The Month in GP News –

Less than a year after cutting its $1 billion fourth fund by $250 million, Worldview Technology Partners has picked up its axe for a second swing. The Menlo Park, Calif.-based firm has agreed to reduce the fund by an additional 20%, which brings its total capitalization down to $600 million.

“We are seeing fewer great deals,” says Michael Orsack, co-founder and general partner with Worldview, who confirmed the fund cut in June. “Rather than just throw money into average deals-of which there are plenty-we cut the fund so we can stay disciplined.”

This reinvigorated discipline also is being used to explain the impending departure of General Partner John Boyle, who joined the firm in 1999 after a stint at Matrix Partners. Boyle was hired to focus on data communications and telecom deals, but Orsack says that the firm’s investors should no longer be fixated on any one market or technology. “John is leaving because he was telecom-only focused, and we are trying to be flexible in our approach and go where the good deals are,” Orsack says.

Boyle has yet to produce a single positive liquidity event for Worldview investors, and he was responsible for the firm’s ill-fated investment into Acton, Mass.-based router company Tenor Networks Inc. Tenor went out of business earlier this year, but not before Worldview and other firms bought into a late 2000 Series C round that valued Tenor at just under $700 million.

The question now is whether or not the fund cut and Boyle’s exit will be able to help salvage Worldview Fund IV, which is part of the so-called “lost generation” of venture funds that were raised between 1999 and 2001. Worldview IV’s vintage year is 2000.

According to public records data released by the California Public Employees’ Retirement System (CalPERS), Worldview Fund IV posted an internal rate of return of 23.3% through the end of 2002. That is slightly below industry benchmarks, although the fund was just 30% invested at the time.

LPs also seem pleased that Worldview opted to alter the management fee structure of its previous fund, which was closed in 1999 with approximately $475 million. The new plan will let Worldview invest a certain percentage of management fees into Worldview Fund III portfolio companies deemed worthy of additional funding.

U.S.-based LPs in Worldview IV include the City and County of San Francisco, Commonfund Capital, FLAG Venture Partners, Hewlett-Packard, Horsley Bridge Partners, IBM, Invesco, Knightsbridge Advisors, Los Angeles County Employees’ Retirement Association, MacArthur Foundation, Salomon Smith Barney, Sovereign Financial, Stanford University, Thomas Weisel Partners and the University of Michigan.

– Dan Primack

Valhalla Holds First Close

The firm is named for the mythical Viking heaven and has shown that it can weather continued market depression, war with Iraq and general uncertainty that has been making investors nervous since before the firm was founded.

Sources familiar Valhalla Partners say the McLean, Va.-based fund has held a first close for a little more than half of the amount it is seeking. The firm is reportedly seeking $200 million, which would place its first close at more than $100 million. Valhalla expects to hold a final close on the fund by late autumn.

Valhalla was founded by former New Enterprise Associates General Partner Arthur Marks in 2002. Former FBR Technology Ventures partners Hooks Johnson and Gene Riechers joined Marks as GPs. The firm also has three partners.

While Marks declined to comment about the fund this time around, he voiced optimism when launching the fund last spring. In an interview with VCJ last year, Marks cited the firm’s smaller size as a reason to expect success. “The high ratio of dollars to people is going to give us a lot more time and we are going to operate at a relatively slower pace than the rest of the industry,” he said. “We sort of think our target is around a deal, or a deal and a half, per year per partner.”

Valhalla Partners focuses on early-stage technology companies in the Mid-Atlantic region, with a concentration in Maryland, Virginia, and Washington D.C. The firm will likely do between three and six deals per year and focus on communications and networking, IT services, software and technology buyout deals.

– Matthew Sheahan

Irish VC Gets Boost

The Bank of Ireland has invested $7.4 million in the Kernel Capital Partners venture capital fund, which will now be known as Bank of Ireland Kernel Capital Partners Private Equity Fund. The infusion brings the fund’s total to $22 million. This investment is the second close on the fund, which has an overall goal of raising $29.2 million

The fund was established in spring 2002 by Kernel Capital Partners and Enterprise Ireland, the Republic of Ireland’s government agency charged with domestic economic development. Enterprise Ireland also invested $7.4 million in the fund when it was founded last year.

Mary Harney, the Deputy Prime Minister of the Republic of Ireland, cited this fund as further evidence of Enterprise Ireland’s commitment to bringing more private funding to the venture capital industry in Ireland, and to helping various regions outside of the Dublin area. Kernel Capital Partners is located in the city of Cork and is the only fund of its kind in Ireland’s Munster region.

Enterprise Ireland has helped establish 17 such VC funds in Ireland over the past eight years. It was given a budget limit of $111 million, which it has now reached. Firms it helped to found have been able to leverage approximately $468 million in capital. While the government does not have any plans for extending the program, it might do so if it feels there is a strong enough market demand for the program to continue.

