Onset Ventures Gets Set with Fund V –

It’s tough being a startup software company these days, trying to carve out a living amongst the industry’s behemoths. Recently, Oracle’s completed takeover of PeopleSoft came alongside a flurry of large M&A deals, such as Symantec agreeing to buy storage software maker Veritas, Microsoft purchasing anti-spyware provider Giant Software, and Siebel moving into electronic billing by buying eDocs.

“The leaders in the enterprise software business-Oracle, SAP, Microsoft, IBM and a few others-have acquired the status of anchor tenants,'” says Mark Hilderbrand, a general partner at Onset Ventures. “A startup today can rarely compete with this inertia.”

Nonetheless, Onset won’t let the monsters of the software industry scare it away from its mission of backing early stage companies, which it has done for two decades. In fact, late last year, the Menlo Park, Calif.-based firm raised $200 million for Onset V, its seventh fund since its founding.

Onset V was raised mostly from returning LPs and made up primarily of foundations, endowments and a small number of public investors. Onset wouldn’t identify any of the LPs. Though Hilderbrand says that disclosure issues are of concern for the firm, Onset did not exclude any public investors from investing in fund V. He says that Onset releases to LPs just a limited amount of fund information, such as top line data, but not any significant company information. “We are supportive of disclosure, except to the extent where it hurts our portfolio companies,” he says.

Onset V, like its predecessors, will focus on information and medical technology startups with early stage and follow-on investments. The fund, which took less than six months to raise, was targeted at $200 million, $80 million less than Onset IV, which was raised in 2000. Hilderbrand says that the reduced fund size was mostly because fund IV, which is nearly fully invested, took longer than expected to invest. Typically, the firm invests $8 million to $12 million over the life of a portfolio company. “There are only five general partners at Onset, so $200 million is a manageable size for each of us to handle one or two deals a year the next couple of years,” he says. The firm expects to start investing in the new fund during the first quarter.

Another factor in the reduced fund size, Hilderbrand says, is that the average deal size for enterprise software startups has gotten smaller in recent years. “That’s a good thing since it compels entrepreneurs to show they can do more, but with less money.”

Hilderbrand, who’s been with the firm since 1998, says that today’s startups face a difficult path as the software industry consolidates. He notes that the universe of software companies has shrunk by about 25% since 1997. And most observers expect more large vendors to muscle out smaller rivals. Despite this contraction, Hilderbrand says that opportunity exists for startup software companies to raise venture capital.

“There’s still potential for innovation out there,” he says. “The anchor tenants are vulnerable to changes in business processes. If you’re an entrepreneur, that’s the challenge you must focus on.”

Onset Ventures

Founded: 1984

Locations: Menlo Park, Calif.

Fund Name: Onset V

Fund Size: $200M

Under Management: $700M

Previous Fund: Onset IV raised $280M in 2000.

General Partners: Leslie Bottorff, Mark Hilderbrand, Robert Kuhling, Susan Mason, Terry Opdendyk.

Focus: The firm mostly does early stage deals in three main areas: enterprise applications and infrastructure software; communications and networking; and medical technology. Onset normally supports a startup with early stage and follow-on investments. Typically, investments average between $8M-$12M over a company’s life.

Portfolio: Onset has backed about 100 companies. Most recently, it participated in a $20M Series D round for VisionCare Ophthalmic Technologies Inc., a maker of prosthetic devices to treat age-related macular degeneration. The company has raised $45 million from Onset, Three Arch Venture Partners and other investors.

Successes: Onset has backed 10 companies that have gone public, including Callidus Software Inc., which raised $70M when it debuted in 2003; and Netopia Inc., which launched a $36M IPO in 1996.

Failures: Among its busts was Gluon Networks, a Petaluma, Calif.-based provider of telecommunications hardware that raised about $80 million from Onset, NEA and USVP, among others. Gluon shut down early last year.

Did You Know? Onset is known for its whimsical holiday cards. It recently mailed a holiday songbook-featuring such titles as “Frosty the Auditor” and “O Little Town of Menlo Park”-to 3,000 friends of the firm. You can find the songbook and all of Onset’s previous efforts on its website at www.onset.com.

Source: PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey and original research.

Email: alastair.goldfisher@thomson.com