NEW YORK – Six weeks after launching its first venture capital fund, Lehman Brothers in April closed Lehman Brothers Venture Partners L.P. on $350 million.
The firm committed $145 million to the fund, while its employees invested an additional $75 million. The balance of the fund’s capital primarily came from high-net-worth clients of the firm, although one pension fund contributed $5 million, said Managing Director Mike Odrich, who added that the pension fund has not invested in any of the firm’s previous buyout funds.
“We didn’t want to spend a lot of time raising money,” he said. “We could have just as well put up all of the money.”
Prior to raising a dedicated venture vehicle, Mr. Odrich said Lehman Brothers’ Chief Executive Richard Fuld authorized the allocation of $70 million of firm capital for venture investments to test the model. Since 1996, the group has invested in 16 venture-stage companies, including Marimba Inc. and VerticalNet Inc., both of which recently went public.
“The fund will allow us to make smaller bets in the high-growth sector,” Mr. Odrich said. “It is a way to create and capture a nice margin of the business.”
Mr. Odrich concedes that Lehman Brothers might have missed out on investing in several Internet high-fliers because the firm “couldn’t get its arms around their business models.”
Lehman Brothers expects to become better versed in new industries by partnering with early-stage venture investors. Mr. Odrich expects these firms to account for roughly 50% of the fund’s deal flow. The firm’s network of investment bankers will source the other half of the fund’s opportunities.
The fund will invest between $2 million and $10 million in roughly 35 to 40 companies that have previously received venture funding and are within 12 to 24 months of filing for an initial public offering.
Potential portfolio companies must meet Lehman’s venture litmus test and have a product that has reached the beta-testing stage. Lehman Brothers intends to act as a financial partner but does not intend to offer operating expertise. “We will not tell companies how to run their business from day-to-day,” Mr. Odrich said.
Lehman Brothers occupies board positions at only three of its current portfolio companies.
The fund may acquire developing companies in the technology sector, “as long as it doesn’t conflict with the merchant banking fund,” Mr. Odrich said.
In addition to Mr. Odrich and fellow Principal Michael Castleman, Lehman Brothers has appointed two associates and three analysts from within the firm to manage the fund. Lehman is considering placing additional staff, possibly recruited from outside, in San Francisco.