De Novo Locks Up Second Fund, Lets In UC

Fred Dotzler may not be a household name, but perhaps he should be.

The health care investment veteran and his fellow partners at De Novo Ventures are expected to announce this week the final close of De Novo Ventures II at $250 million, $50 million above the firm’s initial target.

And Dotzler, managing director of Menlo Park, Calif.-based De Novo, says that investors wanted the firm to go beyond the $250 million ceiling because they were pleased with its inaugural fund – De Novo Ventures I, which closed in 2000 with $100 million.

Dotzler says that the first fund, which invested in medical device makers, biotech companies and developers of health care-related IT products, has not made any distributions yet, but he’s expecting it to produce a good rate of return – an achievement made all the more impressive when compared alongside the IT-focused funds from the same era.

Indeed, the venture world’s appetite for medical device and biotech investment is overpowering whatever apprehension limited partners may have about young venture firms that are raising their second funds.

For De Novo’s first fund, the limited partner based was comprised of 70% individuals and 30% institutional investors. But De Novo Ventures II has turned that number around and then some, with institutional investors accounting for 80% of its LPs.

General partners invested about 3% of De Novo Ventures II.

Limited partners in the fund include fund-of-fund managers Knightsbridge Advisers, Paul Capital Partners and INVESCO Private Capital. Other investors include GS Private Equity Partners 2002 Offshore Holdings, J.P. Morgan, Goldman Sachs, and Windship 8, as well as Northwestern University and University of California (UC).

In accepting an investment from UC, Dotzler says the firm, obviously, has no problem with the disclosure of its IRR, so long as certain information, such as the valuations of portfolio companies, is kept private.

De Novo says the new fund will have a much greater focus on medical device investing over the first fund. While the premier fund invested 60% of its capital in medical device companies and 40% in biotech, the new fund will put 80% of its capital into medical devices and 20% in biotech.

The focus is not surprising, given the advancement of technology developments and that “health care is an attractive sector in investing right now as health care expenditures increase 7% a year,” says Dotzler, who was previously a GP at Medicus Venture Partners (which he founded in 1989) and Crosspoint Venture Partners.

The success of the second fund in attracting institutional investors has been partly the result of its focus and investment record.

Last month, De Novo portfolio company Renovis Inc. (Nasdaq: RNVS), which develops drugs and treatments for neurological diseases, launched a $66 million IPO at $12 a share. At the close of trading on March 11, shares of Renovis (Nasdaq: RNVS) were trading at $13.83.

Renovis is the first portfolio company of De Novo’s to go public, and Dotzler says that a couple more are planning IPOs. Also, others in Fund I are looking at potential mergers and four of the firm’s medical device companies have “steep sales ramps,” he says.

So far, the firm has made two investments from the second fund. De Novo led a Series B round in a Minneapolis-based atrial fibrillation company and co-led an investment an a hearing device company InSound Medical with the Johnson & Johnson Development Corp. Richard Ferrari, a managing director with De Novo, expects Fund II to make a total of 25 investments.

Email Matthew Sheahan

Lawrence Aragon and Alastair Goldfisher contributed to this story.