New Fund, Big Dream: VanEdge Capital

Investors aren’t playing around when it comes to video games. Whether it’s Electronic Arts’ $4 billion-plus revenues each year or Zynga’s $180 million financing in December—the gaming business is bigger than ever and attracting more attention from VCs.

Of course it hasn’t always been this way. Rewind just 20 years to 1989 and no serious person would have ditched a good job in corporate finance for a video game business. But that’s exactly what Paul Lee did when he left Chrysler Canada’s pension fund. “Everyone asked me if I was insane,” he says.

But it turned out to be a good move for Lee, who joined Distinctive Software Inc., a company that ported video games written for one platform into another. If you’ve never heard of it, maybe you’re familiar with the company that bought it in 1991: Electronic Arts. Lee rose to become President of EA Studios.

It may have worked out once, but deciding to launch a first-time VC fund in late 2008 takes the concept of crazy to a new level. “If we’d known how hard it was going to be, we would have thought more closely about that,” Lee confesses.

Still, Lee’s VanEdge Capital is looking to close on $100 million this month from six large LPs toward its $200 million inaugural fund, VCJ has learned.

HOW WE’RE DIFFERENT…

“Most venture capitalists are pretty good on technology and the business angle,” says Lee. “But what about the character sets and is the artwork? Engineers feel much less comfortable with that. Is the game-play engaging? They’re even less comfortable with that.”

Beyond its sector expertise, VanEdge is working from, but not limited to, Vancouver where it is seeing very attractive valuations, Lee says.

It doesn’t hurt that Lee and his team are smart guys. “Over the years I experienced his repeated financial brilliance in expense control and budgeting, forecasting and picking winners among projects and people,” says Kleiner Perkins Caufield & Byers’ Bing Gordon, who worked with Lee at EA.

DEAL FLOW ADVANTAGE…

“The major VC firms are scrambling to get into position to add to their staff and get the right people,” says Lee. And he’s absolutely right. Benchmark added former Jamdat CEO Mitch Lasky as a general partner in 2007. Last year, Kleiner Perkins Bing Gordon to help the firm wrap its arms around gaming.

Everyone else is trying to play catch up when it comes to gaming. “A lot of VCs have come to us to go through the creative and see if it makes sense,” says Lee.

Oh, and it doesn’t hurt that one of VanEdge’s limited partners is Electronic Arts.

If we’d known how hard it was going to be, we would have thought more closely about [raising a new VC fund].

Paul Lee

TEAM STRENGTHS…

All of the firm’s partners come from Electronic Arts and have extensive experience managing the unique blend of technology and creative pizzazz that goes into gaming. “Our competitive advantage is that we have subject matter expertise and great connections and contacts,” says Lee.

General Partner Glenn Entis was Chief Visual and Technical Officer of Electronic Arts’ Worldwide Studios before becoming a venture capitalist. There he led 3,000 engineers and artists. He came to EA through the company’s acquisition of DreamWorks Interactive, where he was the CEO.

General Partner Jason Chein works from VanEdge’s office in Shanghai. He helps VanEdge source deals in Asia and will focus on ways to assist the firm’s portfolio companies in connecting with low-cost producers in China.

STATUS REPORT…

At press time, VanEdge was still waiting to hear back from its LPs on the negotiated conditions of its legal documents, with Lee expecting the commitments to be finalized by the end of January.

But the VanEdge team isn’t sitting around and waiting for the ink to dry on its fund agreement. The firm’s founders are looking for attractive early stage digital media startups and investing out of their own pockets. Lee co-invested with Jefferson Partners of Toronto to put $4 million into NeoEdge’s Series A in September 2009. The startup helps connect advertisers with casual games. Lee expects to roll that investment into VanEdge’s first fund, pending approval from limited partners.

PROFILE: VanEdge

Locations: Vancouver and Shanghai

Founded:

2008

Fund: Raising $100M for VanEdge Capital I

General Partners: Jason Chein, Glenn Entis and Paul Lee

LPs: Investors currently executing final diligence on the firm include: Export Development Bank (EDC), Business Development Bank (BDC), BCIMC (one of Canada’s largest pension funds), BC Renaissance Capital Fund, Electronic Arts and Nicola Investments.

Did you know? VanEdge partner Glenn Entis won an Academy Award in 1998 (a first for a VC?) in “Technical Achievement” for his role as co-founder of Pacific Data Images, the 3-D image rendering software company later subsumed by DreamWorks.