There often is a fine line between being viewed as innovative and being viewed as misguided. Just ask Accel Partners, which seemed to teeter on that tightrope last spring when it agitated certain investors by proposing to split its eighth fund in half, before belatedly endorsing a pure fund reduction. Now, however, the Palo Alto, Calif.-based venture firm seems to have learned from past mistakes.
Accel in April sent LPs a letter that outlines a 28.5% reduction to both Fund VIII and its strategic side fund. This is on top of May 2002’s 32.1% cut, and would reduce Fund VIII to $679.25 million and the side fund to $97.1 million. They were originally closed in 2000 with a total of $1.6 billion.
The cut is subject to LP ratification of a partnership amendment, but investors speaking on the condition of anonymity say they don’t expect any significant dissention. “I’m sure some people will have something to say about it at [last month’s] Accel LP meeting, but I think this is really what everyone had always wanted them to do,” says an investor.
Another LP says that Accel always should have known that the original cut was not deep enough. “They first suggested splitting the [general] fund into two $700 million funds, so why did they then turn around and think that it would make sense to only cut it down to $950 million?” he asks. “Did they suddenly find $250 million in extra deal flow?”
A source at Accel says that the firm believed that the venture capital market might return to a “normal” investment pace, reminiscent of the early to mid-1990’s. Instead, he says, the sluggishness of 2001 has persisted without any sign of increasing.
Indeed, preliminary data from Venture Economics (publisher of VCJ) shows that Accel VIII has participated in just seven deals since the initial fund cut. Three of those transactions were follow-on rounds, although the firm did add a quartet of new portfolio companies: Apexon Inc., ItemField Inc., NBT Technology Inc. and Trapeze Networks Inc.
Once the new partnership amendment is ratified, Accel will have voluntarily taken more committed capital out of its own coffers than any other venture firm in history. Accel also becomes the fourth firm known to have cut into the same fund twice, following Atlas Venture, Redpoint Ventures and Mohr, Davidow Ventures.
The source at Accel says that the final decision was made following positive feedback from the firm’s executive advisory board during a March 19 meeting. He adds that the fund’s remaining capital should take Accel into 2004, and that a successor fund likely would be targeted at between $350 million and $400 million.
Limited partners in Accel VIII include CalTech, General Motors, Harvard University, Hewlett-Packard, Illinois State Teachers’ Retirement System, MIT, Northwestern University and the Washington State Investment Board. Also investing is the University of Michigan, which recently revealed that the fund’s internal rate of return through the second quarter of 2002 was negative 22%. This is off just slightly from the Venture Economics’ vintage year benchmark for venture funds of negative 19.8%.
Longworth Beats the Odds
Fifteen months is a long time to spend fund-raising, but Jim Savage of Longworth Venture Partners isn’t complaining. In fact, he sounds thrilled that his Waltham, Mass.-based firm managed to hold an oversubscribed final close in what everyone agrees is a difficult environment for young, early-stage firms.
The new fund busted its $100 million target by $15 million, which includes a few dollars devoted to a friends and family side vehicle. Longworth held an initial $33.3 million close in December 2001, according to an SEC filing.
Savage says that even though his firm now has more money than when it operated with a $20.5 million fund, the overall investment strategy will not change. That means a lot of lead investments in early-stage companies with pre-money valuations below $10 million. Areas of industry interest include enterprise application software, systems management solutions, IT infrastructure and related services.
Helping scout out the deal flow will be Peter Roberts, who joined Longworth as a general partner after a number of years spent as a managing director with BancBoston Ventures.
Senmed Shuts VC Unit
Corporate venture capital unit Senmed Medical Ventures is being shut down by its parent company, Sentron Medical. The firm recently sent word to potential limited partners that it was withdrawing its offering of Senmed Medical Venture Fund I. Targeted at $50 million, this would have been the first fund that Sentron Medical raised from outside investors.
Senmed Medical Ventures may be no longer, but Triathlon Medical Ventures is already looking to fill the hole. Dennis Costello, Suzette Dutch and John Rice, former investment directors with Senmed Medical Ventures, have started a new venture capital fund, which is raising a fund targeted for between $30 million and $60 million. Triathlon’s fund will be a standard venture fund with a 10-year life cycle and an investment life of four or five years, depending on the market. The new firm has been speaking with the five limited partners that committed to Senmed’s fund and so far has secured the backing of the University of Cincinnati.
