Portfolio Profile: Charter Growth Capital –

PALO ALTO, Calif. – Founded in late 1997 during the beginning of the get rich quick, early-stage Internet investing epoch, Charter Growth Capital has, instead, practiced patience. The firm waits for the field of promising early-stage companies to shake out; then backs the expansion-stage companies that have transformed their limitless potential into a path to success.

“At the expansion stage it is easier to identify the top three companies in a given sector, when the product is in the hands of customers you can talk to, and when you can talk to analysts who cover the sector and the companies in that sector,” said Jim Boettcher, general partner. In addition, the returns generated by investing in expansion-stage companies over the long-term are comparable to those generated by investing in early-stage companies, Boettcher noted, adding that early-stage VCs generally have a much higher percentage of their deals turn bad. “Early-stage guys usually have to write off one-third to one-half of their deals… from our perspective we would be disappointed with two write-offs out of 10 deals,” he added.

Charter engages in expansion-stage venture capital deals. The majority of their deal flow comes from the West Coast. About 50% of the firm’s deals are located in Silicon Valley, 25% in Los Angeles or Seattle, and the remaining 25% are scattered throughout the country. “Valuations are higher out here, but there are a plethora of deals. It just makes more sense to drive 20 minutes to a company than hop on a plane and fly for hours,” Boettcher said. However, the firm has done some deals in and around Boston, including one for current portfolio company Tenor Networks Inc., which is in the optical networking industry. Charter plans to increase its activity in Boston because of the number of first-rate, early-stage VC firms in the city that can provide the firm with deal flow, Boettcher added.

The firm focuses on companies in the industries of communications, enterprise software and business-to-business e-commerce/infrastructure, areas where Charter’s four general partners have the experience and comfort level to evaluate potential deals.

The firm has a three-step strategy for locating promising deals, Boettcher explained. The initial step is to proactively identify hot, new market spaces in Charter’s area of focus. “A few years ago this meant digital subscriber line companies. Now application service providers are pretty big,” he added. The firm accomplishes this by attending conferences, networking with colleagues and keeping up on industry trade publications.

Step two is to try to focus on companies in the areas that received funding from top tier early-stage venture capitalists. “So many companies get started in the same space, but the ones that are funded by better VC firms just have better executive teams, better business plan and better boards,” he said, declining to name early-stage VCs with which Charter prefers to work.

The third step is to network with the companies as they develop, Boettcher said, so that when they need funding to support their growth, they are already on Charter’s radar screen and the firm can move quickly to close a deal. “This doesn’t always work – sometimes we identify a bunch of promising companies and they all get acquired, but it does allow us to identify areas with promising products,” he noted. Boettcher pointed to Copper Mountain Networks Inc., a DSL company that is part of Charter’s portfolio, as an example of a successful investment Charter made following its three-step approach.

To date, the company has raised two main funds. Charter Growth Capital I, which closed on $106 million in 1997, is fully committed, backing 33 companies with an average deal size of $3 million. The firm’s sophomore effort, Charter Growth Capital II, was initially targeted for $200 million, however the vehicle easily exceeded its mark, closing on $440 million in March 2000 (VCJ, May, page 40). At that time the firm also closed a $25 million side fund, whose investors – entrepreneurs, CEO’s, early stage VCs and senior managers at various companies – help the firm with deal flow, due diligence, networking and recruiting management for portfolio companies. Boettcher expects Fund II to back between 40 and 50 deals, with an average deal size of between $8 million and $10 million, though investments could range from a minimum of $2 million to a maximum of $15 million, depending on the company in question. To date, the vehicle has completed seven deals and committed to three deals for a total of $60 million. Boettcher expects Fund II to have a three to four-year investment cycle.

Boettcher said Charter leads approximately half of its deals, noting the firm does not have a preference regarding whether or not it leads a particular round of funding. “If a company wants us to be a lead investor, we are happy to do that, if there is enough lead time. On the other hand, we will also participate in a round of funding if that is what is available,” he said. In the situations when Charter does not take a board seat with a portfolio company, it does take board observation rights. “This allows us to network with other board members and add value to a company by knowing, for example, when it might need a strategic partner,” he added.

