When you’re not based in Silicon Valley, you have to be a little more creative about where you find tech deals. Just ask Paul Ahlstrom, a managing director for vSpring Capital.
The venture capital fund was looking to expand beyond its headquarters in Salt Lake City several years ago, and Ahlstrom figured New Mexico had potential. “I thought, ‘How could you pour several billion dollars [in R&D investment] a year into the area and not get any significant exits?’” he says.
So, he and his wife packed up their belongings and moved to Los Alamos, N.M., where he spent a year reconnoitering. “I was probably the dumbest guy in the town, the only one without a Ph.D.,” he recalls.
Ahlstrom was pleased with what he found, or, rather, the lack of what he found. First, the area didn’t have a history of entrepreneurship. There were lots of smart people focused on research, but “there wasn’t a strong interest in commercialization,” he says.
Second, the region didn’t have a strong, informal network of trusted investors and businessmen needed to foster startups. “You need to connect that with early stage capital, and you have to have them there for a significant period of time to get things off the ground,” he says.
New Mexico will play an increasingly important role in what vSpring does, but currently represents only a small part of its deal flow. So far, it has only done four deals in the state, about 10% of its investments. It still makes the majority of its investments, about 60%, in Utah.
“We’ve been looking for these brave new world technologies coming out of New Mexico and have funded four so far,” Ahlstrom says. “It is earlier stage, but the technologies are very different from what you might find in California.”
How could you pour several billion dollars a year into the area and not get any significant exits?
Paul Ahlstrom, Managing Director, vSpring Capital
For example, vSpring has backed VeraLight, a diabetes tester that uses fluorescence spectroscopy to figure out if a patient is developing diabetes. The technology, which is non-invasive, can be more accurate than a test that requires blood to be drawn.
Going off the beaten path has worked out well for vSpring. Its first fund, raised in the inauspicious vintage year of 2000, returned 15.4% as of Q1, Ahlstrom says.
With that successful track record, vSpring has raised $56 million toward a proposed third fund of $250 million, according to a regulatory filing. The new fund would be nearly three times larger than its second, an $86.1 million fund raised in 2004.
Why such a big increase in fund size? Ahlstrom explains that smaller funds prevented vSpring from purchasing greater ownership in its portfolio companies. “We went back and looked at the other investments we made in our last two funds and we looked at what size the funds would have to have been to maximize our returns,” he says. “We weren’t hitting our ownership target for our deals.”
The firm’s inaugural fund raised $41.5 million from limited partners and another $78.5 million from the Small Business Administration. To date, that fund has had eight exits that returned money, three exits that didn’t and three write-offs, Ahlstrom says. Vspring notched a big win as part of the consortium that spun LanDesk out of Intel and sold it to Avocent for $416 million last year. The deal netted an estimated 10x return for the investors.
Limited partners in vSpring’s previous funds include CPP Investment Board, Merrill Lynch & Co. Inc., the New Mexico State Investment Council, SVB Financial Group, Wells Fargo & Co. and Zions Bancorp.
Locations: Salt Lake City and Albuquerque
Team: Managing Directors Paul Ahlstrom, Ed Ekstrom, Dinesh Patel and Scott Petty.
New fund: Currently raising third fund targeted at $250M. Has raised $56M to date.
Previous fund: Raised $86.1M for its second fund in 2004. First fund, raised in 2000, collected $41.5M from private investors and another $78.5M from the Small Business Administration.
Sample LPs: CPP Investment Board, Merrill Lynch, New Mexico State Investment Council, SVB Financial Group, Wells Fargo.
Focus: Early stage companies in four key areas: software, communications, Internet and life sciences.
Top co-investor: Wasatch Venture Fund (12 companies).
Sample exits: Protalex (rheumatoid arthritis drug developer, IPO in 2002), Salus Therapeutics (nucleic acid-based drug developer, acquired in 2003), Soronti (maker of switches for wireless peripherals, acquired in 2003), Cerberian (Internet access software developer, acquired in 2004), LANDesk (desktop management software developer, acquired in 2006).
Source: Thomson Financial and VCJ reporting.