“We were pretty far along in our fund-raising under the auspices of the Senmed Fund,” says Dutch, who says that Triathlon will be based in Cincinnati and have the exact same investment strategy as Senmed, which invested $2 million or more in each portfolio company in various rounds of fund-raising. According to Dutch, Sentron’s departure from the venture business was due to its expansion into more tangential areas of growth and the lack of common strategic gain between the company and its venture unit.
Senmed will lay off 10 of its investment professionals and keep a skeletal staff on to manage the group’s portfolio companies.
Israeli VCs Give Back
Israeli VCs returned more capital than they raised in 2002, resulting in a negative balance of $128 million, according to the IVC Research Center, an Israeli venture capital research firm.
IVC estimates that available capital in Israel’s venture capital industry stands at $1.5 billion, half of which is intended for startups. Israeli venture capital funds raised a measly $65 million in 2002. Back in the heyday of 2000 the country brought in $3.14 billion.
Other than being a poor fund-raising year, in 2002 five Israel investors returned capital to their LPs. Israeli funds returned a total of $191 million in 2002. Funds that returned money includes AIG, BRM Capital, Runway Telecom and Botticelli Venture Funds, which later shuttered. Additionally, Jerusalem Global Fund has indicated that it would not call down $32 million in commitments. The fund had expected to raise $188 million.
There may be some light at the end of the tunnel. Although Benchmark Capital is in not an Israel-based VC, it is working against the trend. The firm raised another $40 million to fund Israeli-based startups.
UTIMCO To Release New Data
Texas Attorney General Greg Abbott ruled in April that the University of Texas Investment Management Co. (UTIMCO) must release top-line performance data on funds within its private equity portfolio-whether or not those partnerships signed confidentiality waivers. In doing so, he disagreed with arguments put forth by Atlas Venture and Austin Ventures that such disclosure violated trade secret law and would leave affected funds at a competitive disadvantage.
The opinion was issued in response to a March request from UTIMCO to clarify an earlier ruling from former Attorney General John Conryn. That original decision had been careful to avoid being used as a precedent, going so far as to explicitly say that it was valid only for fund performance data through June 30, 2002. UTIMCO not only needed the new ruling to respond to new information requests under the Texas Open Records Act, but also to settle the issue once and for all by issuing what is known in legal jargon as a previous determination.
West Coast Disclosure
In other disclosure news, the San Jose Mercury News and clerical workers union Coalition of University Employees have filed suit against the University of California (UC) over the school’s refusal to release fund-by-fund private equity performance data. Filed in Alameda County’s Superior Court, the suit also asks for records of various closed-door sessions related to investment and advisor selection decisions.
UC has spent the past two decades building up a $143 million private equity portfolio, which accounts for 3.4% of the school’s $4.2 billion endowment and pension system. The systems private equity holdings took a loss of 15.4% for the year ended June 30, 2002, but they have returned 34.7% over the last five years.
Southbridge Stops VC Investing
Ontario, Canada’s Southbridge Capital is reorganizing and is no longer making venture capital investments. The firm declined to comment further. Its Web site displayed only basic contact information and the promise of a “redeveloped” Web site coming soon.
Southbridge Capital manages the investments for Southbridge Investment Partnership I. It has approximately $80 million under management and invested between $680,000 and $3.4 million with a preference for investing between $2 million and $2.7 million in each portfolio company.
Partner Reginald Petersen founded Southbridge in 1997 after his sale of Versa-Care Ltd., a 30-year-old retirement and nursing care company. The firm’s portfolio companies included International Menu Solutions Corp. (OTC: MENU), a Toronto-based food services company. The firm also invested in DSP Factory, a Waterloo, Ontario-based developer of miniature low-power digital signal processing (DSP) technology.
Jefferson Pulls In $136M
Closed with approximately $136 million within a few weeks, Jefferson Partners’ fourth private equity fund will invest in a mixed bag of Canadian technology companies, with a focus on application software and services, communications infrastructure and Internet technology.
