San Jose, Calif. – Pond Venture Partners Ltd. held a final close in late August on the firm’s second fund, the $78 million Pond Ventures II, said Chief Executive Officer Richard Irving. The fund was launched in late February with a target of $50 million and held an initial close on $51 million in April, he added.
Pond’s current vehicle is six times the size of the firm’s freshman effort, 1997’s $13 million Pond Ventures I, Irving noted. Like its predecessor, this vehicle will focus exclusively on early-stage communications companies, he added. “This is the growth area in technology: higher speeds are needed by everyone and more services are needed by end-users – this is close to a trillion dollar market, which contains hundreds of niche markets that are growing rapidly,” he said.
Pond is expecting the fund to back 10 companies with initial investments of about $5 million, which will allow the firm to keep some capital in reserve for follow-on investments in its portfolio companies. Irving said the firm is deliberately making fewer investments than other venture firms, in order to insure that each partner can really add value to the portfolio companies with which he works. “Each partner will spend one day a week with each of his portfolio companies,” Irving said. He estimated that the fund would have an 18-month investment cycle, at which time, he said, Pond would once again hit the fund-raising market.
The fund will be invested in Western Europe, expanding on the geographic focus of the firm’s first fund, which was invested only in the U.K. However, Irving said Pond would look for a concentration of companies in a few different areas, rather than investing in 10 companies in 10 separate countries. He said Pond is currently seeing strong deal flow from Ireland and Scandinavian countries.
Irving said Pond, which has offices in San Jose, London and Tokyo, decided to focus on investing in Europe because companies there felt under served by traditional European private equity investors. “There was very little U.S. style venture capital activity in Europe. . . most of the firms there were big financial companies treating things simply like transactions, rather than building companies,” he said. In addition to attempting to fill this gap, Pond is also planning to emulate the success of VC’s who have found high-returns in Israel, by locking up Israeli companies at low valuations in their homeland and then helping them move to the U.S. “The market is here in the U.S., so we are going to emulate this Israeli high-tech model, by leaving these European companies’ research and development departments in Europe and moving their sales and marketing to the U.S.,” he explained.
Pond has already achieved a notable success, selling one of its portfolio companies, the U.K.-based Microcosm Communications Ltd., a supplier of high-speed integrated circuits for fiber optic communications, to Newport Beach, Calif.-based Conexant Systems Inc. in January for $180 million. The sale yielded Pond a 20 times return on its initial investment.
Pond put up 5% of Fund II’s total capital. Irving declined to reveal the fund’s management fee or carried interest structure, though he did say the firm takes a premium carry. “It’s clear that we are not investing very quickly and our LPs respect our patient way of investing,” he said, adding “we also have had demonstrable successes.”
The fund’s LPs are approximately 60% individual and 40% institutional, Irving said. The overwhelming majority of investors are European, he said, noting that only one of the fund’s institutional investors is from the U.S. The individual investors in the fund who reside in the U.S. are all European nationals who live and work in Silicon Valley, Irving said.