Kodiak & Weisel Still Early-Stage Fans –

CONCORD, Mass. – While much of the venture capital community has gone back to basics by funding later-stage companies with proven business plans, at least two private equity firms are still bullish on start-ups.

In late May, Concord-based Kodiak Venture Partners and San Francisco-based Thomas Weisel Partners LLC announced that they had each recently closed early-stage sophomore funds originally targeted at $250 million.

At its final close, Kodiak Venture Partners II LP (KVP II) weighed in at $290 million, while Thomas Weisel Venture Partners LP (TWVP) finished up with $255 million. In addition, both investment vehicles held $200 million initial closes late last year and will focus on technology and Internet infrastructure companies, including communications and software plays. After that, however, the strategies diverge slightly in that KVP II’s portfolio will also include semiconductor deals.

Introducing KVP II…

Like most VCs these days, Kodiak’s David Furneaux would argue that now is good time to invest and, hence, to raise a decent-sized fund. When asked why his firm didn’t shoot for a coveted spot in the billion-dollar fund club, he basically said it stood against the principles Kodiak had been built on.

“You get away from the fundamentals of how to build [good] companies when you have too much money,” said Furneaux, who is a co-founder and managing general partner at Kodiak. “We created Kodiak to take all the good things and good business models that great VC firms have created. There has been a departure from those fundamentals, such as low valuations and milestone-based fundings, but [ultimately] we’re judged by our ability to return high multiples. The larger the fund, the harder it is to return multiples of capital.”

Kodiak’s existing limited partners seem content with that rationale, as they all came back to endorse Fund II, alongside some new players.

Goldman, Sachs & Co. led KVP II’s LP roster and was joined by other old-guard institutional investors like PMC-Sierra, BancBoston Capital, CIBC and Deutsche Bank Alex. Brown. Its LP family also crosses over into the New Economy, as the firm hand-picked more than 100 wealthy individuals from more than 60 technology companies across the country to participate in its funds, Furneaux said.

Following the strategy employed in 1999’s $70 million Fund I, KVP II will focus on its Boston base, but be willing to spread out between Ottawa and Washington, D.C.

“Ottawa has some of the best communications engineers in the world,” Furneaux said, referring to the region’s hearty deal flow. “There are a million people in that region, and about 50,000 work in high-tech fields. We saw it as a place underserved by venture [firms] back in 1995.”

KVP II also does not deviate much from its predecessor in that its investment size will fall between $500,000 and $5 million, depending on the individual capital needs of its portfolio companies, he added.

As such, the fund will likely bring about 25 to 30 companies into the Kodiak fold over the next two or three years, with about 50% being reserved for later rounds.

Although it officially closed in May, KVP II has already committed $9 million to four new companies, including optical communications firm TeraConnect, wireless connectivity chip-maker IceFyre Semiconductor, network and telecommunication equipment provider Sentito and data compression and chip encryption technology developer Chaoticom, a spin-out from the University of New Hampshire’s research lab.

Furneaux said he expected Kodiak to do between 10 and 12 deals by the end of the year in keeping with its historic investment pace.

…And Its Virtual Twin, TWVP

Traditionally a late-stage and buyout investor, Thomas Weisel Partners chose to establish a start-up-focused fund because it recognized that early-stage opportunities were still abundant amid dotcom fallout, said Andy Sessions, a partner at the firm.

“We were seeing a tremendous amount of early-stage deal flow, but we didn’t have a vehicle to capitalize on and capture that flow,” he explained.

As such, TWVP’s early-stage strategy is quite a departure from that of the firm’s first fund, Thomas Weisel Capital Partners LP, a $1.3 billion later-stage investment vehicle that closed last January.

That fund’s success, along with the clout of the Thomas Weisel brand, enabled the firm to raise more than it anticipated for its latest offering, Sessions said. Indeed, it virtually ignored some of the cautious deeds of other early-stage private equity houses, which in some cases had gone so far as to prematurely halt their fund-raising efforts and even return commitments to their limited partners.

“There is a bifurcation going on between some of the incumbents with great track records and [firms] with a different story and product to offer LPs,” Sessions explained. “What our LPs saw with us was not just two smart guys hanging up their shingles, but an 800-person, global organization with tremendous resources. There was no black magic in terms of getting people to participate. Relatively speaking, they thought it was a good place to make a bet.”

In addition to Thomas Weisel employees – who are given first dibs on making small commitments to company funds – the firm’s LPs included both existing and new institutional investors such as CalPERS, Raytheon, Natexis, Winterthur, National City Bank, EFG and S.E. Banken. The new fund also boasts participation from communications heavyweights like JDS Uniphase and Siebel Systems.

Sessions said he anticipated that the fund would invest between $2 million and $10 million in about 20 firms. To date, TWVP has already invested $21 million in three companies, including Aligo, an enterprise software company focused on mobile data applications; Bay Microsystems, a next-generation networking firm; and Santel Networks, an optical networking play.

With additional offices in New York and Boston, the firm will seek out investments mostly in the U.S. and Canada, Sessions said. It also has an office in London, but Sessions said overseas deals aren’t in the cards for TWVP.

With the new fund, Thomas Weisel Partners currently has about $2 billion under management.