Jon Staenberg, the well-known Seattle area venture capitalist who has raised two funds over the past eight years for early-stage tech firms, has decided to end his efforts to go it alone. Staenberg Venture Partners (SVP) partnered with Los Angeles-based Rustic Canyon Ventures in July as the two firms simultaneously announced a first close of Rustic Canyon Ventures SBIC. The new fund has $130 million of commitments in what is planned to be a $175 million SBIC-backed fund that Rustic hopes to close by the end of September.
It was not an unexpected move. Last February, Staenberg told Venture Capital Journal (March 2003) that he was in discussions about raising a third fund, in light of requests from other VCs seeking his firm’s help in investing in Northwest technology startups. Though the Northwest has Microsoft, some video game developers and other tech companies, the area is in the nascent stages of development when compared to Silicon Valley.
That same VCJ article reported on the decline in venture capital for Northwest tech startups. The consensus among regional VC firms at the time was that times were tough and likely to remain that way for the foreseeable future.
In a signal that such hard times continue, the merger of Staenberg and Rustic Canyon is seen as a victory by each of the two firms. Rustic Canyon gains access to Staenberg’s individual investors (SVP was funded exclusively by high net worth investors), and the Northwest retains a knowledgeable and longstanding early-stage venture capitalist that believes in the region.
Staenberg will remain based in Seattle though he now has access to the Rustic Canyon offices in Menlo Park and Santa Monica. He will continue to manage investments from his firm’s two prior funds raised in 1995 and 1999, which total about $100 million combined. Investments made under the old funds will be separate from those made by Rustic Canyon SBIC.
Rustic Canyon SBIC will invest primarily in IT and health care, in a mix of A and B rounds, later stages than Staenberg, which invested primarily in seed and A rounds.
Staenberg admits that fund-raising exclusively from private or institutional sources remains problematic. At the same time the low interest rates currently offered on capital by the Small Business Administration, not to mention its 2-for-1 backing, made the approach attractive.
Rustic’s new fund has more than $50 million in LP commitments. Once the SBA contributes, the new fund will have grown to $175 million-the maximum allowable with SBA backing.
That, says Mark Menell, a Menlo Park-based partner at Rustic Canyon, translates into “about four or five deals a year at an investment rate of around $5 million apiece.”
Moving forward, the new fund, Rustic Canyon SBIC, will make one to two investments per year in both the Southern California and Seattle areas. And, “We’re going to assign two partners to each deal,” says Staenberg.
Neither SVF nor Rustic Canyon has ever produced a household name startup. For its part, SVP has invested in 53 companies, 10 of which have been acquired and five of which have gone out of business, according to Venture Economics (publisher of VCJ). Rustic Canyon, which raised about $550 million in a joint collaboration between the Chandler Trust and Times Mirror Co. in 1999, has invested in about 50 companies, according to VE. Of that group, five were acquired, one (ValueStar) that went public, and six are defunct.