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 putti=
ng
all their eggs in the Internet-only basket. Dismantling their old,
diversified firms, they are now becoming "pure play" Internet shops. In t=
he
most decisive such move, a total of six partners from Institutional Ventu=
re
Partners and Brentwood Venture Capital are breaking away from their curre=
nt
firms to form a new, Internet-focused venture firm that will seek to rais=
e
$500 million from investors.
Partners at both firms are gambling that a single-industry focus will wor=
k
better for them. Until this week, Brentwood and IVP have publicly markete=
d
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 leavi=
ng
to join the new Internet firm. "But we think we can make a new spindle th=
at
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 fu=
lly
diversified venture firms.
While other venture firms aren't taking such extreme steps, many are quie=
tly
narrowing their focus. Firms such as Sequoia Capital and Accel Partners h=
ave
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, a=
re
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 tryin=
g
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 compan=
y
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 Junipe=
r
Networks Inc. Typically, companies that carry out IPOs end up with stock
valued at five to 50 times the prices that venture-capital partnerships p=
aid
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 crea=
ted
some wistfulness at Brentwood and IVP, especially as rival venture
capitalists use their biggest successes to create an aura of invincibilit=
y
around the entire firm. IVP's Mr. Yang said the decision to combine the t=
wo
firms' Internet teams was first broached casually this spring in a golf g=
ame
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 olde=
r
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 invest=
ing
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 Brod=
y
and Brad Jones from Brentwood, and Mr. Yang, Mr. Haley and Tom Dyal from
IVP. Ruthann Quindlen, an IVP partner specializing in software and Intern=
et
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."
Tushar J. Mehta
email: [email protected]
voicemail: (206) 405-2335