VC Newcomers Win Over Foundations

Formative Ventures today is expected to announce that it has closed its first institutional fund with $77.5 million in commitments.

The Palo Alto, Calif.-based firm was founded in 2000 by Brian Connors and Clint Chao, a pair of sales and marketing pros whose careers were highlighted by early employment with such companies as C-Cube Microsystems Inc., SkyStream Networks Inc., Synopsys Inc. and LSI Logic Corp. They raised $5 million from friends and family for their inaugural fund, but at the time they didn’t plan to ever secure any institutional capital.

“We were just trying to find our place and learn the ropes in the early days, because we weren’t even certain that we’d be any good at venture capital,” Connors says. “But we debugged the partnership, honed our investment thesis and found that we were actually successful.”

Institutional fund-raising still presented a daunting challenge, however, when the firm began sending out books two years ago. Not only was the overall fund-raising market ice cold, but LPs that claimed to be interested in emerging managers showed little interest in Formative’s first institutional fund.

“We met with all of them [LPs with emerging manager programs], but we weren’t the type of emerging manager they wanted,” Connors says. “Except for Erica Bushner [managing director of GKM Newport Generation Funds], they were looking for people they already had a history with, like people who were spinning out of VC firms that they had already invested in.”

Formative soon found, however, that its story did resonate with the endowment and foundation crowd, which generally is considered inaccessible for first-time funds. It signed fund-of-funds GKM as its initial backer, and then added Harvard Management Co. as an anchor LP. Other LPs would ultimately include The University of Virginia Investment Management Co. and the University of Pittsburgh.

In all, about 90% of the $77.5 million came from universities and endowments. Connors and Chao say that they had at least $100 million in interest, but capped the fund because they didn’t feel they were ready to add a third general partner that the additional capital would require.

The fund will back early stage technology companies in such areas as communications, wireless and Internet solutions. It invested in a stealth software company in April, and is about to fund a company in the open-source systems management space.

Fund I portfolio companies include Marketocracy Inc., IP Infusion Inc., Zyray Wireless Inc. (acquired by Broadcom), InnoCOMM Wireless (acquired by National Semiconductor) and defunct Fast-Chip Inc.