A New Generation Of VCs Lets Loose
By Michael V. Copeland

(Business 2.0) – Miles from the rarefied enclave of Sand Hill Road, Jason Green is launching a new VC firm—and rethinking the venture capital business. Along with his two co-founders, Green runs Emergence Capital Partners, one of the dozens of freshly minted VC groups that are now raising and investing their first funds. This new breed takes a different approach from the Kleiners and Sequoias of the world. Moreover, they regard the tough, postbubble economic environment as an ideal opportunity to invest. "This is what it was like when today's great firms got started," Green says from his bland office near San Francisco International Airport. "They all launched during tough times, and they wanted to do something different."

The new style of venture investing is all about narrower focus and smaller pots of cash. VC firms traditionally consist of a dozen or more partners who invest funds of $400 million or more across a variety of industries. By contrast, new firms like Emergence, Orchid, Shasta, and Valhalla have just a handful of partners who oversee funds of $200 million or less, targeting their efforts in just one specific industry or area. Freed from the pressure to put massive amounts of money to work, and undistracted by hangovers from previous bad investments, these new firms are actually returning venture investing to the model that prevailed before the bubble.

In Emergence's case, that has meant dealing only with companies that sell Web-enabled services. "Nobody will be better in the sector," Green says, "because nobody else will be thinking about it exclusively, like we do."

Other new firms define their focus geographically. Valhalla Partners, a Potomac, Md., firm launched by former New Enterprise Associates partner Art Marks, will focus its $177 million inaugural fund on investments in the mid-Atlantic states, an area VCs have typically ignored.

The new VCs have timing on their side. Venture capitalists are finally placing bets again. In the last quarter, VC investment was $5.6 billion, up 17 percent from the same period last year. Startup activity is also increasing. Nationwide, 208 newly minted companies received first-round funding in the past three months—a two-year high. The new VCs hope to exploit these trends by investing more selectively—focusing smaller investments in companies with existing products aimed at well-defined markets.

And while everyone is looking to discover the next Google, the new VC firms are more open than their predecessors to one of today's biggest trends—exit strategies that don't involve an IPO, such as buyouts or acquisitions (see "The New Road to Riches," page 84). "A small fund doesn't need a billion-dollar outcome for an investment to be meaningful," says Emergence's Green.

Of course, the birth of a new generation of VC partnerships is also a bellwether of sorts; the last time so many new firms took root was in 2001. Raising money was simpler back then, but Green wouldn't want to trade places. "It's harder today, but overall, it's better to raise a fund when you have low startup valuations and less competition," he says. The view from his office may not be spectacular, but Green is exactly where he wants to be. — MICHAEL V. COPELAND

Source: Listed companies