New Jersey is home to few venture capital firms. Nonetheless, in 2001 New Venture Partners decided to set up its headquarters there, thousands of miles from Silicon Valley. What’s more, many of the deals pursued by NVP are not even within an hour’s drive of Murray Hill, New Jersey. Instead, the portfolio investments NVP prefers are on drawing boards and in hard drives around the world.
New Venture Partners has its roots in Lucent Technologies’ research and development facility, the famed Bell Laboratories. Out of these labs, headquartered in Murray Hill, came the laser, the UNIX operating system, radio astronomy, the transistor and the photovoltaic cell, among others. NVP’s predecessor at Lucent was the Lucent New Ventures Group (NVG), the company’s venture development arm. Established in 1997, NVG took technology innovations at the labs that didn’t fit with Lucent’s corporate strategy, and turned them into independent businesses.
NVG built 34 ventures in four years. But then a downturn in the telecom market forced Lucent to reevaluate NVG’s investment model. Lucent ultimately decided to sell 80 percent of its interest in the NVG portfolio to London secondaries firm Coller Capital. After the sale in December 2001, the core NVG team left Lucent and started New Venture Partners to manage the portfolio.
On their own at last
The newly independent firm stayed in Murray Hill, and spent the first few years growing the existing portfolio and exiting investments, says managing partner Andy Garman, one of the original members of the Lucent team. NVP decided it would continue to commercialize technologies coming out of corporate labs, but would raise a fund to enable it to better weather short-term market fluctuations. The firm also began to seek out exclusive partnerships with other corporate labs, to emulate the Lucent model that had been so successful. In March 2003 NVP formalized the first such partnership, with British Telecom.
“It was a natural fit for us, because their labs are somewhat analogous in what they do in the UK to what Bell Labs has done in the US,” Garman says.
BT’s labs at Adastral Park had a venture arm, Brightstar, that was structured much like the erstwhile Lucent New Ventures Group. Brightstar fostered potential spinouts within the BT labs, then brought in VCs for Series A funding when the businesses were ready to leave the fold. But after the dot-com crash, VCs bunkered down and stopped making investments, leaving Brightstar without a source of capital. The Brightstar team realized that the investment model needed to evolve to be less vulnerable to market downturns.
“It looked like we had built a four-legged table and two of the legs had fallen off,” says former BT executive and Brightstar creator Harry Berry. “After that we started to think that maybe it wasn’t a great idea to be relying on VCs for A Round funding for early ventures.”
Brightstar began looking for other models, and found NVP. With financial backing from Coller Capital and BT, Brightstar was spun out and became a part of NVP, with Berry and Brightstar co-founder Chris Winter joining the NVP investment team. They were the first non-Lucent additions to the NVP investment team. As part of the transaction, NVP became the exclusive venture partner of BT, and Berry and Winter set up an NVP office in Adastral Park in Ipswich.
In October 2004, NVP spun out Royal Philips Electronics’s venture unit, Silicon Hive, and agreed an exclusive partnership with Philips. The firm hired Anton Arts, formerly a partner at Netherlands VC Gilde IT Fund, to serve as a liaison between Philips and NVP. Arts set up the firm’s third office in Eindhoven, near Philips’ research labs.
Trusted partners
Setting up offices near the labs of each exclusive corporate partner is important, Berry says. In order for the model to work, NVP must be a committed, long-term partner, always on site and available.
When working with sensitive, proprietary technologies, both sides need to trust each other.
NVP’s partners are in constant communication with the directors and managers of the labs, talking about the projects the labs are working on, looking for those that seem promising but don’t have an outlet within the corporation’s lines of business. After an initial filter, NVP will sit down with the principal researchers of particular projects and talk with them for an hour or so about potential candidates. If one of those projects piques NVP’s interest, the firm will spend a few months formulating a plan for how to develop it into a business.
If the technology seems promising enough, NVP then seeks the approval of the corporation to begin investing in the project. For the first round of investment, NVP incubates the business within the corporation, spending around $1 million or $2 million to bring in outside management, develop a business plan and find a lead customer for the technology.
At the end of one year, NVP makes a decision about whether to spin out the business or not. One in four times, NVP will decide not to spin out.
“This is a very high risk, high reward kind of venture investment and you’re absolutely bound to have failures,” Garman says.
If NVP does decide to spin the business out, the firm must work out the tricky issue of licensing the intellectual property rights to the underlying technology: mediating between the needs of the new venture, which must hold enough rights to the IP to remain competitive in its industry, and the corporation, which may itself need to practice under the IP it has licensed. Then there is the issue of price: how much is the IP worth, and how much should the new venture pay for its license? It’s difficult to determine value at such an early stage of the technology’s development, Berry says. Instead, NVP’s approach is to give the parent corporation a share of the profits. As the business grows, the parent corporation may elect to invest more capital, or put more people or equipment into the business, which would increase its equity stake. The parent corporation can see the value of its stake when NVP decides the new business is ready for a second round of fundraising, and brings in outside investors for the first time.
This investment model, Berry emphasizes, would not work without trust and an established relationship.
