SAN FRANCISCO – Venture Strategy in mid-April held a $175 million final close on its sophomore effort, VS-2, said Joanna Rees Gallanter, managing partner at the firm. The fund, which had been targeted for $100 million, held a first close on $55 million in January (VCJ, March, page 34).
The vehicle will back approximately 20 to 25 early- to expansion-stage companies in the business-to-business enabling technology arena, the business-to-business sector and what Gallanter refers to as special situation companies, like dotcom spinouts from existing offline companies. The firm focuses on backing companies that are committed to being brand leaders in their market sectors.
Initial investments will range from $4 million to $5 million, with follow-on investments bringing total commitments to some deals as high as $10 million. Gallanter expects about 50% of the fund’s capital will back enabling technology companies, 30% to 40% will back B2B companies and the remainder will go to special situation deals. The firm prefers to back companies that are close to its headquarters in San Francisco, but Gallanter said Venture Strategy will not let distance keep the firm from a good opportunity.
The vehicle received $300 million in soft-circled commitments from its limited partners. However, Venture Strategy decided to cap the fund at $175 million because it wanted to continue to have the flexibility to invest in early rounds of financing, and it did not want to tarnish its reputation as a capable co-investor, Gallanter said.
“The bottom line is, if we let it get too big, we might have felt the pressure of more dollars and changed our strategy,” she said. “We have lead some deals, but we have also developed a reputation as a good co-investor, and we did not want to send the wrong signal to the marketplace, and make it think we wanted to own deals.”
The decision to cap the fund at $175 million was based on the amount of capital the firm wanted to invest per deal and the number of deals that could reasonably be done by each partner, Gallanter said. She has three partners: David Likins, Tony Conrad and Matt Crisp. “Six deals per partner seemed like the right number, so $175 million appeared to be an appropriate amount of money,” she added.
Limited partners in Venture Strategy’s first vehicle, the $25 million VS-1, were all individuals, Gallanter said, and these LPs provided the majority of the capital for fund II’s first close. The second close was dominated by capital invested by new institutional investors, including Invesco, Horsely Bridge Partners Inc., FLAG Venture Management LLC, Pantheon Ventures Inc. and The Wellcome Trust.
Venture Strategy’s partners collectively put up 1% of the vehicle’s total capital. The firm collects a 2.5% annual management fee and has an 80%/20% carried interest structure. To date, the fund has backed four deals and has another four in the pipeline, which altogether should amount to $33 million, Gallanter said.