Portfolio Profile: Summit Partners –

BOSTON/PALO ALTO, Calif. – Throughout its 16-year history, Summit Partners has traditionally looked for late- stage companies on the cusp of profitability or hyper-revenue growth that it can help build into success stories, said Bruce Evans, a general partner at the firm.

“We think that this approach minimizes the downside risk, while the upside is comparable to firms which do early stage investing,” Evans said. “We get returns as good as anyone else and are able to avoid investing in stuff with a technology risk or management team risk that can hurt you,” he added.

Founded in 1984, the firm engages primarily in late-stage venture capital deals, buyouts, industry consolidation plays, recapitalizations and corporate divestitures across the United States and Canada. The firm has also recently begun to scout deals in Europe and Israel. In fact, Summit recently closed its first deal in Israel with MIND CTI Ltd., a provider of billing and account management solutions for Internet telephony and other Internet services. Summit focuses on companies in the software, communications, electronics, Internet solutions, health-care, information technology services and business services sectors, Evans said. The firm is looking to do more Internet infrastructure deals, he added, because it believes that area should experience good growth.

Approximately 70% of the investments made by the firm could be described as conventional venture capital deals, while 30% of its deals involve some sort of leverage. “We really are sort of a blend of venture capital and a buyout firm,” Evans said. “This makes us unique and positions us well in terms of deal flow.”

The firm focuses on late-stage, technology-related investments because of its business model, which calls for identifying companies with high rates of revenue growth and good cash flow, Evans said. “This has sort of brought us to software, information services and communications deals,” he commented. “We also have a long history now of doing technology-related deals and many of us were recruited by the firm out of business school and have grown up with it doing these types of deals. We possess the right skill-set to be making these kinds of decisions.”

Summit’s 40 investment professionals work out of offices in Boston and Palo Alto. Evans said the firm sources the majority of its deals on its own, through business plans it receives, as well as the efforts of its associates who scour trade shows and help wanted ads, in addition to making cold calls to find potential deals. The firm likes to invest in a company’s first institutional round of funding, Evans said, adding that this is the case in approximately 75% of the firm’s deals. While Summit does not mind co-investing – which it does about half the time – the firm does prefer to be the lead investor in a round of financing. “We think we can add value to a company by being a member of its board of directors and usually companies don’t distribute board seats equally to everyone who invested; so we want to make a significant investment and make sure that we can get a board seat and help shape a company’s future,” Evans said.

To date, Summit has raised five late-stage funds. Summit Ventures I closed on $160 million in 1984. The $230 million Summit Ventures II was raised in 1988, while Summit Ventures III closed on $280 million in 1992 and Summit Ventures IV raised $600 million in 1995. In early 1998, the firm closed on its most recent late-stage fund, the $1.1 billion Summit Ventures V (VCJ, April 1998, page 10). Summit Ventures I through IV are all fully committed, Evans said. Summit V has backed 35 deals so far, for a total of $624 million. It makes investments ranging from $10 million to $200 million, with an average deal size of $20 million to $25 million, he said.

Early-Stage Deals and Subordinated Debt

In October 1999, the firm closed on the $180 million Summit Accelerator Fund to make investments in early-stage companies. This vehicle backs technology companies that are already producing some revenues or have finished beta testing and need to finance the rollout of their product. “We were generating a lot of opportunities that were too small and at the wrong stage for our main late-stage fund, but we wanted to be able to take advantage of these opportunities, so we raised this fund,” Evans said. Initial investments for this fund range from $2 million to $10 million, Evans noted. The Accelerator fund has made six investments so far, averaging $4 million to $5 million per deal.

In addition to these funds, Summit has also raised two subordinated debt funds. The firm’s Summit Subordinated Debt I fund closed on $160 million in 1994, while Summit Subordinated Debt II closed on $335 million in 1997. Subordinated Debt II co-invests with the firm’s late-stage equity fund, providing debt funding for recapitalizations or buyouts, Evans said. The fund has made 12 investments so far, with an average deal size of $13.5 million. In 1997, Summit established the Mt. Everest Fund, a hedge fund that currently has assets of a little over $1 billion, in a joint venture with Lawrence Greenberg, formerly vice president and a fund manager at Fidelity Investments.

Summit has no preferred exit strategy, Evans said. Summit Ventures I through V have made 201 investments since 1984, with 100 of those companies holding initial and secondary public offerings. Another 57 companies were involved in mergers or sales.