EDEN PRAIRIE, Minn. – In a more perfect world, venture capitalists would be able to find one limited partner willing to give them all the capital they need for their latest fund. Well, welcome to the world of St. Paul Venture Capital, one of the largest early-stage VC firms in the U.S. with $3 billion in committed capital.
The firm receives its capital exclusively from the St. Paul Fire & Marine Insurance Co., a company with more than $20 billion in assets.
“We only have one LP, and that permits us greater flexibility in our investment style and strategy,” said Patrick Hopf, managing general partner of St. Paul Venture Capital. “We’re able to invest across funds, invest in the same company across those funds, and we don’t have to reserve a specific amount for follow-on investments and we don’t have any conflicts of interest among LPs.”
Founded in 1988, the firm closed a $1.3 billion venture fund in October, marking its sixth and largest fund yet.
St. Paul’s investment strategy – or as Hopf said its “mission” – is to generate superior long-term performance. The firm does so by focusing on early-stage companies in about four sectors – communications, business Internet, consumer technology and health care – in three geographic areas – Minnesota, Boston and California.
“As a result we really can be long-term investors,” he said. “Having to spend time with only one LP, leaves more time to spend on investments and our portfolio companies.”
When evaluating potential investments, Jim Simons, a general partner, said “first and foremost, companies have to fit into the frameworks that we have developed for our industry sectors. If they don’t fit in those frameworks, it’s pretty unlikely that we will find them compelling enough, regardless of all of the other characteristics they may have.”
Simons added, “the second cut is: are they producing, what we think, could be industry changing technologies and are they supported by the beginnings of a really world-class management team?”
Hopf noted that the firm likes existing management to show a receptivity toward a culture that emphasizes partnership. “We all want be in the same boat going in the same direction,” he said.
The firm has taken a more aggressive approach over the last few years in developing portfolio company management to ensure that over time the portfolio companies get better at being managers, hire the appropriate people and get the most out of those hires.
“It has to be a thoughtful approach, and an important part of a company-building process,” added Hopf.
The firm’s latest fund is expected to have a investment cycle of three to four years. Hopf said the investment range will be quite broad, ranging from as little as $250,000 to as much as $45 million with the firm’s sweet spot being in the $6 million to $12 million range after multiple funding rounds.
“If we really like a company and it’s fairly capital intensive and the public market isn’t available for one reason or another, we could end up with $25 million to $35 million in the company,” Hopf noted.
Home Field Advantage
“In Minnesota, we tend to be the largest venture investor in the state,” Hopf said. “We see a very high percentage of all of the best deals, and we try to be a fairly dominant investor and invest across all industry categories.”
In Boston, the firm is working on developing a group of people that are very heavily focused on communications and the wireless area. St. Paul recently hired Roderick Randall, former chief marketing officer for Lucent Technologies, as the firm’s third Boston-based general partner. Randall joins Rick Boswell, a 12-year veteran of the firm, and Zenas Hutcheson, who is based in Minnesota, but spends two-thirds of his time in Boston.
St. Paul also hired Staffan Ericsson as venture partner for the Boston office in September, and at press time planned to hired an additional venture partner, Tom Rowbotham, the former director of technology at British Telecom. Hopf said the firm has plans to add another partner and a principal in that market over the next 12 months. “The focus there is very heavily weighted on seed- and early-stage communications. We think the market warrants the level of personnel and resources we are committing,” said Hopf. “Over the next few years our expectation is that communications – depending on how many deals we find – can be anywhere from 30% to 50% of our investment dollars in that time period.”
When it comes to investing in California, Hopf said St. Paul has a niche strategy.
“In California, we are one venture firm out of probably 1,200. We have one full-time IT partner there, and he’s one out of probably 3,000 there, so by the nature of the scale, you need a niche strategy.”
St. Paul’s niche strategy is to focus on what it characterizes as the Internet and consumer services businesses as well as finding opportunities in and around those segments.
From a communications standpoint, Hopf noted the firm is also interested in the San Diego area. “We have been probing the waters and expect to find some opportunities there. We haven’t made any investments, but we are starting to get closer and closer to putting a few deals together.”
In addition to investing its main fund, St Paul Venture Capital has helped to establish six satellite funds, which are largely controlled funds as St. Paul is again the only LP. “We have had a long-term relationship with the individuals responsible for these funds and they fit a particular sector or geographic need that we have in our direct portfolio,” Hopf said, adding, “the funds are also a great source of deal flow.”
The satellite funds consist of: Upper Lake Growth Capital, based in Eden Prairie; Flying W Capital, based in Bryn Mawr, Pa.; Windamere Venture Partners, based in San Diego; Perspective Capital, based in San Francisco; Annapolis Ventures, based in Annapolis, Md.; and Quatris Fund, based in Minneapolis.
