New Internet Firm Closes Fund, Three Deals –

ATLANTA/DALLAS In yet another sign of the abundant deal flow in the Southeastern United States, Monarch Capital Partners, a new venture fund dedicated to information technology investments, quickly landed three deals after an early January final close.

Monarch is the latest of several IT-focused firms to spring up in the Atlanta region this past year. Other newcomers include netWorth Partners (VCJ, March, page 5) and LiveOak Equity Partners (VCJ, March, page 37). Meanwhile, established Atlanta firms such as Alliance Technology Ventures, which raised its second, $75 million fund in October 1998 (VCJ, October 1998, page 8), and Noro-Moseley Partners, which launched its $112 million fourth effort in February 1998, have increased fund sizes to accommodate the growing deal flow.

Monarch, which plans to invest between $500,000 and $3 million in Internet, e-commerce, wireless, telecommunications and health-care information systems businesses, will devote a substantial portion of its fund in the Southeast and Texas. While the Southeast venture capital market is competitive, it is far less cutthroat than Silicon Valley, explained John Brewer, a principal of the firm.

In fact, two of the firm’s first three deals – Advanced Charger Technology Inc., an Atlanta-based developer of software that improves battery-charging technology for wireless phones and laptop computers, and e2 Software Corp., a Dallas developer of relationship management tools for e-businesses – hail from the region.

The $30 million Monarch Capital Partners, which quickly surpassed its target of $20 million, held an initial $13 million close in September 1998. Investor interest in the fund was piqued by the presence of Monarch co-founder Robert Guyton, also a co-founder of Inktomi Corp., one of last year’s most successful initial public offerings. His success with Inktomi legitimized his stature as a VC, enabling the firm to quickly ink a number of high-net-worth individual investors and several small institutions.

“We were taken aback by how fast we were able to raise money,” Mr. Brewer said. “We had to deny a substantial amount of investors.” The firm expects to raise a larger second fund that caters to more institutional investors in the next year or so.

At Inktomi, Mr. Guyton teamed with Dr. Eric Brewer and Paul Gauthier, the developers of Inktomi’s search engine technology at the University of California, Berkeley, and raised the company’s initial $6 million round of private investments. At various stages, Mr. Guyton was Inktomi’s chief financial officer, vice president of operations and vice president of business development, as well as a member of the company’s board of directors from February 1996 to June 1997.

“The great [thing] about Rob is he’s a visionary,” said Karen Robinson, president and chief executive of Advanced Charger, Monarch’s first portfolio company. The challenges Mr. Guyton faced with Inktomi, she added, are similar to those of her own company: attracting venture capital to an industry outside of the sector du jour.

With venture dollars flowing so readily into the e-commerce sector, battery technology is not exactly the first thing on a VC’s mind, Ms. Robinson said. However, just as Mr. Guyton saw the huge potential for Inktomi’s technology with Internet search engines, he and Monarch were willing to bet that Advanced Charger could revolutionize the wireless industry.

Monarch in October invested $3 million in Advanced Charger as the sole investor in the company’s first round of venture financing. The company received approximately $7 million from angel investors and trust funds since being founded about two years ago. The new capital will be used to help the company license its product to wireless and laptop manufacturers, wireless service providers and other related companies. Advanced Charger will announce its first licensee in the second quarter of this year.

Monarch in early February invested $1 million in e2 Software, as part of a $2 million first round that included a host of other Dallas-area individual investors. The 18-month-old company develops one-on-one relationship management software for companies conducting businesses over the Internet. Integrated with sales automation tools, e2’s software provides e-shoppers with a more personalized experience, including suggestions for complementary products for previous purchases and other functions that normally require a follow-up phone call from a salesperson. The software also has an application to help direct marketers, providing those types of businesses with a more effective sales medium than junk e-mail, also know as spam. The company has signed Dell Europe as a customer.

Bennie Bray, Monarch’s other co-founder and an early investor in Inktomi who led the deal from the firm’s Dallas office, said the money will be used for expansion and growth, including research and development. E2 likely will seek another round of venture financing late this year, he added. Jeff Farris, the company’s chief executive, did not return phone calls by press time.

Mr. Bray expects Monarch to close several more deals soon after Venture Capital Journal’s deadline. Software and telecommunications opportunities have been particularly strong in Texas, he added, noting that the telecom hub in nearby Richardson, Texas, is home to many big-name companies in the industry and, thus, a skilled entrepreneurial talent pool.

Monarch’s other deal at press time was a $2 million investment in Digital On- Demand, part of a $17 million round alongside Soros Fund Management, the investment company owned by private equity investor George Soros. The deal was oversubscribed in mid-December when Monarch approached the company and got in at the last minute, said Tom Szabo, the company’s chairman and chief executive.

The Carlsbad, Calif.-based company is developing a delivery system for digital content that will enable retail stores to sell items such as compact discs and digital video discs (DVDs) that they do not have in stock. The company started as a joint venture between IBM Corp. and Blockbuster Inc. and received more than $20 million in research and development before Mr. Szabo bought the rights to all the patents and intellectual property and expanded the original system’s capabilities.

Digital On- Demand – available only in Disneyland’s Tomorrowland, where users can preview and select theme park music – is currently negotiating with several major record labels to obtain licensing contracts. Proceeds will be used to roll out the company’s system in retailers nationwide. Mr. Szabo anticipates that the company’s next round of financing will be to raise public funds or debt for a massive roll-out that will install systems in 500 locations by the end of 1999 and 10,000 stores in the next two-and-a-half years.