Fund Profile: Sky Is Clear for Washington’s OVP –

What appears to be a stormy fund-raising climate is little more than a drizzle to Chad Waite, a general partner at OVP Venture Partners. It once took him 22 months to raise a fund of $37 million. “You don’t know how many people tried to break my nose by shutting the door on it,” he says with a laugh.

Waite’s nose is in no danger of getting smashed. He and his four partners held a final close on a sixth fund of $190.6 million in July. OVP, based in Kirkland, Wash., just outside of Seattle, held a first close on $165 million in October 2001. It expected to hold a final close last fall, but because of the events of Sept. 11, it put off the final bit of fundraising until February of this year.

The 20-year-old firm has effectively had two lives. Its first two funds produced single digit returns, resulting in little interest in its third when Waite hit the fund-raising trail in 1991. The rebirth happened after Waite joined in 1987 and General Partner Gerry Langeler, a co-founder of Mentor Graphics, came aboard in 1992.

LPs were asking what made OVP stand apart from other firms, so “we needed a marketing story that wasn’t bullshit,” says the plainspoken Waite. He and Langeler sat down and asked themselves what was working and what wasn’t. Conclusion No. 1: The firm didn’t do well when it invested in follow-on rounds of deals that it hadn’t sourced. “Every time we’d do someone else’s second round, we were getting our ass handed to us,” Waite says.

Conclusion No. 2: OVP did much better by investing in its backyard than investing in distant locales like Silicon Valley.

Starting with its third fund and continuing today, OVP only invests in situations where it’s the first institutional money and the lead or co-lead. It puts up $2 million to $6 million for an initial investment and $8 million to $12 million over the life of a deal. It also restricts itself to investing in the Northwest, except in special situations.

Those two strategies have paid off. Its third fund, which closed in 1993, produced an internal rate of return in excess of 30%, while its fourth fund, a $63.8 million vehicle raised in December 1997, has an IRR hovering around 80%, Waite says.

Among OVP’s hits are @Mobile, Logic Modeling Systems, Verity and WatchGuard Technologies.

Returning investors in the new fund are the Oregon Public Employees Retirement Fund, the Washington Investment Board and Western Metal Industry Pension, a union pension plan based in Seattle. The trio put up the bulk of the money about $120 million combined.

Other investors include the California Public Employees’ Retirement System (through Grove Street Advisors), Dow Chemical, Nationwide Insurance, Myer Memorial Trust of Portland, Indiana University Foundation, Kenyon College, and investment manager Frank Russell (on behalf of one of its clients). A corporate pension fund based in Connecticut, which Waite declines to name, contributed most of the money for the second close and is the fund’s third largest investor.

OVP’s sixth fund will focus on software. Specifically, it will focus on deals in the areas of “unstructured data,” business process outsourcing and wireless and network infrastructure. It has made one investment in an unstructured data company-a series A for an undisclosed amount in October 2001 in Intelligent Results, based in Bellevue, Wash. The startup is trying to develop the equivalent of a relational database for unstructured data like emails and customer relationship management data.

In the area of outsourced business processing, OVP made a series A investment of $6 million in April 2000 in Returns Online of Mercer Island, Wash. The company has developed proprietary software to process everything from clothing to computers. It’s now seeking a B round.

Among OVP’s wireless investments are a series A of $4.4 million in May 2000 and a series B of $2.5 million this year for Action Engine. The Redmond, Wash.-based company has built a software platform that allows enterprise customers to develop wireless applications.

OVP has been relatively successful with biotech investing, but it won’t make any such deals in the new fund. It has consistently seen a return of four to five times its money on biotech deals, as opposed to 15 to 20 times its money for IT deals, Waite says.

A perfect example is Rosetta Inpharmatics, which Waite co-founded in January 1997 with Vulcan Ventures. It was sold to Merck in May 2001 for $660 million, but OVP made just $22.2 million on its $6 million investment. In contrast, OVP saw a return of $121.4 million on its $4.4 million investment in Watchguard.