Granite Global raises fund on solid foundation

One of venture capital’s most successful firms has raised a third fund, nearly double the size of its 2004 vintage fund.

Granite Global Ventures, based in Menlo Park, Calif., returned 41.7% on its inaugural 2000 vintage fund and is returning 17.2% on Granite Global Ventures II, a 2004 fund, according to data from the California Public Employees’ Retirement System, as of March 31. Those returns put the firm in the top 10 performers of the pension fund’s alternative asset portfolio.

Now, Granite Global hopes lightning strikes twice as it has raised $400 million for Granite Global Ventures III, which will invest in expansion stage tech companies in the United Sates and China. The fund is nearly twice the size of its $230 million predecessor fund. The fund, which the firm began marketing in July, was significantly oversubscribed. “Our track record certainly helped,” says CFO Stephen Hyndman. Limited partners for the fund include the University of California, AlpInvest, Grove Street Advisors and Pantheon.

Although the firm has bulked up since its last offering, it won’t be hiring any new partners. The firm has added three managing directors since early last year. It picked up Jixun Foo from DFJ ePlanet Ventures, where he invested in Baidu (Nasdaq: BIDU) and Focus Media (Nasdaq:FMCN); it added Jenny Lee from JAFCO Asia and promoted her in March 2006; and it hired Glenn Solomon from Partech International, where he was an investor in Vignette (Nasdaq: VIGN) and Broadbase Software, which was acquired by Kana.

Granite Global had been planning for a $400 million fund for the last two years and ramped up its staff accordingly, Managing Director Scott Bonham says.

The firm invests between 30% to half of its funds in Chinese startups, and three of its seven managing directors are located in Shanghai and Singapore. “The big insight for us was that the world was globalizing and the traditional venture model was going to change,” Bonham says. “The idea that if a startup didn’t have a 650 area code you couldn’t invest, was going to change. You have to welcome it and make changes appropriately.”

A large portion of the firm’s success has come from its overseas deals. Not only did it score big on Chinese Internet company Alibaba (Yahoo bought a 40% stake in the China search engine for $1 billion), it also backed Beijing-based mobile content company Hurray! Solutions (Nasdaq: HRAY) before its 2005 IPO of $70 million. Granite Global is hoping for a big win on Toodou.com, a Chinese startup that Bonham calls “the YouTube of China.” Toodou has raised $8.5 million from Granite, IDG Technology Venture Investment and JAFCO Investment.

Having a significant Chinese operation also helps the firm get into domestic expansion stage deals, Bonham says. “We do a lot of business development for companies in the U.S. trying to get into China and that allows us to get into them,” Bonham says.

The firm’s returns are none too shabby, either, thanks to these later stage deals. Granite has had successful exits from such companies as P-Cube, which it sold to Cisco (Nasdaq: CSCO); NetScaler, which was bought by Citrix Systems (Nasdaq: CTXS); and XFire, which sold to Viacom (NYSE: VIA). The firm looks for companies with dedicated customers and growing revenue. “Those are the type of businesses that if the economy goes south, you’ll still make money on,” Bonham says. “It’s a way for us to mitigate risk. We’re trying to hit a lot of base hits, we’re not trying to get 10X all the time.”