Boettcher said Charter does not prefer one exit strategy to another. To date, of the 33 companies Charter backed with Fund I, 13 have held initial public offerings and one company was sold. “Exits depend on the market; for the last few years initial public offerings have been great, but an acquisition is also great – both can work out well,” he said.

Charter’s investment team is made up of six professionals: General Partners Kevin McQuillan, Steve Bird, George Bischof and Boettcher, along with Analysts Dan Ho and Alison Esselink.

Following are some of Charter Growth Capital’s portfolio companies:

Active Software Inc. (Santa Clara, Calif.) develops integration software that allows businesses to share information between legacy and web-based systems.

Co-investors include Kleiner Perkins Caufield & Byers, Sierra Ventures, Enterprise Software, Bayview, Lehman Brothers and Intel Corp.

Agile Software Corp. (San Jose, Calif.) develops data management software for distributed or supply-chain enterprises which provides product design definitions and changes.

Co-investors include Accel Partners, Sequoia Capital, Mohr, Davidow Ventures, Integral Capital Partners and Hambrecht & Quist.

Alteon WebSystems Inc. (San Jose, Calif.) manufactures gigabit Ethernet adapters, switches and load balancers.

Co-investors include Matrix Partners, Sutter Hill Ventures, New Enterprise Associates and Technology Crossover Ventures.

Copper Mountain Networks Inc. (Palo Alto, Calif.) develops DSL equipment to provide high-speed connectivity over existing copper wiring.

Co-investors include Sutter Hill Ventures, Greylock Management Corp., Matrix Partners, InterWest Partners, Canaan Partners, Technology Crossover Ventures and Intel Corp.

Corio Inc. (San Carlos, Calif.) is an application service provider that provides its customers with e-business capabilities.

Co-investors include Kleiner Perkins Caufield & Byers, Integral Capital Partners, Greylock Management Corp. and Norwest Venture Capital.

CoSine Communications Inc. (Redwood City, Calif.) develops IP service delivery platforms for network service providers.

Co-investors include Kleiner Perkins Caufield & Byers, Worldview Technology Partners, Norwest Venture Capital, Technology Crossover Ventures, AT&T Ventures and the Anshutz Family.

Extricity Inc. (Redwood Shores, Calif.) provides business-to-business integration platforms that enable electronic-commerce between trading partners and supply chain members.

Co-investors include Technology Crossover Ventures, Cambridge Technology Capital, Intel Corp., IBM Corp., SAP and Invesco.

Financial Engines Inc. (Palo Alto, Calif.) provides online investment advice for 401K corporate plan participants.

Co-investors include New Enterprise Associates, Foundation Capital and Charter Ventures.

Interwoven Inc. (Sunnyvale Calif.) provides content management systems for Web site development.

Co-investors include Accel Partners, Charter Ventures, Foundation Capital and Integral Capital Partners.

Niku Corp. (Redwood City, Calif.) is an application service provider for the management of professional service firms.

Co-investors include Venrock Associates, Whitney & Co. and Amerindo Investment Advisors.

Shoreline Teleworks Inc. (Sunnyvale, Calif.) develops IP based enterprise telephone systems.

Co-investors include Crosspoint Venture Partners, Foundation Capital, Matrix and J.P. Morgan & Co.

Tenor Networks Inc. (Acton, Mass.) develops high performance switching equipment.

Co-investors include Matrix Partners, North Bridge Venture Partners, Greylock Management Corp., Worldview Technology Partners, Technology Crossover Ventures and Amerindo Investment Advisors.

Vertical Networks Inc. (Sunnyvale, Calif.) provides integrated communications platforms for small businesses and branch offices that combine voice, data and applications support into one platform.

Co-investors include Kleiner Perkins Caufield & Byers, Accel Partners and Integral Capital Partners.

Wireless Online Inc. (Los Altos, Calif.) develops antenna solutions for wireless data networks.

Co-investors include August Capital, the Mayfield Fund and Redleaf Venture Management.

Charter Growth Capital is located at 525 University Avenue, Suite 1400, Palo Alto, Calif. 94301. Tel (650) 325-6953, fax. (650) 325-8811. The firm’s Web site is http://charterventures.com/.