Additionally, Toronto-based Jefferson Partners Fund IV will make opportunistic investments in later-stage private companies with at least $3.4 million revenue, products on the market, customer traction, and depressed valuations.
The fund will initially commit between $2.7 million and $4.1 million to each portfolio company, reserving up to twice that amount for follow-on investments, which it expects will be enough to take a 20% equity position in each portfolio company and to claim at least one board seat. It also will take an active role with each portfolio company’s management team, working through problems to reposition and revive the company. Like its predecessors, about 85% of this fund’s capital will go into mid- to later-stage companies. The remainder will be left for seed- and early-stage deals.
About 70% of the fund’s limited partners are U.S. investors, while the remainder is Canadian.
Foundry Closes Third Fund
The Foundry, an incubator of medical device companies, closed its third fund, Foundry III, with $1.35 million. Morgenthaler Ventures and St. Paul Venture Capital co-invested. The Redwood City, Calif.-based incubator will use the funding to invest in its next portfolio company, tentatively named Foundry Newco.
Foundry I, which was founded in 1998, raised $3 million mostly from individuals and lasted two and a half years. Foundry II, which was founded in 2000, raised $4.6 million from institutional investors. Previous investors in The Foundry include ABS Ventures, Kleiner Perkins Caufield & Byers, New Enterprise Associates and Three Arch Partners.
Foundry I and Foundry II launched a total of five portfolio companies in the medical device sector. Together these startups have raised over $100 million in venture capital. The incubator specializes in promoting medical device companies that promote minimally or non-invasive surgery and the concept of “surgery without knives.”
Advantage Capital Seeks $110M
With a little help from the federal New Markets Tax Credit (NMTC) program-administered by the U.S. Treasury-Advantage Capital is preparing to raise a $110 million fund to be named Advantage Capital Community Development Fund.
The premise: Every $100 an LP puts into the fund will result in a $5 or $6 tax credit, assuming Advantage Capital meets all the U.S. Department of Treasury’s investment criteria. The program was developed to stimulate growth and job creation in low-income communities. The NMTC provides tax credits for up to $15 billion for new private sector investment in economically distressed communities.
The firm’s LP list includes banks and insurance companies. Founded about a decade ago, Advantage Capital has raised 25 funds. Each has been raised and invested in the Southeast, Midwest or New York. The firm has 20 investment professionals spread among offices in New York, St. Louis, New Orleans and Tampa, Fla.
The tax credit money was allocated to Advantage Capital’s New York office. Therefore, the fund will focus more on the metro New York area. This fund will invest about 50% in metro New York and the remainder will be split evenly between the Southeast and Midwest.
The fund is expected to make investments from $500,000 to $1 million into mostly expansion-stage deals. After the fund is fully committed it will have invested in 150 deals, over three years. Additionally, the fund will have a general focus. Advantage Capital just started to raise the fund and is not sure when it will be closed.
Ex-St. Paul Partner Starts Anew
Brian Jacobs says he learned the value of working in a small firm when he started out as one of four partners with St. Paul Venture Capital. Since the economy surged and crashed, he’s become more confident that a smaller ship can better weather the storm.
And so Jacobs launched Emergence Capital Partners. Jacobs, the founder and general partner of the Burlingame, Calif.-based firm, is joined by former U.S. Venture Partners investor Jason Green and Gordon Ritter, founder of Whistle Communications and Tribe Computer Works.
Emergence capital expects to close on a $100 million fund within six to 12 months.
So far the firm has done a few deals with money out of their own pockets, including buying secondary stock of SalesForce.com from a former company employee. Emergence also invested in HireRight, a company Jacobs funded when he was with St. Paul. Emergence Capital Partners expects to invest between $5 million and $6 million in technology-enabled service providers.
Two Mass. Funds Become One
Working toward the same goal usually pays off and the Worcester Capital Partners Fund and Long River Capital Management are hoping for such combined success. The two have merged and will take the name Worcester Capital Management-the name of Worcester Capital Partners Fund’s original management firm. Both firms managed $15 million, first-time regional funds based in central and western Massachusetts respectively.
The management team has also been combined. As a result of the merger, John Merrill, founder and a general partner with the Worcester Capital Management will remain active with the fund as a member of the investment committee, but will no longer be part of the day-to-day management. Long River Capital Management was managed by Tripp Peake and Will Cowen. Together they will co-manage to new firm. Peake is the former founding president of Mass Ventures Corp. and was named managing partner of Long River Ventures in June 2000.