“One of the problems I used to have when I was in BT was that VCs would pop up and try to do a clever deal, and then we’d never see them again,” Berry says. “If the thing made a lot of money, you always felt that you’d let it go too cheaply. Whereas in this mechanism, we’re there, we have an office on site…people trust that we’re not going to run off with the crown jewels.”
No hub-and-spokes
Philips and BT are NVP’s main corporate partners, and tending to these relations are the primary responsibilities of the teams in the UK and the Netherlands. But NVP also frequently does one-off deals with some 20 to 25 other institutions, including Siemens AG, UK software developer Connetix, Intel, Telstra and Avago Technologies. Two NVP partners are assigned to each deal, and the assignments are not segregated by geography. UK partners work on US deals as often as not, and vice versa. NVP partners are constantly crisscrossing the Atlantic, Garman says. In the first two months of 2008 alone Berry says he spent a week in the US, a week in India and a week in Barcelona.
“We made an important decision not to operate this in kind of a hub and spoke model where there’s a bunch of people in New Jersey centrally, and then deals are taken care of locally in other countries,” Garman says. “Rather, all the people on the team are part of one big pool of resources, and people choose deals based on their expertise and their interests.”
NVP can afford this flexibility because everyone on the investment team is a senior professional with a wide range of operating experience. There are no junior level associates at NVP. Each partner does his own number crunching, although for such early stage investments, deals don’t typically involve much financial engineering. The complexities of NVP’s deals are more often legal issues. The firm’s well utilized general counsel, Drot Futter, spends much of his time on both IP licensing and mergers and acquisitions. Futter is an original member of the NVP team, having worked as lead counsel for several groups in Lucent in addition to Lucent New Ventures Group. Chief financial officer Anthony Abrahams rounds out the team. His job comprises typical private equity CFO duties like financial accounting, reporting and tax and audit filings. In addition, he helps NVP’s spinout ventures establish financial practices and controls.
The firm outsources its payroll and human resources functions. But on the whole, NVP found that being an independent firm requires fewer administrative resources than being an arm of a large corporation, which made its departure from Lucent in 2001 fairly painless.
“When you’re in a large corporation, you have a lot of other calls on your time associated with functioning within the organization,” Garman says. “You have to sort of feed the financial beast with data. That turns out to be in many ways a lot harder than running an independent firm and reporting to your limited partners. So we actually downsized considerably in terms of back office function going from Lucent to independence.”
The firm brings in outside help from time to time, relying on industry expert consultants to tackle the technical issues of new technologies, and outside counsel to assist with legal issues in foreign countries. The investment team also receives critical support from its advisory board, comprised of seven industry heavyweights who serve as a source of “grey hair and advice,” Garman says. NVP has sought to staff the board with people who can offer connections in the technology industry, insight to the research and development process, or a strong background in finance.
Among the board members are Lucent’s former chief operating officer, Daniel Stanzione, the former CEO of British Telecom, Sir Peter Bonfield, and the former CEO of BTexact, Stewart Davies. The remaining four members are Henry Chesbrough, a Haas School of Business professor; Sir Richard Dearlove, formerly head of the British Secret Intelligence Service (MI6); Paul Horn, formerly director of IBM Research; and Peter Wheeler, founder and chairman of business services company IPValue. Board members receive options from NVP funds on top of their retainers. They frequently sit on the boards of portfolio companies as well. They also have the opportunity to invest directly in the funds if they choose, giving them “a stake in the game,” Berry says.
Still evolving
Six years after striking out on its own, NVP is still continuing to evolve. In 2006, the firm raised its first traditional VC fund with a broad base of institutional investors. Its first three funds were mainly capitalized by Lucent, Coller Capital, British Telecom and Philips. For its fourth fund, the firm brought in around 25 LPs, including US and European pension funds, funds of funds, endowments, financial services institutions, and family offices.
The fund had a target of $200 million, and raised $275 million by June 2006. Currently, the fund has a total of $303 million in commitments.
The firm is starting to resemble a traditional VC in another way: last November NVP opened an office in Silicon Valley.
The establishment of the new office was facilitated by the hire of tech vet David Tennenhouse. Tennenhouse was most recently CEO of A9.com, the developer and operator of Amazon.com’s search engine. Before, he was vice president and director of research at Intel for six years. Prior to that he spent two years as chief scientist and director of the IT office at the Defense Advanced Research Projects Agency, the research and development body of the US Department of Defense.
The office is currently staffed solely by Tennenhouse, who is tasked with keeping his ear to the ground and tapping his network of contacts in the R&D community there. NVP’s timing is good, Tennenhouse says: in recent years the research system in Silicon Valley has become more open, with corporations and universities seeking partnerships with each other and with venture firms more and more.
Though Silicon Valley is a notoriously competitive environment for venture firms, NVP is confident that it will fill a unique niche in the valley’s ecosystem. The combination of what Tennenhouse calls “a huge pent up demand and opportunity” for spinouts, and most other VCs’ tendency to shy away from the legal complexities of the process, positions NVP to fill a critical gap.
“We become a source of deal flow to the mainstream VC community,” Garman says. “We take something that wouldn’t be investable for a traditional VC, and we make it investable.”
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