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 percent.
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 preeminent VC firm in Los Angeles. Other venture capitalists routinely cite it as the gold standard by which others are judged, and entrepreneurs who take Redpoint's checks praise the value of the firm's advice and business contacts.
Redpoint is expected to announce Aug. 14 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.
"We had to turn back a lot of investors," said Redpoint Managing Partner Brad Jones, who heads its L.A. 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: L.A.-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 percent, 244 percent and 106 percent, 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."
Several Los Angeles companies have benefited from their association with Redpoint's partners in the past, and testify to the confidence of their investors. Brentwood put $4.2 million into Thousand Oaks Internet startup Sandpiper Networks in 1997. Last October, the company was bought by Digital Island of San Francisco for $1.1 billion. Brentwood's share current value of stock held plus stock sold is around $200 million.
Back in 1993, Brentwood made a $4.5 million investment in Calabasas-based Xylan. French telecom giant Alcatel bought the computer network switch manufacturer for around $2 billion; $260.5 million went to Brentwood and its investors.
Seeing future value
"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."
LaValle was brought in by Jones to be chief financial officer at Calabasas-based ComCore Semiconductors in 1997, after Brentwood had invested $4.1 million in the company. A year later it was acquired by National Semiconductor Corp. for $122 million, netting Brentwood $19.2 million and bringing LaValle millions as well. Jones then brought him over to Stamps.com.
"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 this spring's 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, the company has more than $300 million in the bank, thanks to a secondary offering in December. Its revenue is growing, and it expects to be profitable by early 2002. Jones professes unconcern with its prospects. But he 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, at least four L.A. companies have been funded by it in the past year. The companies are in completely different spaces, and demonstrate the diversity of L.A.'s technology entrepreneurs.
The most prominent is BizBuyer.com, which runs an online marketplace where small and medium-sized 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. It has 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.
Money plus expertise
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.
Redpoint recently took part in a $10 million "B" round of financing for Line 6 Inc. in Thousand Oaks, which has gotten notice in the music industry by putting a computer chip in amplifiers to dramatically enhance the sound. Line 6 is developing digital technology for a wide variety of audio equipment, and is one of the fastest-growing music products companies around. Sales in 1999 were around $20 million, up from less than $10 million in 1998, and the company is profitable, said President Mike Muench.
The fourth company, Internet Machines Inc., is a mere seven months old, but recently got $8 million in funding, most of it from Redpoint. Based in Agoura Hills, the company is designing semiconductors for 10-gigabit network switching devices. Internet Machines has gone from four co-founders to 87 employees since January, and CFO Frank Knuetter attributes that in part to Redpoint's reputation.
"In addition to the dollars, they brought to us a very high level of awareness among engineers we were recruiting," Knuetter said. "Of those 87 people, only seven were (found) through headhunters."
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