G.P. KKR and Accel Merge Worlds –

Venture capital firm Accel Partners is partnering with buyout firm Kohlberg Kravis Roberts & Co. to form a company that will provide financial and intellectual support to businesses that are merging offline operations with online opportunities, in exchange for ownership.

The joint venture, Accel-KKR Internet Co., follows a business model both firms believe is the wave of the future. The success of pure dotcom business models is ending and it is the hybrid companies that will move forward, said Marc Lipschultz, an executive at KKR in charge of technology investing.

The new entity will make investments “of between $50 million and $100 million per company,” said Jim Breyer, a managing partner at Accel. Lipschultz said Accel’s recent investment in Wal-Mart.com, an online retailer companion to the physical company, is representative of the type of deals in which Accel-KKR Internet will invest. The key to the integration is to take advantage of a physical business’ supply chain, customer base, knowledge of suppliers and brand purchasing power, by merging that with online capabilities.

VC, KKR Style

For some time, KKR had been contemplating ways in which to involve itself in the venture industry to take advantage of the high returns associated with Internet start-ups. After exploring various options, such as partnering with venture firms and hiring Internet talent, the private equity firm decided on a business model whereby a buyout firm and a venture capital firm would create a joint company, Lipschultz said.

Accel, based in Palo Alto, Calif., had been in discussions with a number of buyout firms seeking to form partnerships and decided to collaborate with KKR because the firms “shared a common vision,” Breyer said.

“Why Accel?” Lipschultz said. “We think they are the best in the business.”

The partnership leverages the strengths of both firms. KKR investors bring knowledge of and connections to the bricks-and-mortar business world. Accel partners are experts in early-stage Internet investing. The new company will have the opportunity to tap the combined network and rolodexes of the two firms.

New York-based KKR and Accel, agreed to provide Accel-KKR Internet with equal amounts of initial funding, though the exact amount has not been released. Additionally, Accel has not disclosed where their portion of the capital will come from, be it the firm or its most recent fund, the $600 million Accel VII.

KKR to Use Firm Capital

The KKR partners decided to invest the firm’s capital, rather than the two active funds – the $6 billion KKR 1996 Fund, and the more than $2.9 billion KKR European Fund – in the new company, because those vehicles were set up to make large buyouts and growth equity investments, Lipschultz said. The firm considers itself extremely responsive to its limited partners. “Over time we meet their interests and needs, and as things evolve, we will take our appropriate cues,” he said.

KKR limited partners include a variety of other state pensions, corporate funds and university endowments.

An active search is underway to locate executives to run the new company. Each of the firms named three of its investors to the company’s board of directors: Arthur Patterson, Theresia Ranzetta and Breyer from Accel, and Henry Kravis, George Roberts and Lipschultz from KKR.

The new company will have dual headquarters in New York and Silicon Valley and will also have an office in London.