Crediting consistent focus, Red Rock Ventures, based in Palo Alto, Calif., said it racked up $86 million in fund-raising for Red Rock III.
After about a year in the market, the firm actually closed the fund in early April and secured an SBIC license accompanied by Small Business Administration (SBA) funding of about half the fund’s capital.
Shortly after its founding in 1997, the firm raised a $30 million fund. Then in 1999 the firm closed on a $102 million vehicle, which was the firm’s first SBIC fund.
“It was certainly tighter this time,” says Red Rock General Partner Peter Dumanian, of the fund-raising environment. “I think we were successful because of our focus on early-stage enterprise software. Sophisticated investors want people who add real value in certain specific areas.”
In Red Rock’s case that area is software that costs at least $100,000 and is sold to large corporations through a direct sales force. The firm initially supports about half its deals in the seed stage and the other half at the first institutional round. The firm invests $500,000 to $2 million initially, with a target of investing $6 million throughout a company’s life to maintain a 15% ownership position. And Red Rock invests west of the Rockies.
Dumanian reports no major firm changes between the two funds, with the same five partners – Laura Brege, Dumanian, Bob Marsh, Kip Myers and Bob Todd – calling the shots. As a matter of fact, Dumanian says those characters call all the shots. The firm doesn’t have any associates.
Investors in Red Rock III include university endowments, U.S. financial institutions, foreign funds-of-funds and individuals. Dumanian expects the fund to invest in 15 to 18 deals, split between application companies and infrastructure companies.
Of the nine companies in Red Rock I’s portfolio, three have been sold at what Dumanian calls “very nice multiples.” I2 Technologies bought SupplyBase Inc., Agile Software Corp. bought Digital Markets Inc., and Primus Knowledge Solutions Inc. bought Imparto Software Corp.
He thinks the three most promising companies remaining in the portfolio include Plumtree Software Inc., Silicon Energy Corp. and Zantaz.
Zantaz actually spun out a company, which became Red Rock III’s first and only investment to date. Both Zantaz and its spin-out, Persist Technologies, focus on digital archiving software for companies like securities brokerages that have to retain extensive files with copies of non-proprietary information, like customer letters.
Zantaz tackles that need with a service solution. Dumanian says, “Our customers told us we are happy to buy it from Zantaz, but we would like it even more if you had a product we could run internally.” And, Persist will fill that need with a software platform corporations can purchase and administer themselves.
Red Rock invested $1.9 million of Persist’s $10 million round, the remainder of which was split by ArrowPath Venture Capital and ComVentures.
Following the same logic behind the Persist spin-out, Dumanian says he thinks the next big thing in enterprise software will be defined by customer needs, and holes in the offerings of the large vendors will leave the door open for small companies. Generally, he says technologies, like Web services, that help two organizations communicate more efficiently have great potential right now.
Contact Charles Fellers at Charles.Fellers@tfn.com