Article from WSJ Venture Dispatch.
“If you think early-stage investing is the only place to be in venture capital, you haven’t been paying attention to Institutional Venture Partners.
Although it’s a senior citizen in VC with 13 funds to its name, the late-stage investor is behind two of the Web’s hottest companies, Twitter Inc. and Zynga Game Network Inc.
And while many firms struggle to hit fund-raising goals, IVP recently closed a new fund at $750 million, its largest ever, blowing by a $600 million target.
Its partners think that’s because this is exactly the right time for its strategy as the road to exiting has grown longer and early investors and founders look for liquidity.
Although the firm is not lacking competition, “the supply-demand relationship in the late stage is quite attractive,” said General Partner J. Sanford “Sandy” Miller. Fund-raising data support this view: Early-stage and multi-stage venture firms raised $3 billion and $3.98 billion, respectively, in the first half of this year, according to Dow Jones LP Source; late-stage specialists raised a mere $500 million (this amount does not include IVP’s latest fund, which closed in the second half of this year).
Miller, who joined IVP in 2006 from London-based 3i Group PLC, and before that co-founded investment bank Thomas Weisel Partners, said that although public offerings are again “a feasible alternative,” they will remain a small percentage of venture capital exits compared with M&A. Strategic acquisitions will provide the best exits for VCs as technology companies deploy their “unprecedented war chests,” Miller said.
Meanwhile, many technology companies, especially those employing the software-as-a-service model or in digital media, are investing aggressively to drive growth. IVP initially invested in both Twitter and Zynga in 2008 when they raised second rounds. Late-stage investors traditionally invest in third or later rounds.
IVP General Partner Dennis Phelps said Internet companies, because they can be launched cheaply, often can tap the late-stage market after raising little previous capital. For example, IVP in March led a $10 million Series B round for New York-based DoubleVerify Inc., which runs a brand-protection service for online advertisers and had raised $3.5 million from investors previously.
The DoubleVerify investment also illustrates another trend in the late-stage market as IVP, besides injecting fresh capital, bought Series A shares from an angel investor who was looking for liquidity. Miller said such transactions are more common now, although it is usually founders or management selling shares. Not only is it a way for IVP to boost its ownership stake in the company but it also can relieve financial pressure on company executives who otherwise might have to wait a decade to get money out of the business.
Recent IVP funds have performed well. Its 10th vehicle, raised in 2001, had an internal rate of return of 7.4% as of March, according to data from investor California Public Employees’ Retirement System. Its 12th fund, closed in 2007, had a 28.4% IRR as of March, according to California State Teachers’ Retirement System.
“We’re looking for the emerging winners,” Miller said of IVP’s investment strategy. “If you wait too long, they’re no longer emerging and they’re just very expensive situations.””
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