SARATOGA, Calif./SEATTLE – In an effort to preserve its strategy of backing early-stage Internet companies with intense hands-on assistance and capital, Redleaf Venture Management L.L.C. has split into two firms, one in California and the other in Washington.
Seattle-based Russ Aldrich, a managing director of Redleaf Venture I, has formed Crossroad Ventures with Jim Thornton, an operating veteran and angel investor.
Meanwhile, Redleaf’s Saratoga-based managing directors, John Kohler, Robert von Goeben and Lloyd Mahaffey, will raise a second vehicle under the Redleaf banner.
Although the two groups now will raise separate funds, they will share investment philosophies and deal flow – as well as some of their carried interest split – as an incentive toward continued cooperation, Mr. Aldrich said. Messrs. Aldrich, Kohler, Mahaffey and von Goeben will continue to manage the $15 million Redleaf I portfolio. The fund is fully invested except for reserves (VCJ, September 1998, page 20).
Explaining the decision to split into two firms, Mr. Aldrich said Silicon Valley operates differently from Washington’s Silicon Forest. Redleaf, created in 1996, takes advantage of its limited partners, many of whom are high-tech Silicon Valley businessmen, for deal flow and support.
But the firm’s California investor base was too far removed from the Seattle scene to lend support to that office, he said. Raising a new fund in Washington will allow Mr. Aldrich to tap into Northwest investors, as well as into the region’s powerful angel networks, he said.
Redleaf’s investment team also was hampered in closing deals because the firm’s fund managers had difficulty coordinating their schedules to review potential additions to the portfolio.
“It’s … a geographically intimate model,” Mr. Kohler said, referring to Redleaf’s investment strategy. Nevertheless, he sees Redleaf eventually forming alliances with venture funds in other regions, similar to Redleaf’s relationship with Crossroad.
Slated to begin marketing its inaugural fund in January, Crossroad Ventures L.L.C. will target $25 million and will back seed and early-stage companies in the Northwest, predominantly in Washington and Oregon. The fund will have a broader sector focus than Redleaf I, which has concentrated on Internet hardware and services deals. Crossroad also will consider life science opportunities, in part because of Mr. Thornton’s background at a medical company.
Mr. Aldrich anticipates a potential first close in March and possibly a final close in June. He estimates 60% of the fund will come from high-net-worth individuals and the remainder from Northwest institutions.
Mr. Aldrich said he learned from his Redleaf experience that getting involved with a company early and aggressively does not necessarily result in an earlier exit. Having served for a year as an interim chief executive of MediaSeek, a Redleaf portfolio company, he is reluctant to take on that level of responsibility again, he said.
Crossroad plans to invest $2 million to $2.5 million in each of six to 10 portfolio companies, beginning with initial investments of $500,000 to $1 million apiece.
Messrs. Aldrich and Thornton are the fund’s managing directors, and Seattle-based Redleaf associate Chris Brookfield has joined them.
Mr. Thornton most recently was president and chief executive of LifeSpex Corp., a venture-backed company that makes diagnostic systems for detecting epithelial cancers. Previously, he was vice president of finance and operations of software maker Aldus Corp., guiding the company’s initial public offering and its effort to expand into foreign markets. Before that, he was vice president of corporate banking at Bank of America in Washington.
Mr. Aldrich provided advice to Mr. Thorton on several angel investments, and although Redleaf did not back any of the companies, Mr. Thornton said he was impressed by his counsel. Attracted to Redleaf’s hands-on early-stage investing, Mr. Thornton was eager to help establish a new firm based on the same model.
Citing concerns about the Securities and Exchange Commission’s investor-solicitation rules, Mr. Kohler was circumspect in discussing Redleaf’s fund raising plans, but he confirmed the group’s intention to raise a second vehicle, Redleaf Venture II, this year.
“Redleaf I was a flywheel fund that proved a number of the opportunities that we saw with early-stage Internet technology investing, so in that metaphor, it certainly should start a larger wheel rolling,” he said, declining to cite a specific fund-size target.
“As in Redleaf I, we believe Silicon Valley is ground zero for Internet start-ups,” he said, referring to the firm’s geographic focus.
At this point, Redleaf does not plan to add investment professionals, he noted.
Crescendo Venture Management L.L.C. (formerly IAI Ventures Inc.), Ventures West Management and FLAG Venture Partners all backed Redleaf I. Crescendo had not considered by press time whether to back one or both of the firm’s successor funds. Ventures West Management could not be reached for comment.
FLAG, an advisory and fund-of-funds firm, backed Redleaf I with its Next Generation I fund, a modest vehicle designed to back first-time teams of experienced VCs, as well as small funds in specialty niches. Redleaf I was managed by a new team, and it had a specialty niche, but the general partners had no venture experience – something FLAG chose to overlook.
The $45 million Next Generation Fund II plans to back Redleaf II, which fits the specialty niche category. The fund-of-funds, however, likely will not back Crossroad.
The choice should not reflect badly on Mr. Aldrich or his efforts, emphasized FLAG Managing Partner Peter Lawrence. Next Generation II will back only about 10 funds, and FLAG would not want to take up two of those slots with funds sharing such similar investment strategies.