St. Paul Venture Capital Divides

St. Paul Venture Capital (SPVC) called it splits last week in announcing that its general partners soon would soon form a new pair of autonomous firms.

Each offshoot plans to raise third-party capital, and already has secured a commitment from SPVC parent St. Paul Travelers Cos.

“We believe smaller, focused funds are better positioned to generate superior returns for venture investors, and this new structure facilitates that approach,” says Zenas Hutcheson, one of two managing general partners with SPVC. “It’s also been four years since we raised our sixth fund, and we felt that it was at the right stage for us to do something like this.”

The split into two independent firms – Split Rock Partners and Vesbridge Partners – is scheduled for July 1.

General Partner Dave Stassen will join Split Rock Partners, which was named for a historic lighthouse on Lake Superior, rather than as an allusion to the breakup of SPVC.

The new firm will continue to focus on early-stage opportunities in the medical device, specialty pharmaceutical, enterprise software and Internet services spaces. It also will keep SPVC’s Minneapolis headquarters and Menlo Park, Calif. office, and try to restrict its investments to the northern Midwest and West Coast regions.

In addition to Stassen, Split Rock GPs include Michael Gorman, Jim Simons and Alan Will. Other remaining SPVC investors include principal Josh Baltzell and CFO Steve Schwen.

The other group has been dubbed Vesbridge Partners and will be based in Westborough, Mass. It will focus on early-stage networking and Internet infrastructure plays nationwide.

Vesbridge includes general partners Hutcheson, Rick Boswell, Bill Cadogan and Rod Randall and managing director Raj Alur, venture partner Martin Steinmann, venture partner Tom Rowbotham, venture partner Staffan Ericsson and recently hired Vice President of Resource Network Development Mark Burns.

Neither group includes COO Mary Jeffries, who left SPVC in January. She currently is consulting, traveling and helping her son for his first year at the University of Iowa. “The whole [split] process has been very thoughtful, but there just wasn’t a need for a COO any more,” Jeffries explains.

Neither of the new firms includes Patrick Hopf, who never came back to SPVC after what had been originally planned as a summer sabbatical in 2002. He later formed a VC firm focused on the consumer retail market – which also was backed by St. Paul Travelers Cos. – but it folded earlier this year.

Hopf, who now is back in an operating role with startup company Better Life Media Inc., expresses regret at the SPVC split.

“I’m disappointed to see this because I was the guy who started the firm and helped build the brand over the years, but things change,” Hopf says. “I’ve invested in a number of companies that get sold and then have their names disappear, so that’s just the way things go sometimes.”

SPVC was founded 14 years ago, when St. Paul Fire & Marine Insurance Co. asked Hopf to help launch an independent venture capital investment arm. Hopf was a former consumer company CEO who had since moved over to T. Rowe Price, but he jumped at the opportunity to start something from scratch.

He also recognized the need for a mix of experienced VCs and experienced operators, as evidenced by the early hires of Stassen, who was a 10-year veteran of North Star Ventures, and Boswell, who was the former president of ADC Telecom and former president and CEO of E.F. Johnson Co.

Hopf originally envisioned SPVC as a fund-of-funds practice, but such activity was quickly supplemented by direct investments in early-stage companies.

The firm’s $750 million fifth fund, for example, included $500 million for direct investments, and $250 million for limited partner interests.

One year later SPVC raised $1.3 billion from sole investor St. Paul Fire & Marine, and the direct-to-indirect ratio had risen from 2-to-1 to nearly 3-to-1.

By 2002, the firm had completely exited the fund-of-funds business via four secondary market sales to Lexington Partners.

During the transition, SPVC morphed from a midwestern phenomenon into a national one. The firm opened offices on both coasts, and even launched seed-stage affiliate funds like Quatris Capital in Minneapolis and Flying W Capital in suburban Philadelphia.

Such changes in size and scope also led to internal changes, including a 1998 move to decentralize the decision-making process. Rather than having one investment committee overseen by Hopf, the firm began giving certain measures of autonomy to investment teams based on industry expertise and/or geographic location.

When Hopf stepped down in early 2002, the firm formalized its structure by forming a pair of divisions run by Stassen and Hutcheson, respectively. Each division was free to pursue its own investment strategy and was allocated its share of fund and management fee capital.

By late last year, however, it had become clear that the only natural evolution was to split SPVC in half.

In preparation for the July 1 split, SPVC and St. Paul Travelers Cos. have agreed to reduce the size of SPVC’s sixth fund to $675 million. The vehicle originally was capped at $1.3 billion, but that figure was cut down to $970 million following the sale of VC fund interests in 2002.

Even at $675 million, SPVC still has around $180 million of un-invested capital. Almost all of it will be used for follow-on investments in existing portfolio companies, which will continue to be managed by former SPVC partners.

Neither Hutcheson nor Split Rock’s Gorman would discuss fund-raising efforts for either of the new groups, except to say that St. Paul Travelers has pledged an undisclosed amount of financial support.