VSP Finds It Easy the Third Time Around

When Joanna Rees-Gallanter formed VSP Capital she sold investors on the idea that she could help companies brand and position their products and services. Fast-forward six years and Rees-Gallanter is still showing how far brilliant salesmanship can take a company – specifically her own.

San Francisco-based VSP Capital, which invests in early stage consumer and enterprise technology companies, closed its third fund last week. The $185 million raised exceeded the firm’s target by roughly $30 million, and the money took just six months to assemble. “It was relatively quick considering our stage of development,” says Rees-Gallanter.

It was also quick for a firm with VSP’s track record, which is working hard to deliver a big return to investors.

VSP recently enjoyed a 5X return on an investment, according to Rees-Gallanter, when it sold Web mail service Oddpost.com to Yahoo in July for an undisclosed amount. VSP and co-investor Draper Fisher Jurvetson contributed $2 million to the company, according to The MoneyTree Survey from PricewaterhouseCoopers, Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association. Another investment, ZipRealty, went public last year, a first for VSP. The firm owned more than 1.6 million shares (or 8.2%) of ZipRealty at the time of the IPO. The stock which debuted at $13 per share, closed at $15 per share on Thursday, meaning VSP’s stake was worth more than $24 million.

Its most recent exit came last week, when the assets of lifecycle software startup Privia – which had raised $7.6 million from such as firms as VSP, CAP Ventures and Benchmark Capital – were sold to enterprise software company MAP ROI Systems for an undisclosed amount.

VSP has no companies currently in registration for an IPO, though Rees-Gallanter says, “Some will exit in the reasonable future.” She says that Danger, a Palo Alto, Calif.-based software developer that has raised more than $113 million from over a dozen investors, including Mobius Venture Capital and Redpoint Ventures, “looks good,” as does Quin Street, a Foster City, Calif.-based startup that sells online marketing services and has raised $49 million from eight venture firms and Stanford University.

Rees-Gallanter concedes that the venture business has never been easy, especially for a firm that closed its first fund in 1999 and made a number of investments in failed dot-coms. She says competition to find deals has been tough. But the firm has built up its stable of GPs – John Hamm, Vince Vanelli and Matt Crisp – and VSP recently added as partner Dana Settle (who came over from Mayfield).

On a positive note, Rees-Gallanter maintains that VSP has a few aces up its sleeve. For one thing, she says, “We understand things that scare other VCs to death, such as retail and consumer dynamics.” Rees-Gallanter spent five years as a marketing exec at French food company Groupe Danone in the early 1990s.

Already, the firm has made three stealth investments from its third fund, including in what Rees-Gallanter characterizes as a next-generation search company. The other two are an instant-messenger “enhancing” startup and a marketing services company.

The firm has announced 44 new investments since closing its first fund, a $25 million vehicle in 1999. Of its investments, 18 remain private and 14 are out of business. Another 11 VSP portfolio companies have been acquired or merged – including OddPost – but the terms of only one transaction was made public. In 2000, Netcentive paid $140 million in stock for the marketing company Post Communications, which raised $24.8 million from several investors over three rounds, each of which included participation by VSP.

VSP’s third fund has 14 limited partners, down from the 75 that contributed to the previous fund. Rees-Gallanter says that concentrating the firm’s investor base was by design. Returning investors in its third fund include Horsley Bridge Partners, the Regents of the University of California and Wellcome Trust. Among its new investors are the Duke Endowment and Adams Street Partners.