It didn’t exactly sound like a recipe for success: three 20-somethings starting a new venture fund just before the bubble burst in 2000. But the three young founders of ITU Ventures are showing they have staying power: They recently held a first close on $40 million fund that will invest in technology emerging from the labs of California’s research universities.
Beverly Hills-based ITU held an initial close on $7 million for its third offering, ITU Ventures California I LP. The new fund will scout research labs for emerging technologies in electronic design automation, materials science and next-generation semiconductors. It will work directly with university faculty and technology transfer groups to seed ideas.
ITU was founded as Information Technology University in March 2000. Its first fund totaled $35 million, according to research firm Venture Economics (publisher of Venture Capital Journal). Since that time, ITU has made 13 investments in cutting-edge technologies being developed in universities.
Despite their youth, the firm’s managing directors-Chad Brownstein, 29, Jonah Schnel, 29, and Adam Winnick, 27-have made enough smart bets that their portfolio companies have attracted additional funding from the respected venture firms August Capital, Draper Fisher Jurvetson (DFJ), Mohr Davidow Ventures and Sevin Rosen Funds.
ITU’s total investment in a single portfolio company will reach between $2.5 million to $3 million over the company’s life cycle, Brownstein says.
After completing a $250,000 convertible bridge financing to secure intellectual property rights, ITU is ready to take an idea out of the lab and take the first steps to convert it into a company. ITU will bring in a management team and develop a comprehensive business plan. Once the company has met certain technology milestones and engaged at least one major customer, ITU will market the deal to secure a lead for the company’s next institutional round of financing. Although ITU’s bridge notes will convert to equity at a valuation set by a third party, ITU will hold on to its pro rata share of the company’s equity through subsequent rounds of venture financing.
ITU has not had any exits, but some of its portfolio companies are making good progress. For example, Coatue Corp., a memory chipmaker that spun out of UCLA, has secured $8.6 million in follow-on financing from DFJ. It also closed a joint development deal with Advanced Micro Devices to build DRAM and flash chips, and AMD invested $10 million in the company.
Another ITU success story is Eizel Technologies, a Carnegie Mellon University spinout. The maker of multimedia software for wireless devices has a development deal with cell phone giant Nokia as well as investment capital from Nokia.
“Working with large partners and getting them to invest is how we validate our strategy and judge success,” Brownstein says. ITU may see its first liquidity event this year. “It takes three years for a company to become profitable,” Brownstein says.
The firm is close to making its first investment out of the new fund-an electronic design automation play being spun out of UC Berkeley. Its pipeline includes 15 deals under review for the last six months.
Although the firm’s reach extends from Rhode Island to California-with stops in North Carolina, Pennsylvania and Texas-its latest fund will not cross the Sierras to the east.
“The history of California technology has always been one of leadership, with the ability to bring together key faculty and entrepreneurs and investors,” Brownstein says. “The University of California system, and California’s private universities, like CalTech, have highly sophisticated technology transfer programs that have experience putting together complicated technology transfer deals with venture capitalists.”
Universities like Carnegie Mellon University, Columbia University, Georgia Tech, Johns Hopkins University, North Carolina State University and Princeton University have opened their doors to ITU’s previous funds. This time the firm is limiting its scope to 15 California universities-the California State University System, the University of California system and private schools like CalTech and Stanford. It has put together a panel of 15 advisers to bridge the gap between the academic and investment communities.
Investors in previous ITU funds include Colorado’s pension fund, Softbank, AMD, First Data Corp., GKM Ventures, Greater Bay Bancorp, and funds managed by Trust Co. of the West and the principals of Apollo Management. This time around, ITU is targeting a new list of corporate investors. It will still take some non-California money. Colorado’s state pension fund will invest up to $15 million in ITU California Ventures I. It has already put up $5 million to finance the fund’s first close, alongside $2 million from ITU’s three principals.