Cowen, a long time health care investor and co-founder of Navimedix, a Boston-based health care IT company, has moved his primary office to Worcester and is already actively looking at local and regional opportunities. The funds haven’t made any new investments and were both about 30% invested prior to the merger.
Keeping an early-stage focus, the funds are expected to be equally invested in health care, IT and telecommunications deals. Additionally, two thirds of the capital will be put to work in central and western Massachusetts, while the remaining one third will be invested in the greater New England area. The funds will invest $500,000 to $5 million into each portfolio company and are expected to be fully invested in three years.
The new firm’s LPs include FirstMass Bank, Fleet Development Ventures LLC, Sovereign Bank New England, WPI, the College of the Holy Cross, Clark University, The Massachusetts Property and Casualty Insurance Company Community and Economic Development Initiative.
Aussies Say G’day To VC
Venture capital activity may have collapsed since the explosion of the dot-com bubble, but in the land down under they’re hoping it’s preparing to take off again. Australia’s government recently eliminated capital-gains taxes on VC funds brought into the country, and now it’s actively campaigning to draw U.S. and European VCs into its own burgeoning venture arena.
Until now, VC investments in Australia were not appealing for U.S. and European funds because they were subject to Australia’s 24.5% capital-gains taxes, on top of taxes levied by the funds’ own countries.
Hoping to significantly boost its $3.5 billion VC economy, the Australian government passed legislation in November allowing for the creation of VC limited partnerships-the structure preferred by the international VC community. Additionally, Axiss Australia has kicked off a promotional campaign, with a group of representatives meeting with U.S. and European VCs to tout the benefits of launching VC funds in Australia or investing in those already there.
PA Early Stage Nabs $68M
PA Early Stage Partners closed on $68 million, with a $100 million final close planned for its third fund in July. PA Early Stage Partners III is the most recent offering from the Wayne, Pa.-based firm that has raised two funds and a total $150 million since 1998.
The fund will concentrate on early-stage technology plays, making an initial commitment between $100,000 and $5 million to each portfolio company. It will invest up to $6 million over the course of a company’s life cycle.
The fund plans to make half its investments in the information technology arena, and the other half in the life sciences sector. About 70% of the firm’s investments will be in Pennsylvania, while the remainder will be concentrated in the Mid-Atlantic region from Boston to Washington, D.C.
The 15 limited partners in PA Early Stage Partners III include Pennsylvania State Employees’ Retirement System and Philadelphia Pension Fund.
Entrepia Heads To Japan
Entrepia Ventures has raised two funds, which are both designed to bring technology from around the world to Japan.
The firm closed two side-by-side funds: the Entrepia Fund II L.P. and the Le Fonds Entrepia Nord S.E.C. for a total of $50 million. Entrepia decided to raise two funds so one could be Canadian, which allows the LPs located in Montreal to reap the benefits of Canadian tax laws that reward citizens for investing in Canadian entities.
The funds plan to invest in expansion-stage companies that have strong IT, communications or electronic technology.
As a firm, Entrepia’s goal is to support companies that will bring their technologies to the Japanese markets, where there is a demand for innovation.
Entrepia’s first fund, totaling $30 million, closed in 1999. By the end of 2002, it managed investments in 20 North American companies and generated an average rate of return for investors of 153%.
Entrepia began raising the two new funds just before Sept. 11, 2001. Emboldened by early successes, it set out to raise $100 million. Later, the target amount was lowered to $50 million.
Most of Entrepia’s backers are institutional or financial investors. The Nissho Iwai Corp. of Japan, where Kawaratani worked for 17 years in business development, was the only institutional investor in its first fund. Kawaratani declined to provide any further information about the firm’s LPs.
Entrepia plans to spend four years making initial investments in 20 companies at an average amount of $3 million to $4 million apiece. After that time, it will begin to consider follow-on investments. As opposed to its first fund, which was limited to investing in North American companies, the firm plans to invest 30% of its new funds in Europe and Asia. Based in New York, the firm also has offices in Silicon Valley, Calif., and Tokyo.
– Nat Worden