The Bank of Ireland Kernel Capital Partners Private Equity Fund invests in early and mid-stage companies in information and communication technology and life science companies. It usually invests between $349,000 and $1.75 million in each portfolio company.

Kernel Capital Partners, formerly known as Kernel Group, was founded in 1999 and has raised more than $70 million in venture capital and venture debt for technology companies based in Ireland.

– Matthew Sheahan

Gates Foundation Sends $22M To School

The NewSchools Venture Fund now has more than $65 million in its Charter Accelerator Fund, after a $22 million investment from the Bill & Melinda Gates Foundation. The San Francisco-based venture philanthropy firm will use the funding to develop a minimum of five charter management groups that will create 20 new schools serving about 8,000 students over the next two years. The funding will launch a total of 100 new schools and serve 40,000 students over the next 10 years.

In addition to the Gates Foundation, other investors in the Charter Accelerator Fund include the Broad Foundation and the Walton Family Foundation. The Charter Accelerator Fund helps start charter schools to help students throughout the United States in areas lacking strong educational systems.

The donation is a significant development in the non-profit firm’s quest for more foundation and institutional investment. The fund currently has about twice as many individual donors as institutional donors. “We’re such an unusual institution, it’s taking a while to make the large foundations understand that this value-added intermediary makes sense,” says Kim Smith, co-founder and chief executive officer of NewSchools Venture Fund. “On the impact side, the thing that is the most challenging is finding what we call hybrid entrepreneurs, leaders who understand both the business part of what we do and educational part of what we do. We need people who understand the inside of how good education works and the strategic and organizational things that make institutions work.”

NewSchools Venture Fund has investment partners who make investments in both for-profit and non-profit entities that seek to improve education for grades K-12. Any profits the firm sees from its investments are re-invested in the fund to support more educational investment. Its portfolio includes non-profit organizations like New York-based Teach for America and for-profit Teachscape, also based in New York.

In May, NewSchools Venture Fund announced it was raising a new fund, the Performance Accelerator Fund, with a goal of $20 million. The new fund will be used to provide training to teachers and educators and to develop educational assessment tools. It plans to raise its minimum investment amount from between $200,000 and $1 million to between $500,000 and $5 million.

The NewSchools Venture Fund was founded in 1998 by Smith and Kleiner Perkins Caufield & Byers partners Brook Byers and John Doerr. The fund has invested $20 million in 10 organizations.

– Matthew Sheahan

French Fund Holds First Close

Innovacom, the venture capital unit of France Telecom, has held a $59 million first close on its fifth fund, Innovacom V. The firm expects to hold another closing in July and a final close in November to bring the fund’s total to $117 million.

Limited partners that invested in the fund include Access Capital Partners, AGF Private Equity, CIC Finance, European Investment Fund, FPCR (Caisse des Depots Group), France Telecom and individual investors. The fund has no LPs from the United States.

Innovacom’s fifth fund will likely follow the strategies of the firm’s past funds. Innovacom traditionally makes an initial investment between $1.2 million and $3.5 million, with a total possible investment of between $5.9 million and $7 million per portfolio company. It is a lead investor in its European deals and typically co-leads or co-invests in the United States.

Innovacom traditionally has 25% of its investments in North America and 75% in Europe, a ratio that the firm expects its fifth fund to follow as well. Innovacom invests in components and hardware developers, content and service providers, software providers and wireless companies.

Innovacom was founded in 1988 and has more than $161 million under management. Its headquarters are in Paris, and it has offices in San Francisco and Stockholm.

– Matthew Sheahan

Army Marches Into VC

Milcom Technologies, an incubator and venture capital investor, has been chosen by the U.S. Army to manage OnPoint Technologies. OnPoint is the Army’s $25 million non-profit private equity fund that invests in mobile power and energy technology.

While the two entities are technically separate, they share common staff members. Jason Rottenberg, the president of Maitland, Fla.-based Milcom, is the managing director of OnPoint and a member of its board of trustees. Mike Buffa, who is chairman of the board and CEO of Milcom, is chairman of the board of trustees of OnPoint. OnPoint is treated like a fund managed by Milcom with the sole LP of the U.S. Army.

The fund will likely invest between $500,000 and $1.5 million per company and fund between four and six companies per year. Though the fund is structured as an evergreen fund, Milcom will take about five years to invest OnPoint’s initial $25 million, Rottenberg says.

While OnPoint is a non-profit entity, Milcom is not. “We’re much like a manager of a venture fund is with a fee and carry structure. The difference is that we’re interested in strategic interests, if not more than financial interests,” says Rottenberg.

The appointment marks the first project to see Milcom working directly with the Army, even though many of the technologies behind Milcom’s companies are leveraged from the military. Milcom partners with defense contractors, government-backed research institutions and universities in order to capitalize on military technology.