They’re a One LP Firm
St. Paul Venture Capital manages money for the St. Paul Companies on a management contract basis. Hopf said the 10-year contract has a carried interest with terms that are very close to the premier firms in the business.
Hopf said every time St. Paul Venture Capital considers raising a new fund, they also consider the attributes of bringing in outside partners, and then discuss it with their lone LP.
“Their [St. Paul Fire & Marine Insurance Co.] appetite has increased substantially over the years and they still want to be the sole investor. It’s the highest returning investment vehicle they have. Despite the fact that’s it’s a $1.3 billion cash commitment, they expect the return to be greater,” said Hopf.
Following are some of St. Paul Venture Partners portfolio companies:
Adaytum Software (Minneapolis) is a provider of enterprise budgeting and planning software for medium to large corporations.
Co-investors include H&Q, Andersen Consulting Ventures and 3i Group.
Altaworks Corp. (Nashua, N.H.) is a provider of systems management software for e-business applications
Co-investors include Prism Venture Partners.
Bravida Corp.(Palo Alto, Calif.) develops next generation data communications infrastructure products.
Co-investors include Patricof & Co. Ventures, Onset Ventures and Anila Corp.
Cool Cuts for Kids (Euless, Texas) provides high-quality hair care services for children.
There were no co-investors.
Crescent Networks Inc. (Lowell, Mass.) provides an optical-scale service delivery platform for public networks.
Co-investors include Venrock Associates and Bessemer Venture Partners.
Entelos Inc. (Menlo Park, Calif.) is a provider of mission critical R&D decision support and disease knowledge management tools to the pharmaceutical industry.
Co-investors investors include Charles River Ventures, Abingworth Management and Brentwood Venture Capital.
Flycast Communications Corp. (San Francisco) is a leading provider of Internet direct response advertising solutions.
Co-investors included Bessemer Venture Partners, Charles River Ventures, Bell South, Southwestern Bell and U.S. West.
Granite Systems Inc. (Manchester, N.H.) provides software for carrier network configuration and inventory management.
Co-investors include Global Crossing Inc., SAIC and Motorola Inc.
Integral Access Inc. (Chelmsford, Mass.) provides network access systems for advanced telephony applications.
Co-investors include Ascent Venture Partners, Canaan Ventures, Coral Ventures, Prism Venture Partners and Technology Crossover Ventures.
Lexar Media Inc. (Fremont, Calif.) is a premier technology provider of high-performance digital film and connectivity solutions for digital photography.
Co-investors included APV, Thomvest, Mellon Ventures and GE Equity.
Net Perceptions Inc. (Plymouth, Minn.) provides real-time marketing and personalization technologies.
Co-investors included Hummer Winblad Venture Partners, JAFCO Ventures, Vulcan Ventures and Berkeley International.
NextCard Inc. (San Francisco) is a leading issuer of credit cards and financial services online.
Co-investors included Brentwood Venture Capital, Trinity Ventures, Kleiner Perkins Caufield & Byers, Sequoia Capital and Highland Capital Partners.
NuGenesis Technologies (Westborough, Mass.) is a provider of enterprise wide scientific data management systems for science-based industries.
Co-investors include TA Associates, BancBoston, Highland Capital Partners and Brentwood Venture Capital.
Optical Solutions Inc. (Plymouth, Minn.) makes fiber-to-the-home and fiber-to-the-curb access systems eliminated the “last mile” bandwidth bottleneck.
Co-investors include Menlo Ventures, Sprout Group and Coral Ventures.
Prometheus Laboratories Inc. (San Diego) offers innovative diagnostic and disease management services for the gastroenterology community.
Co-investors include Patricof & Co. Ventures, Sprout Group and Brentwood Venture Capital.
QuinStreet (Redwood City, Calif.) provides e-commerce sales and marketing services for Internet-based businesses.
Co-investors include Sutter Hill Ventures, J.W. Seligman, Catterton Partners, Rosewood Ventures and Venture Strategy Partners.
Sentillion Inc. (Andover, Mass.) is a maker of enterprise application integration software.
Co-investors include Polaris Venture Partners, First Ventures, Newbury Ventures and Intersouth Partners.
StarGen Inc. (Marlborough, Mass.) is a fabless semiconductor company developing interconnect products for the communications industry.
Co-investors include Bessemer Venture Partners and Morganthaler Ventures.
St. Paul Venture Capital is located at 10400 Viking Drive, Ste. 550, Eden Prairie, Minn. 55344. Tel: (952) 995-7474, Fax: (952) 995-7475. The firm’s Web site is http://www.stpaulvc.com/.