BRIARCLIFF MANOR, N.Y. – With billion-dollar funds popping up across the country, it would be hard for Opticality Ventures LLC to compete on capital alone.
The newly formed venture firm closed its first fund, the $30 million Opticality Ventures I LP in late June, said Hadar Pedhazur, founder and principal of the firm. Launched in November 1999, the fund secured most of its commitments by January, and at press time, the vehicle already had six companies in its portfolio, he said. And the deals keep rolling in.
The secret to the firm’s success: deep involvement and trusting relationships with its portfolio companies.
Opticality Ventures typically backs early-stage companies in the Internet, finance, e-commerce, business-to-business and software development sectors that focus on programming tools, development environments, distributed object systems and programming languages. The firm plans to invest between $1 million and $5 million in each of its portfolio companies, over several rounds, backing each with an average of $4 million, Pedhazur said.
Opticality Ventures seeks to be the first institutional investor in a deal and prefers to be the majority, if not sole, investor in that round. The firm is open to making investments throughout the U.S. and Canada, Pedhazur said.
Opticality Ventures’ nine limited partners consist of six high-net-worth individuals, two fund-of-funds and an institution. The firm retains a 2.5% management fee and a 20%/80% carried interest split, and maintains a 7% preferred return, Pedhazur said.
Pedhazur invests the fund along with Matt Jacobus, senior associate, and Lois Snitkoff, director of marketing and communications. The firm expects to have the fund completely invested by December, at which point Opticality Ventures plans to raise a second, larger fund and hire another two or three investors, Pedhazur said. The firm is, however, willing to hire immediately if the right people come along, he said.
Prior to forming Opticality Ventures in late 1999, Pedhazur was with Verticality Investment Group, an entity he founded in early 1998. Without a formal fund, Verticality invested on a deal-by-deal basis, establishing stand-alone limited liability companies for each investment. He and his two partners would pitch each investment opportunity to a group of about 50 investors, a subset of which would join each deal. Pedhazur left the firm because he no longer wanted to operate on a deal-by-deal basis and he didn’t believe Verticality had the credibility to raise a fund, he said.
Pedhazur’s track record includes companies such as investment research Web site, BigCharts Inc., which was purchased by CBS MarketWatch.com Inc. in June 1999, and Go America Inc., a wireless Internet service provider that went public in April.
The Relationship VC
Pedhazur can’t compete on capital, he said, so he prides himself on the fact that he never goes back on his word and maintains a deep level of involvement with the entrepreneurs running the companies in which he invests. For example, Pedhazur convinced Digital Creations Inc., a company in the Opticality portfolio, to change its business plan to become a services business, rather than a products-based business. Pedhazur believed the entrepreneurs had more potential for success if they open-sourced their software platform, Zope, and generated profits through consulting and writing programs for clients to use on top of Zope.
In an effort to ensure the trust of portfolio companies, the firm never invests in competitive entities. Pedhazur is so serious about this policy that he puts the final decision-making power in the hands of his existing portfolio companies.
“I’ll tell my portfolio companies – these guys want my funding – if they [the existing portfolio companies] think they [the potential investments] are competitive and I think they are not, I pass,” he said. This way, “if an opportunity [arises] for me to throw business their way, I’m never conflicted.”
Following are some of Opticality Ventures’
Conducent Technologies Inc. (Sterling, Va.) is a supplier of a software architecture that integrates Internet functionality and advertisements within desktop software.
Castile Ventures and Lycos were co-investor.
iClips Inc. (New York) enables clients to create streaming videos that can be viewed on the Internet. The company provides clients with software to help create the videos.
Co-investors included Schoffstall Ventures and Internet.com.
Red Oak Software Inc. (Mountain Lakes, N.J.) is a provider of software that enables clients to create automated access to Internet and legacy applications.
There was one co-investor who requested to remain unnamed.
XMLSolutions Corp. (McLean, Va.) is a provider of XML-based infrastructure software and services. The company’s XEDI product connects legacy EDI systems to Internet-based XML-enabled systems.
First Analysis Venture Capital and Schoffstall Ventures were co-investors.
Zero G Software Inc. (San Francisco) enables clients to deploy software on multiple platforms through its InstallAnywhere software. The company’s PowerUpdate software alerts clients of the most current versions of the software they are using via the Internet.
Schoffstall Ventures was a co-investor.
Opticality Ventures is located at 29 Country Club Lane South, Briarcliff Manor, N.Y. 10510. Tel. (914) 923-0003, fax: (413) 487-2114. The firm’s Web site is http://www.opticality.com