Idealab's Latest Venture Fund Sets Southland Record

September 13, 1999
1998 Los Angeles Times
By Karen Kaplan, Times Staff Writer

Setting a venture capital milestone for the Tech Coast, Idealab Capital Partners has raised $364 million for a new fund that will invest in Internet start-ups in the Southland and elsewhere.

The ICP fund, which will be announced today, is the largest venture capital fund ever created in Southern California, according to Venture One, an investment research firm in San Francisco.

Although it often takes many months or even years to round up money for a venture capital fund, Pasadena-based Idealab Capital Partners raised the money in just two months, said Bill Elkus, company co-founder and managing director. ICP, the venture capital arm of Internet incubator Idealab, originally planned to raise $250 million but boosted the figure because of an enthusiastic response from investors, Elkus said.

The new fund is the latest sign of increasing investor interest in Southern California high-tech start-ups, especially electronic-commerce and other Internet firms. Two weeks ago, Santa Monica-based ECompanies announced it had raised $130 million in 60 days to invest in Southern California online start-ups.

"There's a lot of confidence in this market as a great market to start the next generation of Internet companies," said Jake Winebaum, the former Walt Disney Internet chief who co-founded ECompanies with EarthLink Network Chairman Sky Dayton.

Several other Tech Coast venture capital firms are in the process of raising money for new technology-oriented funds. It will take San Diego-based Enterprise Partners only 45 days to raise $250 million to invest in information technology, Internet and health-care companies in Southern California, said Andy Chedrick, the firm's chief financial officer.

Innocal, meanwhile, is raising $150 million for a new fund, said Rohit Shukla, president and chief executive of Los Angeles Regional Technology Alliance. The Costa Mesa-based venture capital firm did not return calls to discuss the new fund.

Silicon Valley still commands the lion's share of venture capital. By Elkus' calculation, there is 20 times as much venture money available per capita in Northern California than in Southern California. While Southland firms often lament the discrepancy, it means that venture capitalists who are interested in Tech Coast companies can get better deals on their investments in the Southland--a bigger stake in a company for a lower price--because of the lack of competition.

But that situation won't last, Shukla said. In a few months, the best deals will become too expensive for a single firm to do alone, and venture capitalists will have to start working together on deals as they do in Silicon Valley, he said.

The $364-million Idealab Capital Partners fund surpasses a $300-million health-care fund raised by Brentwood Venture Capital last year as the largest venture fund in Southern California, said Jean Yaremchuk, vice president of research and technology at Venture One. The ICP fund is large even by Silicon Valley standards--most funds there are about $100 million, and only 4% of funds are larger than $350 million, she said.

It took nearly a year for Idealab Capital Partners to raise $105 million for its first venture capital fund last year, but Elkus said the second fund came together more quickly, in part because ICP now has a track record.

Four of the 25 companies from the first fund have gone public--much to ICP's benefit. Its $2.5-million investment in EToys is now worth about $370 million, and the $6.5 million it put into is now worth about $155 million. Another $3.5 million invested in and is now worth more than $45 million combined.

In addition, ICP bought nearly 24 million shares of NetZero for about $8.4 million. The Westlake Village firm is planning to go public soon with an offering price of between $9 and $11 a share. If the shares are priced at $10, the value of ICP's stake in the company will balloon to $240 million.

Idealab Capital Partners won't disclose its total returns. But even if all its other investments were flops, the fund would still be able to boast a 670% return in its first year.

"We could do a third or a quarter of the results of the first fund and people would be very happy," Elkus said. "But we are going to try to do even better with this fund."

All but one of the investors in ICP's first fund--including Compaq Computer Chairman Ben Rosen, Grove Street Advisors on behalf of the California Public Employees' Retirement System, and Times Mirror, which publishes the Los Angeles Times--invested in the second fund.

Additional investors in the new fund include Goldman Sachs, J.P. Morgan, Invesco Private Capital, HarbourVest Partners, Horsley Bridge and Mellon Ventures, along with the Los Angeles County Retirement Assn., Caltech and MIT.

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