PASADENA, Calif – Continuing its race through the venture capital market, idealab Capital Partners (ICP) recently closed its second fund at $363 million, a scant 18 months after the firm held a first close on Fund I.
“We raised this money in a really short amount of time,” said Bill Elkus, co-founder and managing director of ICP. “I took two one-day trips to meet people in New York and Boston and the rest was follow-up.”
The capital committed to idealab Capital Partners II L.P. more than triples the $105 million vehicle ICP raised in its inaugural effort, which held a final close in February.
New limited partners in the fund include Massachusetts Institute of Technology, Goldman Sachs Group Inc., J.P. Morgan, HarbourVest Partners, Horsley Bridge Partners, California Institute of Technology, Invesco Private Capital, Mellon Ventures and Los Angeles County Retirement Association, among others, Elkus said. He added that ICP partners committed $30 million of personal capital to the fund.
Moore Capital Management, the lead investor in Fund I, re-upped for Fund II, exercising its contractual right to remain the firm’s largest investor. Elkus said all but one existing L.P. signed on to the new fund.
Fund I investors included Ben Rosen, of Sevin Rosen, who also is chairman and acting chief executive of Compaq, Sun America, Union Bank of California, The Times Mirror Corp., State of Michigan, Grove Street Capital on behalf of California Public Employees’ Retirement System, Sumitomo Corp., Ray Hunt and Finn Casperson.
The firm intends to establish an advisory relationship with a group of entrepreneurs that Elkus said will bring deals to the firm and sit on the boards of directors of portfolio companies. These entrepreneurs have been brought in as limited partners of the fund, and Elkus said the group will be expected to source deals, participate in due diligence and will be given the opportunity to run deals.
Times Are Changing
The rationale behind such a large venture fund, which Elkus said is the biggest in Southern California, came from a combination of decreased early-stage deal syndication and increasingly hasty second rounds of financing.
As the size of venture funds increase, more firms find themselves going it alone on early-stage investments to deploy capital. This leads to portfolio companies receiving greater attention from the firms that have made solo commitments.
“There are pros and cons to [reduced syndication],” Elkus said. “On one hand you miss having another firm involved, but that is counter-balanced by the shorter time people take to raise second rounds.”
ICP expects to use the larger capitalization to be the lone investor in early-stage rounds. In addition, Elkus expects the greater amount of capital to allow the firm to more aggressively follow companies into larger, later rounds.
“In this market, companies are doing large later-stage rounds that can still be profitable for venture capitalists,” Elkus said. “NetZero and Centraal [two Fund I portfolio companies] took large rounds, and we did not take pro rata. A bigger fund could have put a lot more money to work and grabbed an even higher IRR.”
Initially launched with a target of $250 million, Elkus said Fund II attracted more than $600 million in interest. That led the principals at the Los Angeles-based firm to re-evaluate plans and ultimately settle on the $350 million total.
Fund I has had speedy realizations. Currently, the fund holds public securities in five companies – eToys, Goto.com, MP3, Emusic and Microsoft (because of the software giant’s acquisition of Jump) – and Elkus said the firm likely would have four more portfolio companies in registration by year end.
Since closing, the fund has made two commitments. The first, HealthAllies.com closed in August and the second remained undisclosed at press time.
ICP’s partners have not reached a firm decision about hiring additional staff, but Elkus said he would not be surprised if in one year the firm’s staff is larger than it is today. Currently, ICP’s staff includes Elkus, managing director Bill Gross, Principal James Armstrong and Principal William Quigley.