MA West Preps Linux Equity Fund

Given the almost surreal success of Redhat and VA Linux Systems in the public markets, venture firms appear ready to allocate more capital to Linux developers in the coming months.

M&A West Inc., a San Bruno, Calif.-based Internet incubator currently traded on the over-the-counter bulletin board, recently launched a venture capital fund, targeted between $10 million and $15 million, to invest exclusively in early-stage Linux developers.

Scott Kelly, founder and chief executive of M&A West, said the fund has attracted interest from mostly institutional investors and should hold a first close later this month. Kelly said terms of the fund have not yet been formalized, but indicated they would conform to industry standards. The fund will invest between $500,000 and $3 million throughout the life of each portfolio company.

“We will not just provide money to our portfolio companies, but access to additional forms of capital when they are ready for future financing,” Kelly said. “We are more than likely the sole investor in a venture round and fit between the area of angels and later-stage venture firms.”

Prior to raising the fund, the firm provided seed funding to four companies, including Web development company Digital Bridge Inc. and online gaming portal M&A West owned a 70% equity stake in Digital Bridge by the time the company graduated from the incubator last year. M&A West later reduced its position in Digital Bridge to less than 20% by selling equity in the company to its own shareholders.

“Our model is such that we want to maintain positions on our balance sheet below 20% to bring out the upside of equity,” Kelly said. “Anything more constitutes an operating loss if the company is not profitable.”

M&A West, which earned 19 cents per share in the third quarter of 1999, has applied for a listing on the Nasdaq exchange and plans to join the Big Board early this year.