Focus Narrows Fund

Focus Ventures announced last week it closed its third fund with $250 million in commitments, nearly half the $440 million it raised for fund II in 2000.

Half of the firm’s limited partners did not return as investors in fund III, and many LPs left venture investing all together, says General Partner Steve Bird.

“Nine months ago, if you told me I was going to turn over half our LP base, I would have been very nervous about it,” he says. “But now we have investors that are much more committed to the asset class. That’s good for us.”

The smaller fund brings a smaller management fee with it, and Bird admits that he’s taking a pay cut. “We’ve got to do the right thing for our investors,” he says.

Focus Ventures III will concentrate on the same strategy as previous funds: get behind expansion stage information technology startups coming out of one of the top 30 early stage investors.

It’s a strategy that has worked. The firm saw a slew of acquisitions in 2005, including the sale of FrontBridge to Microsoft (Nasdaq: MSFT), Wily Technology to CA Inc. (NYSE: CA) and NetScaler to Citrix Systems (Nasdaq: CTXS).

Though IPOs have been few and far between, Bird is nonplused, citing acquisition valuations of six to eight times revenue.

“M&A was a last resort for a company that was doing OK, but not great,” Bird says. “That’s completely flipped.”