Milcom was founded in 1997 and has 13 companies in its portfolio that have raised a total of more than $600 million in venture capital funding. The firm focuses on companies in the advanced materials, communications, healthcare, IT and security sectors.

OnPoint Technologies is responsible for finding technology that improves an individual soldier’s mobile power and energy requirements. It brings technology from startup companies to the U.S. Army through equity investments, project partnering, research sponsorship and licensing agreements. It seeks to access energy and communication technology to be used by the military.

– Matthew Sheahan

MVC Could Target Buyouts

The board of directors of publicly traded business development company MVC Capital (formerly known as MeVC) unanimously voted to approve a new long-term strategy and submit the plan for shareholder approval. The shareholder vote, which is not required by the company’s by-laws, but promised by the board prior to their election, will take place by Aug. 29.

So far MVC has said the board’s plan calls for the fund to be managed as a “more traditional, mezzanine and buyout focused” fund. Also, the fund would put forth a tender offer for 25% of outstanding MVC shares for 95% of the fund’s net asset value. The company’s board of directors also voted to appoint former Kohlberg Kravis Roberts & Co. General Partner Michael Tokarz as chairman and portfolio manager of the fund and reduce its board fees by half for the rest of the fiscal year.

In a Feb. 28 proxy vote, shareholders of MVC Capital voted to elect a new slate of board members proposed by dissident shareholder Millenco and its affiliates. The votes were approximately 82% in favor of the new board and 18% in favor of the incumbent board of directors led by CEO John Grillos. Grillos was fired and replaced with interim CEO Robert Everett, a victorious dissident board member and managing director with Everett & Solsvig, a New York-based management consulting firm. The new management froze investment activity. In late April, MVC Capital completed a portfolio review promised by the incoming management and significantly wrote down the value of its portfolio by $25.9 million ($1.61 per share) and put the fund’s net asset value at $156.1 million.

The company says that the vote to approve the board’s plan is being held to give shareholders a clear and final say in the direction of the company. A source familiar with MVC Capital says that shareholders have been consistently communicating to the company that their votes for the new board of directors was more of a rejection of the previous management team than a ringing endorsement of the new board’s plan and that there may be majority support for liquidation. A statement released by MVC Capital says: “If the proposal is not approved, the board will reconsider its options for returning value to shareholders, including a sale of the fund or a managed liquidation of the portfolio and a distribution of the proceeds.”

Under its previous management, MVC Capital filed suit in the United States District Court Southern District of New York against Millennium Partners (its largest shareholder), Millennium subsidiary Millenco and Karpus Management for what it said were violations of federal securities law. The suit alleged that the dissident shareholders were conspiring to take control of MVC and liquidate its assets through pyramid stock ownership, misrepresentations and omissions in SEC filings, and fraudulent proxy solicitations. The MVC management cited Millennium Partners’ takeover and the subsequent liquidation of U.K.-based investment firm International Biotechnology Trust in 2000. Millennium Partners won the lawsuit, which it contended was a desperate attempt by MVC management to obstruct shareholder voting in upcoming board elections, and won the subsequent proxy vote. Millennium insisted that its intention was not to liquidate the fund and is backing the current plan to manage the fund with a mezzanine and buyout focus.

MVC Capital, formerly MeVC Draper Fisher Jurvetson, held a public offering in 2000 and raised $330 million. The company later abandoned its business model of partnering with Draper Fisher Jurvetson on deals. By the end of Q3 2002, MVC had invested $134 million in 26 portfolio companies, which are now valued at approximately $50 million. MVC has about $156.1 million in net assets.

– Matthew Sheahan

Edgewater Raises $200M

After fund-raising for a year, late-stage investor The Edgewater Funds closed its fourth private equity fund with $200 million. The Chicago-based firm plans to make investments of up to $25 million in companies with annual revenue of between $25 million and $250 million.

Drawing on the strength of their own background as chief executives, Edgewater’s nine partners look to back established, profitable growth companies with strong management teams and chief executives. Edgewater founder Jim Gordon is the former head of Gordon’s Wholesale, a candy and tobacco distributor. The firm’s eight other partners-Bob Allison, Greg Jones, Mark McManigal, Dave Tolmie, Bob Growney, Bill Cvengros, Jeff Frient and Phil Lorenzini-each have similar backgrounds building companies, making the firm a people-driven investor.

Since its founding in 1991, the firm has completed 31 investments, at least three of which have gone public, according to Thomson Venture Economics (publisher of VCJ). It has made investments in the computer hardware and software sectors, in Internet companies, as well as in health care technologies.

Edgewater is a minority investor, often investing alongside other financial and strategic investors. Although the bulk of its investments are in late-stage profitable companies, it will occasionally invest in a younger company, but only if that company has compelling technology, asset value or proprietary opportunity. It invests with a mix of debt and equity.

Investors in the Edgewater Private Equity Fund IV include public pension funds, university endowments, fund-of-funds and public corporations.

-Carolina Braunschweig