Tech Investor Palomar Stays the Course
Venture capital firm Palomar Ventures likes to keep behind the scenes. The firm, founded in 1999, has bankrolled several startups that offer software, chips, networking gear and other products that help other companies do business or develop better products.
The investment strategy is a reflection of Palomar’s own approach, according to Randell Lunn, general partner of the Santa Monica-based firm and head of its Irvine office.
“What we try to do is become partners with the entrepreneurs and help them build the business,” Lunn said. “Everything we do is focused on doing the business.”
Palomar has some $200 million it plans to invest in startups in the next few years. In all, the firm counts about $300 million under management. Its first fund, launched in early 1999, raised $80 million and is pretty much fully invested. Palomar’s second fund raised $220 million in December.
“We just started making investments from the Palomar II fund this year,” Lunn said. “We are very liquid and aggressively looking for new deals.”
So far, Palomar has invested $20 million from the second fund. Palomar primarily invests in business software, storage and networking companies. And it isn’t wavering from its tech-heavy focus, according to Lunn.
Palomar’s investments are focused on companies in Southern California, where it expects to invest half of its capital. So far, Palomar has invested in only one OC company: Newport Beach-based Telecore Inc., which was bought by Viasource Communi-cations Inc. of Florida.
The firm’s big hit: Dallas-based Efficient Networks Inc., a maker of digital subscriber line networking products. In early 1999, Palomar made an initial investment of $2 million in Efficient Networks. The company went public last year and was bought in February by Siemens AG for $1.5 billion. Palomar saw a return of $60 million on its initial investment, Lunn said.
Palomar avoids companies that are dependent on heavy marketing, according to Lunn. A typical investment is $3 million to $7 million, he said.
“(Our companies) tend to have a technical component that over time helps differentiate us from competition,” Lunn said. “At the end of the day, customers will buy the better mousetrap as opposed to just a consumer brand that may have a lot to do with psychology and positioning of the branding.”
About a year ago, Palomar invested in the San Diego-based Continuous Computing Corp., a provider of networking gear and software. The firm is looking to Continuous Computing as its next possible winner, Lunn said. Last month, the company won the “rising star” honor for OC and San Diego as part of the Deloitte & Touche Technology Fast 50 program.
One of Palomar’s big misses was Beverly Hills-based AdHarmony Inc., later renamed AdExchange.com. The company, which folded last year, plowed about $10 million into developing a costly online exchange for advertising space. Customers never materialized.
For the most part, Palomar stayed clear of dot-coms. The few it has funded are focused on serving businesses, such as Denver-based Gotajob.com, a recruiting service for restaurants, hotels and others with high turnover.
Palomar has investments in 19 companies. Fifteen of those investments were made from the firm’s first fund. The second fund has invested in four companies so far.
“During the first half of the year we supported our existing portfolio companies making certain we had complete management teams that were well financed,” Lunn said. “In the second half we have focused on making new investments.”
The firm’s investment horizon is about five years, Lunn said.
Lunn, who has more than 20 years of experience in venture investing, said that he and his partners thoroughly evaluate management, the investment opportunity and the value their firm could add to a startup.
“The skill of a venture capitalist is how well he becomes a partner with his portfolio companies to add value in all the functional areas over time as the company grows and matures,” Lunn said.
Lunn said his expertise is in early-stage information technology investing. In his 22-year career, the venture funds that he started or managed have taken more than 40 companies public, two of them at Palomar, he said.
“I help companies focus their strategy, set milestones, build management teams, raise additional financing, establish strategic partnerships, and ultimately gain liquidity for the shareholders either through an IPO, sale or merger,” Lunn said.
Palomar is relatively young. The firm was formed 2 1/2 years ago to invest in early-stage companies in information technology.
Lunn is one of three partners; the others are Jim Gauer and Rick Smith. Gauer is a former partner at La Jolla-based Enterprise Partners Venture Capital. Smith joined Palomar from SunAmerica Inc., where he started and managed its venture arm.
Flush with funds, Palomar also is looking at adding a fourth general partner, Lunn said.
Investors in the Palomar funds include J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Bank of America Corp., Lucent Technologies Inc.’s pension fund and SunAmerica.
Lunn said he is uncomfortable giving performance numbers for Palomar because “two years is too short a period.” As for returns, he said that Palomar’s first fund is in the top quartile.
Lunn began his venture capital career in 1979 as a founder of Harrison Capital, the venture arm of Texaco Inc. At Harrison, Lunn said he was responsible for investments in Iomega Corp. and Amgen Inc., among others.
He then went on to become a founder and general partner of Fairfield Venture Partners and made investments in Life Technologies, now part of Carlsbad-based Invitrogen Corp.
In 1990, Lunn joined TVM Techno Venture Management, a $700 million dollar international venture capital firm, where he was a managing partner of their U.S. operations.
He made his first investment in a Southern California company in 1980 and later in 1984 moved to Laguna Hills. n
