Valhalla headlines Mid-Atlantic fund-raising

Limited partners are aching to invest in the hot Mid-Atlantic region, regardless of the lack of early stage exits, it seems.

Take Valhalla Partners, for example. The Vienna, Va.-based firm raised $264 million in about two months to close its second fund last month, without having successfully exited any of the 16-plus venture investments it made in its last fund, which was formed in 2002. The firm did have one distribution from the recapitalization of buyout deal, a provider of domain name services for businesses. The firm is set up to opportunistically participate in growth stage investments and buyouts, but is the only one it has done.

“When we went back to raise fund two, our current investors wanted to put in as much if not more,” says Valhalla General Partner Gene Riechers. “They knew what our strategy was and could see that we had done it. It was too early to expect exits, though.”

The firm had a tougher time pulling together its first fund in 2002. It took a year-and-a-half, Riechers says. In fund II, Valhalla raised $80 million from new investors and finalized the fund in six to eight weeks.

Overall, startups in the Mid-Atlantic region raised $332 million from VCs during the third quarter, up slightly from the $321 million raised during the same period in 2005, according to The MoneyTree Survey by PricewaterhouseCoopers, Thomson Financial (publisher of VCJ) and the National Venture Capital Association. In comparison, VCs invested $1.9 billion in Silicon Valley startups during the third quarter.

Riechers attributes the firm’s ability to raise money without a track record of hits to the experience of its partners. General Partners Charles Curran and Arthur Marks are veterans of New Enterprise Associates. Riechers and General Partners Hooks Johnson, Scott Frederick previously worked at FBR Technology Venture Partners before founding Valhalla. “There’s 90 companies in our collective history with more than $1 billion inf venture returns,” Riechers says.

Valhalla, which focuses exclusively on information technology investing, pulled its name from mythology. “It’s the Nordic heaven for fallen warriors, where you fight all day, feast all night, and never die,” Riechers says. “We’re going to fight all day for our limited partners, feast when we’re done and not die trying to do biotech.” LPs, which include Altius Associates, the New York State Teachers’ Retirement System and the Verizon Investment Management Corp., are still waiting on the spoils of that fight.

Valhalla isn’t the only firm in the area that has recently raised cash despite a dearth of exits. Novak Biddle Venture Partners, based in Washington, D.C., raised $227 million for its fifth fund earlier this month, which was 50% greater than its last fund. However, Novak Biddle has had one poorly performing IPO and one acquisition in the last two years, according to Thomson Financial.

But not all Mid-Atlantic firms are finding the exit market sparse. Consider Core Capital. The firm returned a gross rate of return of 35% on its first fund, a $160 million vehicle raised in 1999. It may do even better. Sourcefire, a security company in its portfolio, is in registration for an IPO. Core’s latest fund, raised in mid-2005, has already one exit to its credit. It sold SilverStorm Technologies, a networking startup it helped recapitalize, to Q-Logic for $60 million.

Core Capital Managing Director Jonathan Silver attributes his firms’ recent success to lower valuations for local deals. He says startups price at a 25% to 35% discount when they fundraise in his region, primarily because there’s less competition than on Sand Hill Road. “If you can get in at a modest enough valuation, a modest exit is okay,” he says. “We think about ourselves as the value investors in venture.”