Rustic Canyon digs for more

Rustic Canyon Partners has raised $185 million from three investors for a third fund targeted to be $300 million.

The new fund is slated to be smaller than the firm’s $550 million second fund, but larger than the $180 million SBIC-backed fund that it raised in 2003.

Investors in fund III include Allegro Associates, NT Associates and TMCT II, according to a regulatory filing. (TMCT II was formed in 1999 as a result of a transaction between Times Mirror, now a subsidiary of the Tribune Co., and one of its largest shareholders, Chandler Trust No. 2.) Rustic Canyon Managing Partner Tom Unterman was formerly the CFO at Times Mirror.

A partner at the Santa Monica, Calif.-based firm declined to talk about fund-raising due to regulatory concerns. A source close to the firm says the new fund will continue the firm’s focus on early stage West Coast deals. In additon to the Los Angeles area, Rustic has offices in Silicon Valley and Seattle.

The firm expects to back 30 to 35 companies with its third fund. It typically invests $2 million to $5 million in Series A and B rounds, with about $10 million total going to each portfolio company.

Rustic’s primary interest areas are consumer Internet, digital media, information services and clean technology.

In the past year, it has backed nine startups, according to Thomson Financial (publisher of VCJ): optical company Capella Intelligent Subsystems, communications monitoring company HyperQuality, mobile phone services company LimeLife, Spanish-language newspaper company Meximerica Media, advertising company Mobileplay, IT services company PC On Call, eco-friendly company Serious Materials, fuel injection technology company Transonic Combustion, and energy company U.S. Renewables Group.

The firm saw five of its portfolio comanies get acquired and another go public last year: It sold storage area network StoneFly Networks for an undisclosed amount in February 2006, optical communications company Confluent Photonics for an undisclosed amount in March 2006, intellectual property software company PLX Systems for an undisclosed amount in June 2006, enterprise software company Intersperse for an undisclosed amount in July 2006, and training software company Element K for an undisclosed amount in August 2006.

Rustic also took online real estate company LoopNet (Nasdaq: LOOP) public in a $72 million IPO last June. Shares in the company have increased almost 30% from its first day offering price.

It hopes for another exit soon. Portfolio company Pentadyne Power Corp., which makes flywheels, is in registration for a $30 million IPO on the London Stock Exchange’s Alternative Investment Market. —Alexander Haislip and Lawrence Aragon