LA-based Rustic Canyon in transition

It’s no secret that dozens of venture capital firms are fighting to remain viable. It may be time to add Rustic Canyon Partners to that list.

The Santa Monica, Calif.-based firm began life with a bang, raising $500 million for its debut fund in 1999. It would later raise small vehicles—including an SBIC fund and a joint fund with Fontis—and then secured just over $200 million for Rustic Canyon III. That vehicle officially closed in October 2008, though fund-raising, and investing, began in early 2007.

By May of last year, Rustic Canyon had already committed about half of Rustic Canyon III, and, according to one LP, began pre-marketing a new vehicle, one the firm now says that it will begin raising in earnest early next year.

Yet the firm has had some departures, including PE Week has learned, Mark Menell. Menell joined Rustic Canyon at its inception after co-leading Morgan Stanley’s tech M&A practice. Menell, who declined comment, remains on the boards of several Rustic Canyon portfolio companies, including the online business directory MerchantCircle, a profitable, 5-year-old company that has raised $14.3 million in two rounds, including from Scale Venture Partners and Steamboat Ventures.

Also gone is longtime Partner Michael Song, whose LinkedIn profile still lists him as a partner at the firm, but he appears on the firm’s website under the heading “senior advisor,” along with Menell and Partners Michael Kim and Jon Staenberg, who have left the firm but still own a stake in the funds they helped to manage.

Kim announced last December that he was leaving Rustic Canyon to launch a fund-of-funds firm Cendana Capital; Staenberg, a longtime Seattle-based venture capitalist who merged his shop with Rustic Canyon in 2003, left the combined firm two years ago.

Founder Tom Unterman says that Rustic has been “transitioning” partners out of the firm as part of a plan that’s been in place since December 2008.

He says the reason is because Rustic Canyon, which has expanded over the years to invest in Seattle, Northern California, and beyond, wants to return to its original focus on Southern California, and it expects to do so with a smaller-end fund.

“It’s true we raised a [$500 million] fund at the beginning [in 1999], but our last two funds have basically been in the $175 million to $200 million range, which is right for our firm, given that it skews toward early stage,” he said.

“As we looked to a fourth fund and talked with investors about it, it was clear that we’d [again] raise a $200 million fund not a $500 million fund, and that had implications for the size of the firm,” says Unterman, who adds that “there is a strong, younger team coming up that deserved the opportunity to run the fund.”

Nate Redmond, who joined Rustic seven years ago after managing investments for the Harvard Business School professor Clayton Christensen, has been anointed managing partner; going forward, he’ll lead the firm with Unterman and Partner John Babcock, who joined Rustic at its outset. Rustic Canyon is also keeping aboard Principals Neal Hansch and David Travers, both of whom have been with the firm for five years.

“What you’re seeing here is a smaller group, not a new one,” said Redmond.

Asked about Renee LaBran, a Rustic Canyon partner who is listed at the site as leading Rustic Canyon’s participation in Rustic Canyon/Fontis Partners, a late stage and buyout fund, Unterman suggests she will not be a part of its new fund, should it get raised.

Rustic Canyon was launched with one LP, the trust of the Chandler Family, which is the former owner of the Times Mirror Co. Unterman suggests that the Chandler Family, who’ve been joined by tens of other LPs over the years, including California Public Employees’ Retirement System and California State Teachers’ Retirement System, are on board with the firm’s plans.

Whether the changes will be as welcome by new investors remains to be seen. Although the firm will begin fund-raising in earnest for its fourth vehicle “early next year,” the firm has some unhappy and vocal LPs.

Said one of those investors, who asked not to be named, “[Rustic Canyon] has had a Who’s Who of investors from Southern California, including Eli Broad and Steven Spielberg, but I think a lot of those investors would just be happy at this point to get their capital back. [Rustic’s] second fund, at least, is a complete disaster.”

Asked if he would invest in Rustic’s smaller, ostensibly nimbler, new team, the LP said that he that he wouldn’t, but he called Redmond “very sharp.”

Added another source close to Rustic Canyon, who also asked not to be named, the “turnaround” at Rustic Canyon is “overdue, yes, but not too late.”