The venture lending business received a shot in the arm as Lighthouse Capital Partners closed its fifth fund with $366 million. It plans to invest the fund over the next two to four years in companies that have already received funding from traditional venture capital firms.
The firm’s fourth fund closed with $230 million in 2000 and is approximately 80% invested. Lighthouse, based in Greenbrae, Calif., will start making investments from the fifth fund in the second half of this year.
New limited partners in Lighthouse Capital Partners V include Hamilton Lane, Howard Hughes Medical Institute, Key Capital Corp., Quellos Private Capital, San Diego County Employees’ Retirement Association (SDCERA), the State Teachers Retirement System of Ohio, Teachers Insurance and Annuity Association of America (TIAA), Verizon Investment Management Corp., the Fire and Police Pension Association of Chicago and the State of Rhode Island. Previous investors returning to the firm’s fifth fund include Dartmouth College, MIT and the University of Richmond.
Lighthouse had commitments for more than $400 million, but was restrained by one of its previous investors, which did not want the fund to be more than $300 million in size, sources familiar with the fund say. But Rick Stubblefield, a managing director with the firm, says Lighthouse decided to hold off on raising additional capital. “The level of activity in the venture space is less robust than in prior years,” he says. “We thought this was the right amount of capital, even though we had some prestigious institutions that wanted to participate and that we wanted in our fund.”
The offering memorandum for the fund lists the goal as $300 million, however documents filed with the Securities and Exchange Commission lists the fund as a $400 million offering. Stubblefield says $400 million was the firm’s “hard cap,” which was used in order to avoid further filing penalties should the fund raise more than $300 million.
Almost all of the firm’s previous investors anted up again, with what Stubblefield describes as a small number not returning. He declined to say which investors didn’t return, but he says they were mostly financial institutions. “Certain ones that are over-allocated, have had turnover of personnel and a collapse in carrying value of private equities,” Stubblefield says. “They come and go as the markets change.”
Lighthouse invests an average of $4 million per investment and between $4 million and $8 million over the life of a portfolio company. Partners expect the new fund to make 20% of its investments in life sciences, with most of those sector investments going into biotech and medical device companies. “As a venture debt player, we want to follow where the money is being deployed,” says Stubblefield. “We don’t expect much change in our investment strategy. The one exception being we will allocate more of our portfolio to life sciences than we have in the recent past. Clearly anything Internet/consumer related we currently don’t have an interest in looking at.”
Lighthouse was co-founded in 1994 by Stubblefield and managing director Gwill York. Both were previously senior vice presidents with Comdisco Ventures, with York overseeing investment activities on the East Coast and Stubblefield co-managing West Coast activities.
Lighthouse invests in a wide array of sectors, including communications, e-commerce, the Internet, life sciences, semiconductors, software and storage. Its portfolio companies include Ariba, Broadbase Software, Foundry Networks, Millennium Pharmaceuticals, nVidia and RedBack Networks.
Venture lending allows funds like Lighthouse to loan capital to startups for an interest rate of about 10% and warrants for potential equity in the company. For borrowers, it gives them access to much-needed cash without giving away much equity. “The principal difference between us and a traditional venture capital firm is that they’re playing for upside and don’t play what we say is defense,'” Stubblefield says. “The benefit of using our capital is that it extends the existing capital of a startup and allows them to use equity capital for research and development.”
Other venture lenders include Gold Hill Venture Lending Partners, Pinnacle Ventures and Western Technology Investment.