As sure sign of a top, lloks like 1984 in hihg tech again: "Venture Capitalists Focus On Net in New Approach Who would want to scrap an investing formula that has produced 90%
annual returns, on the belief that a new approach will work even better?
Venture capitalists in Silicon Valley, that's who.
In the latest sign of the Internet's impact, venture capitalists are jettisoning
their traditional approach of financing start-ups in a variety of industries --
from microchips to biotechnology to computer software -- and instead are
putting all their eggs in the Internet-only basket. Dismantling their old,
diversified firms, they are now becoming "pure play" Internet shops.
In the most decisive such move, a total of six partners from Institutional
Venture Partners and Brentwood Venture Capital are breaking away
from their current firms to form a new, Internet-focused venture firm that
will seek to raise $500 million from investors.
Partners at both
firms are gambling
that a
single-industry
focus will work
better for them.
Until this week,
Brentwood and
IVP have publicly
marketed
themselves as
firms that can earn
90% annual
returns by investing in a cornucopia of industries. "We're taking the spindle
that spins yarn into gold and breaking it up," says Geoffrey Yang, an IVP
partner who is leaving to join the new Internet firm. "But we think we can
make a new spindle that will spin a bigger amount of yarn."
Meanwhile, health-care partners from Brentwood and IVP will merge their
businesses and try to raise a smaller fund on their own. Except for
wrapping up existing commitments, IVP and Brentwood -- both more than
20 years old -- will begin winding down as fully diversified venture firms.
While other venture firms aren't taking such extreme steps, many are
quietly narrowing their focus. Firms such as Sequoia Capital and Accel
Partners have scaled back their involvement in health care, so they can
focus more intently on the Internet. Other venture firms, such as Hummer
Winblad Venture Partners, which invest only in Internet and software
companies, are promoting their limited range as a virtue.
"When venture capital operated at a more leisurely pace, we all enjoyed
hearing about each others' deals," says Ross Jaffe, a Brentwood partner
who will become part of the new health-care fund. "But as the pace has
picked up, we're all so busy trying to be successful in our specialties that
the synergies of having a broad partnership are getting lost."
Meanwhile, founders of start-ups are adding their own pressures. Venture
capitalists say that the most promising entrepreneurs are making it clear that
they want to do business with financiers that can help with nitty-gritty
business tasks such as recruiting managers and wooing early customers.
That is easier to do if a venture firm isn't trying to master a dozen different
industries at once.
Bill Nguyen, founder of OneBox Inc., San Mateo, Calif., says he
welcomes the Brentwood/IVP realignment "because they will be more
focused." His company currently gets funding from both Brentwood and
IVP. OneBox lets people organize their telephone data and other
communications information on the Internet.
In the past year, Brentwood and IVP have seen more than a dozen of their
Internet-related companies conduct initial public stock offerings. Among
them are Stamps.com Inc., NextCard Inc., Ask Jeeves Inc. and Juniper
Networks Inc. Typically, companies that carry out IPOs end up with stock
valued at five to 50 times the prices that venture-capital partnerships paid
for their early stakes in the business.
So far, though, neither Brentwood nor IVP has posted a mammoth winner
in the Internet, along the lines of Yahoo! Inc. or Amazon.com Inc. That has
created some wistfulness at Brentwood and IVP, especially as rival venture
capitalists use their biggest successes to create an aura of invincibility
around the entire firm.
IVP's Mr. Yang said the decision to combine the two firms' Internet teams
was first broached casually this spring in a golf game with Brentwood
partner John Walecka. The idea gained speed in April, when IVP partners
held a formal meeting to talk about how to replace some older partners
who were getting ready to retire. During a late-night strategy session, the
realignment with Brentwood emerged as the most promising choice.
Looking ahead, officials of both firms say they hope the pure Internet
theme will help them find bigger winners. "We'll focus on investing only in
companies that could be industry leaders," says Tim Haley, an IVP partner
joining the new Internet fund. He and other colleagues said they will cover
a range of Internet-related businesses, including providers of high-speed
"broadband" Internet access, digital media and e-commerce.
The six partners forming the new Internet fund are Mr. Walecka, Jeff
Brody and Brad Jones from Brentwood, and Mr. Yang, Mr. Haley and
Tom Dyal from IVP. Ruthann Quindlen, an IVP partner specializing in
software and Internet investments, won't be joining; she says she would
rather concentrate on setting up a smaller Internet fund on her own.
Officials say they haven't yet settled on a name for the new fund. To date, it
has been known as Project T-Rex, but officials say they will look for
something friendlier.
Looking at Brentwood's own history, Mr. Jones said there is precedent for
narrowing the firm's focus. "Until 1989, we did venture capital and
leveraged buyouts in the same firm," he said. "Then we split them apart.
Both businesses have done better separately than they did together." |
