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Brad Jones for years has run the largest and one of the most successful L.A. venture capital firms, Brentwood Venture Capital.
So why mess with a good thing?
Because something better has come along.
That’s essentially why Jones, as announced earlier this month, is launching a new partnership with Palo Alto-based Institutional Venture Partners.
Brentwood Venture Capital has ceased raising new funds, Jones said, meaning it will gradually fade from the scene over the next 10 years as its existing funds mature and investors are repaid.
Meanwhile, the new firm, which doesn’t even have a name yet, is launching two new funds this October, each targeting a specific industry.
A $500 million fund (code named T-Rex) will be raised to target Internet-related enterprises, and a $200 million fund will target health care companies.
These new, targeted funds mark a radical departure from the days when venture capitalists including Jones and others at Brentwood Venture Capital would invest in a variety of high-growth industries. The T-Rex fund will pretty much stick to Internet ventures, although related companies in communications, computer software and new media will be considered.
Why the narrower focus? One look at Internet-related returns will drive home the answer.
Brentwood Venture Capital IX, which was started in 1997, is posting 166 percent annually compounded returns. Older funds, less involved in the Internet, sport returns of “only” 80 percent to 100 percent. The lesson: The more-Internet intensive, the bigger the return.
Of late, Jones has invested in such successes as Santa Monica-based Stamps.com, an online postal service, and Santa Monica-based The Trading Edge Inc., an online bond trading service.
Another advantage of the “Internet only” strategy is that institutional investors can choose to make a pure Internet play. With a mixed venture capital fund, on the other hand, investors are in essence compelled to make a bet on venture capitalists, not an industry, which is almost like investing in a blind trust, never an appealing prospect.
The Internet, to date, has provided investors with the huge home runs a venture capital fund needs. Of 10 venture investments, two might go flat, and four to six might do well enough. One or two will earn the 10, 20 and even 50-fold returns that blow the pants off of investors, said Jones.
But any venture capitalists in the Internet world are already complaining there is already too much money chasing too few deals.
Jones agrees, but says, “our fund will have unparalleled industry experience, and we hope to back the leading broadband or information technology firms, or health care firms.”
The existing nine Brentwood Venture funds will continue to be managed by Jones and Brentwood Venture partners, but will be closed down over time, as investments finally mature. Joining Jones in his new partnership are Brentwood partners John Walecka, and Jeff Brody.
Jones and compatriots will continue to run the nine existing funds as well, each of which are also separate partnerships.
Accounting monster
Barry Burten, veteran securities and corporate lawyer with Jeffer, Mangels Butler & Marmaro LLP in Century City, has been busy of late and not only with his specialty of herding merger deals through legal gates. He’s also been advising clients about an accounting monster new rules on stock options quietly made public this month by the Financial Accounting Standards Board.
The FASB issues rules that public companies must follow. On Aug. 1, the accounting board affirmed an earlier ruling that when corporations re-price executive and employee stock options downward, they then incur an expense, and such expenses must be reported quarterly.
For young growth companies, the new rule is a quandary, said Burten. If the company is struggling, and the stock is down, it may be hard to retain key personnel who very often are effectively paid in stock. Unless employee stock options are re-priced downward, a brain drain may result which, for struggling company, could be fatal.
Even for a struggling company whose stock price is in the cellar, “it is probably in shareholder interest to keep top employees maybe not the chief executive, you could argue that, but possibly positions No. 5 through 20,” said Burten.
But if options are re-priced, the company must report “the cost” of that re-pricing which reduces reported profit, and could hurt shareholders, said Burten.
A partner of Burten’s, Robin Schachter, said, “We are telling clients to look at alternatives to re-pricing options.”
Some shareholder activists, such as CalPERS, the big state employee pension fund, have been against re-pricing, and have argued that it merely rewards failure.
Two major institutional shareholder groups, the Council of Institutional Investors and Institutional Shareholder Services, have argued against the easy ability to re-price options, without shareholder approval.
When not busy advising clients about stock options, Burten has also been active in M & A; work, helping Santa Fe Springs-based Vans Inc. buy the High Cascade Snowboard Camp in Oregon. (It’s part of Vans’ plan to operate skateboard and snowboard parks nationwide.)
Cool clear water
Erupting in a geyser on Wall Street in the last year has been West Covina-based Southwest Water Co., which was trading last week in the $21-a-share range, up from $12 a year ago.
The little-followed company has been posting steadily improving earnings, and this month announced a deal in which it would buy the municipal water system from the city of West Covina for $12 million. The City Council has green-lighted the deal, which now goes before voters. If approved, Southwest Water’s service base will grow by about 11 percent. Southwest Water operates and manages water supply and wastewater treatment systems.
In its most recently reported third quarter ended June 30, Southwest Water reported net income of $1.2 million, compared with $926,000 (21 cents) for the like period a year ago. Revenues were $19.5 million vs. $18.3 million.
Contributing Reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].
