Artis Capital Management isn’t the first hedge fund to get involved with startups. And based on Google’s $1.6 billion stock purchase of YouTube last week, it probably won’t be the last.
Artis, a San Francisco-based hedge fund with $1.2 billion under management, invested in the startup alongside Sequoia Capital in the second round of financing in April 2006, when YouTube raised an $8 million Series B round, according to a regulatory filing. An Artis spokesperson would not discuss how much the firm made on the investment in YouTube, a popular video sharing website founded last year. But it’s safe to say Artis is hoping for more healthy returns. The firm, which has invested in such public tech companies as WiMAX product maker Alvarion (Nasdaq: ALVR) and software company Synplicity (Nasdaq: SYNP), has co-invested with Sequoia in other startups, such as fables semiconductor company Open Silicon, which has raised more than $43 million in venture funding from Artis, Sequoia and others, including Norwest Venture Partners, according to Thomson Financial (publisher of PE Week).
Artis isn’t alone when it somes to hedge funds crossing over to VC. Hedge funds such as Farallon Capital Management, Och Ziff Capital and Maverick Capital, have each invested in various venture deals. D.E. Shaw, one of the world’s largest hedge funds managing more than $20 billion in capital, hired former Apax Partners’ Alex Wong and opened a Silicon Valley office earlier this year. Farallon and Och-Ziff helped biometric payments startup Pay By Touch raise $60 million in February, on the heels of a $130 million round that the company sewed up in September 2005.
Some VCs have expressed concern that the involvement of hedge funds in early stage deals will draw regulatory scrutiny of venture activity. But it hasn’t stopped some traditional early stage venture firms from looking to invest in bigger deals and in public companies. Sequoia, though still doing many early stage deals, launched an $861 million growth fund for U.S. opportunities in May and a separate $400 million India growth fund in September. The firm worked with with Francisco Partners to put together a $42 million investment in June for Blue Coat Systems, a $200 million public company. Sequoia also partnered with Kohlberg Kravis Roberts & Co. to buyout the software division of Flextronics for $765 million in September.
Meanwhile, Bill Burnham, the former Mobius Venture Capital investor, says the crossover between hedge funds and venture deals is inevitable. Burnham is currently raising the maiden fund for Inductive Capital, a hedge fund he launched earlier this summer that will invest soley in public securities. Burnham, who has raised $10 million toward the $500 million targeted fund, was a software investment analyst before joining Softbank Capital Partners, later called Mobius, in 1999. He says that inductive will have an advisory committee of venture capitalists who will offer insights to help it pick stocks.
“Over the long term, I am convinced that the VC world and hedge fund world will increasingly overlap so hopefully my absence from the venture capital world will prove only temporary,” says Burnham. —Alexander Haislip