Smaller is not necessarily better.
That’s the contrarian mantra echoing through the hallways of Essex Woodlands Health Ventures, which is trying to raise a sixth fund that will be nearly 43% larger than its fifth fund.
Even though Charles River Ventures (CRV) and Technology Crossover Ventures (TCV) are raising new funds that are considerably smaller than their previous funds, Essex Woodlands is going the opposite direction.
The firm, based in Woodlands, Texas, recently held a $268.14 million first close on the new vehicle, with return investments from limited partners like the Virginia Retirement System, MassPRIM and the Ohio Public Employees Retirement System.
Essex already has received capital commitments in excess of its $400 million target capitalization, and is now in the process of trying to delicately convince prospective LPs to reduce their ask amounts.
“The fund is almost mind-numbingly oversubscribed, and a number of existing LPs even wanted the hard cap to be $425 million instead of $400 million,” says a source familiar with the process. “But there already is a very large difference between the $280 million raised for Fund V and the $400 million for Fund VI.”
Essex Woodlands, which also operates offices in Chicago and Palo Alto, Calif., expects to invest in 28 companies through the new fund, with its early- and expansion-stage investment strategy continuing to focus exclusively on pharmaceutical, biotech and medical device sectors.
In keeping with the size increase, the firm has promoted venture partners Jeff Himawan and Mark Pacala to managing directors. It also has transitioned part-time adjunct partner Gilbert Gonzalez to a full-time venture partner role.
Bucking The Trend
Why is Essex Woodlands of so much interest that it ranks front-page coverage? Because it stands in stark contrast to the recent spate of fund-raising activity that has been marked by reduced fund sizes and investor rosters.
TCV, for example, recently closed out its fifth fund with $814 million, less than half of the $1.7 billion it raised for its fourth fund in 1999. In the process, the Palo Alto-based firm also said goodbye to general partners Donna Smolens and Michael Linnert.
Perhaps a more salient case is that of Waltham, Mass.-based CRV. Like Essex, CRV has held a first close on its new fund and expects to finish up by the end of next week.
Unlike its Southern counterpart, however, CRV is only looking to raise just 21% of what it raised back in 2001. It also has experienced layoffs, retirements and defections of several GPs. In fact, the only thing that hasn’t shrunk at CRV is its fund’s 30% carried interest structure.
CRV has been a staunch advocate of VC market downsizing for the better part of two years, and even went so far as to reduce its $1.2 billion Fund XI to $450 million. This time around, CRV is looking for just $250 million and is expecting to hit its target after holding a $191.15 million first close late last year.
Despite the smaller fund and the fact that CRV counts five general partners and another five partners, the firm expects the amount to keep it busy for two and a half years, a source familiar with the situation says. On average, the new fund will put a little more than $7 million total into a deal over its lifetime. That means it will make between 30 and 35 investments, or between 1.5 and two deals per year per partner. “The focus will be on quality, not quantity,” the source says.
Because of the fund’s smaller size, it will have significantly fewer limited partners than the 100 or so LPs in CRV’s previous fund, on the order of 50 to 60. At least a couple of LPs chose not to return because they were offered positions of just $1 million and some weren’t happy with the 30% carry, the source says.
At the same time, CRV made room for at least four new LPs, including a couple from the West Coast, where it traditionally has not had many LPs but wants to boost its presence. That is in keeping with its hiring in 2002 of Bill Tai, formerly of Institutional Venture Partners, to run its Silicon Valley operation and the recent addition of George Zachary, formerly of Mohr, Davidow Ventures as a venture partner in its Silicon Valley office.
Despite the additions, CRV’s roster has suffered some significant losses since raising its last fund. In June 2001, the firm closed its New York office and dismissed partner Dave Edwards. Four more partner layoffs occurred in March 2002 and the firm’s CRVelocity incubator program was effectively gutted.
More recently, CRV has watched partner Dave Power bolt for Fidelity Ventures and firm co-founder Rick Burnes quietly announce his retirement. In addition, unofficial firm spokesman Ted Dintersmith has moved to South Carolina, where he will continue to be affiliated with CRV in a non-general partner role. In all, the new fund has five general partners and another five partners.
“I think that LPs respect what CRV is doing, especially because they gave all that money back when they realized that there weren’t enough quality investments out there,” says an intuitional investor who has seem both the CRV and Essex books. “Part of the reason Essex is able to raise more money right now might be the fact that Essex is in life sciences – which is very hot right now – or maybe that its team hasn’t changed so much recently.”
Neither CRV nor Essex Woodlands would formally comment on this story due to SEC solicitation restrictions. TCV did not return repeated calls requesting comment.
Additional reporting by Lawrence Aragon.