On July 28, Massachusetts-based Avici Systems Inc. finished its first day of trading at $96.75, more than triple its initial public offer price of $31. Late last week, it was trading at around $133 a share.
That means if you held 3.6 million shares in Avici, which makes high-speed fiber-optic data equipment, your stake would be worth roughly $480 million. And if you had invested $6 million early on in the company to get those shares, you’d have a return of around 7,000%. You’d also be working at Redpoint Ventures, the company that achieved that phenomenal return.
Although barely a year old, Redpoint, formed by the merger between two of California’s top 10 venture capital shops, has become perhaps the pre-eminent VC firm in Southern California. Other venture capitalists routinely cite it as the gold standard by which they are judged, and entrepreneurs who take Redpoint’s checks praise the value of the firm’s advice and business contacts.
Redpoint this month announced that it has successfully raised its second fund,a cool $1.25 billion strong. Perhaps more impressive is that the firm declined an additional $400 million from other investors who were clamoring to get in.
Balancing Act
“We had to turn back a lot of investors,” said Redpoint Managing Partner Brad Jones, who heads its LA practice. “It’s a balancing act. You want to have enough capital but you don’t want to have more money than you can properly invest.”
What is it that makes Redpoint so attractive? Track record, for one thing. The firm is the result of the merger of two blue chips: LA-based Brentwood Venture Capital and Institutional Venture Partners of Silicon Valley, whose partners manage those firms’ previous funds as well as those of Redpoint. (Avici Systems is a Brentwood investment.) Jones is also the managing partner at Brentwood, whose last three funds have produced net annual returns of 197%, 244% and 106%, respectively. Those of IVP are similarly successful.
“They’ve won over the past 20 years and will win over the next 20 years,” said Jon Funk, managing partner of Media Technology Ventures. “They have the brand.”
“This is my third (company funded by) Redpoint, including with the predecessor Brentwood,” said John LaValle, chief financial officer at Stamps.com in Santa Monica. “I’ve worked with 15 different VC firms in the last 12 years, and they are far and away the best.”
Midas Touch
“Without question, Redpoint has the Midas touch,” LaValle said. “They have an innate ability to see value in the long-term deal.”
Not that things are always so rosy. Stamps.com is perhaps the most prominent local Internet company backed by Jones and his partners that has gone public, and it has struggled since the spring plunge in new economy stocks. After hitting a high of $98.50 a share in December, the company’s stock fell to as low as $4 on Aug. 3, and was barely above that level last week.
However, Jones sold 2.6 million of the original 5.4 million shares held in Stamps.com before the bottom dropped out.
Redpoint hasn’t finished investing all of the $600 million in its first fund, but so far, several area companies have been funded by it in the past year.
The most prominent is BizBuyer.com, which runs an online marketplace where small and medium-size businesses can comparison shop for professional services. The brainchild of ex-Walt Disney Co. executive Bernard Louvat, the company got notice for its partnerships with the likes of Staples.com. More than 30,000 businesses use the site to buy or sell services.
Redpoint took part in a $38.5 million round of financing for BizBuyer in February, and Louvat says he is pleased with its participation.
“It’s a great crew. Brad is helping us establish relationships with a lot of companies,” he said.
Relationships Count
Those relationships are what separates “smart” from “dumb” venture capital. Dumb money is cash only, smart money brings with it a large Rolodex and management experience. Fandom Inc., which operates Web sites for fans of the science fiction, fantasy and horror genres, welcomed not only the $20 million round of venture funding that Redpoint led in February, but the contacts that followed.
“Redpoint didn’t have the highest deal on the table, but they offered the most value,” Fandom Chief Executive Mark Young said. “We just got a new CFO, Ted Howells, who was with Sony Pictures. Brad brought him on board.”
Fandom has grown to 130 employees from just two workers a year ago, and expects to generate more than $20 million in revenue this year.
In Orange County, Redpoint invested $20 million in November in Irvine-based Nexgenix Inc., which builds Web pages and offers electronic commerce, marketing and branding services. Among its customers: H & R; Block Inc., CBS’ SportsLine.com Inc., Sempra Energy’s Southern California Gas Co., Kawama.com Inc., Military.com Inc. and the latest, Thirsty.com, a site geared toward teens.
“They do quality work,” said John Walecka, managing director of Redpoint and a Nexgenix board member. “They have the capability to mine customer data and help vendors build a presence on the Net.” n
Brinsley is a staff writer at the Los Angeles Business Journal.
