Even with rebound, few new fund firms launch
Boston Business Journal, April 14, 2006
by Scott Denne - Special to the Journal
After 10 years with Waltham-based Battery Ventures, Todd Dagres was ready to set out on his own. He wanted his own VC shop, one that did really early stage investment.
It wasn’t just financial opportunities that led to his departure from Battery in September 2004 and the eventual creation of Spark Capital. Dagres was drawn to the notion of being an entrepreneur.
He has precious little company. In an industry that pins its business model on nurturing young companies, young players are scarce.
Despite a steady increase in the amount of money raised year to year by venture capitalists, the number of first-time funds and new firms has not.
Every year since 2002 the amount of money raised by venture capital funds has increased by about $7 billion, going from $3.9 billion in 2002 to $25 billion in 2005.
“Many VCs are turning money away,“ said Mark Heesen, president of the National Venture Capital Association.
But despite the willingness to invest in venture capital, not many new VC firms are forming. Limited partners, Heesen says, are generally hesitant to team up with an untested outfit or a fund manager without a track record.
“The biggest issue facing those who want to go out on their own is the ability to raise a fund without the name of the company you left behind,“ said Heesen.
The fund-raising process begins long before you move into your new office. It should begin before you ever leave your previous job.
One of the most important things to do when you decided to leave your current employer is to time your announcement properly.
“Timing is important,“ said David Tegeler, co-chairman of the private equity group law for law firm Proskauer Rose LLP. “You wouldn’t want to leave a firm after you had spent a year helping to raise a new fund,“ he said. “Usually before firms begin raising a new fund they take an informal survey of who is going to be around to invest the new fund.“
When Battery was poised to open its seventh fund, Dagres let management know that he would not be a part of it.
“One of the things you want to do before leaving is to make sure that you understand any contractual restrictions you have with your current employer and the economic consequences of leaving,“ said Malcolm Nicholls, a partner with Proskauer Rose, which specializes in private equity transactions.
Often, he said, the economic consequences are an afterthought. “In my experience, when someone really wants to go they don’t care what they leave on the table.“
For Dagres, contractual restrictions weren’t much of a problem—his contract had a non-hire clause, but he did not attempt to take anyone from Battery with him.
“I didn’t want to poach anybody from Battery, to keep the goodwill between us,“ said Dagres.
He had a noncompetition clause in his contract with Battery, but that expired before Spark was officially formed while he was busy cutting his teeth in the sector that he decided he wanted to target: media and entertainment.
So, in his time between Battery and Spark, Dagres started two production companies, Prospect Pictures and Ealing Studios. And, he produced a feature film, “Pretty Persuasion” starring Evan Rachel Wood and James Woods.
Of course it is the actual fund raising that is most important to prepare for.
“We did our homework. We honed our pitch and we had a sense of what kind of product to give to limited partners,“ said Dagres.
“When people spin out they often have not had experience in fund raising and so hire a placement agent to help,“ said Tegeler.
Spark hired Jack Troy to help identify potential investors and in three months and 10 days they had closed a $260 million fund.
“We tended to focus on people we had relationships with and knew. A couple said they wouldn’t go with first time funds. We overcompensated by talking to more people than we needed to and created more demand than we needed to,“ said Dagres.
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