Hummer Winblad refocuses, reloads

Hummer Winblad Venture Partners has finally put Napster behind it.

The venture firm settled a long-running lawsuit over the controversial music-swapping service late last year and has now raised its first new fund in seven years.

The suit by Universal Music Group and EMI Recorded Music claimed that Napster “provided a safe haven for the rampant piracy of copyrighted works on an epic and unprecedented scale,” and that “Hummer Winblad knowingly facilitated infringement of plaintiff’s copyrights for its direct financial benefit.” (Napster investor Bertlesmann was also named in the suit.)

As of last October, things weren’t looking good for Hummer Winblad. The record labels had won sanctions against the firm for inadvertently destroying emails related to Napster. Then Judge Marilyn Patel ruled that investing in Napster could be viewed as inducement to infringe on copyrights.

But the battle turned dramatically when the judge ordered EMI and Universal to submit documents they had shared with their lawyers. The documents might have shown that the record labels had misled the government during an online music service antitrust investigation. The labels settled their suit with Hummer Winblad out of court.

Eight months later, Hummer Winblad held a first close on $183.5 million for a sixth fund with a target of $200 million, a substantially smaller amount than the firm’s $424 million fifth fund raised in 2000.

The small fund size shouldn’t be a problem. “John [Hummer] is very capital efficient and likes investing in companies where the capital requirement is less than $15 million,” says Hank Barry, a former Hummer Winblad partner who is now an attorney with Howard Rice Nemerovski Canady Falk & Rabkin. “He watches it like a hawk.”

The fact that fund-raising began soon after the court settlement was purely coincidental, says Partner Mitchell Kertzman. The firm just needed more cash for deals. To wit, it has already made three investments out of Fund VI, he says.

We’ve been analytical and introspective to what we’ve done well and where we’ve failed.

Mitchell Kertzman, Partner, Hummer Winblad Venture Partners

Hummer Winblad experienced some turn-over in its limited partners, which Kertzman attributes to the firm’s poor performance during the dot-com era, when it was investing out of its $318 million fourth fund raised in 1999. “There are LPs that have been there since the beginning, but Fund IV results factored into some people’s decision,” Kertzman says.

LPS who came on board for the new fund include J.P. Morgan Pooled Venture Capital Institutional Investors III, the VFMC Infrastructure Fund II (via National Nominees Ltd.) and the Northrop Grumman Pension Master Trust (via State Street Bank and Trust Co.), according to a regulatory filing.

LPs can be assured that Hummer Winblad won’t invest heavily in consumer Internet startups again after getting burned by the likes of Pets.com, HomeGrocer, Gazoontite and Mombo.

“Every great VC was a phenomenal believer in companies that turned out failures,” Kertzman says. “You expect people to make mistakes. What you don’t want to see is them not learning from them. We’ve been analytical and introspective to what we’ve done well and where we’ve failed.”

The partners sat down and looked at where they made money and lost money since the firm’s inception in 1989. The upshot? “We have done incredibly in infrastructure software investing, well in applications investing, and poorly in consumer investments,” Kertzman says.

Kertzman joined the firm in 2003 after a successful career as an entrepreneur and executive and immediately took to the software-only investment thesis. “I joked about this when I got here in 2003 having been in the portfolio as one the companies in 1991: Had I been Rip Van Winkle at the time of the funding and then woken up in Hummer Winblad in 2003, I would have assumed that nothing had changed.”

The renewed focus on software stands out in the deals Hummer Winblad has done this year. As of mid-August, nine of the 13 investments in 2007 were in companies that develop software or offer software as a service, according to Thomson Financial (publisher of VCJ).

Still, the firm isn’t refraining entirely from Web 2.0 deals. It has done two such deals this year: It invested $1 million in Kwiry, an online service that lets consumers text notes to themselves, and an undisclosed amount in Widgetbox, which hosts an online community for makers of Web Widgets that run on websites such as MySpace.

Hummer Winblad Venture Partners

www.humwin.com

Founded: 1989

Headquarters: San Francisco

New fund: $200M (has raised $183.5M to date)

Previous fund: $424M, raised in 2000

Under management: $1.2B

Team: Co-Founding Partner John Hummer, Co-Founding Partner Ann Winblad, Partner Mark Gorenberg, Partner Doug Hickey, Partner Mitchell Kertzman, CFO Todd Forrest, Principal Prashant Shah, Principal Will Price, Associate Lars Leckie.

Select LPs: J.P. Morgan Pooled Venture Capital Institutional Investors III, National Nominees Limited As Nominee for VFMC Infrastructure Fund II, and the State Street Bank and Trust Company as Trustee for the Northrop Grumman Pension Master Trust.

Focus: Early stage software investments.

Source: VCJ reporting