form NVP Brightstar.
NVP Brightstar, an independent corporate partnership based in Ipswich, England, is 77% owned by Collar Capital and 23% owned by BT. NVP Brightstar began operations in March by buying the majority of the portfolio companies of Brightstar, BTexact’s incubator.
New Venture Partners will manage NVP Brightstar’s investments and fund new companies. Capital committed to the new group totals approximately $100 million.
Since its founding as an in-house incubator for BTexact in 2000, Brightstar has spun out nine companies and raised $55 million in venture capital.
NVP Brightstar will have the right of first refusal on any entity that BTexact wants to spin out of its labs. So far the new venture group has taken control of four such embryonic companies: a.p.solve, a provider of intelligent management software and serivces; telecom revenue assurance provider Azure; Evolved Networks, a creator of artificial intelligence-based software that automates telecom network design and provisioning; and the Microwave Photonics, which develops technology for Wi-Fi and mobile cellular infrastructure.
NVP hopes NVP Brightstar will be the first in a series. “Our goal is to put together a few more of these [in the next few years] and end up with a worldwide network of these funds,” says Andrew Garman, managing director of NVP.