Generalist Firms Split Up into Two Specialists

In a move that may trigger a chain reaction in the venture community, general partners at Brentwood Venture Capital and Institutional Venture Partners (IVP) have combined to form two new firms that will specialize in early-stage investments in the information technology and health-care industries.

The information technology firm, tentatively titled Project T-Rex, includes Brentwood partners Jeff Brody, Brad Jones and John Walecka, and IVP partners Tom Dyal, Tim Haley and Geoff Yang. T-Rex, which will begin fund raising next month with a target of $500 million, is seeking a 70%/30% carried interest split from its limited partners.

“We think 30% is appropriate given the state of the IT market these days,” said Fred Giuffrida, managing director of Horsley Bridge Partners, a limited partner of both Brentwood and IVP. “[If] both firms come out strong, this situation will be a win for everybody.” Giuffrida confirmed that Horsley Bridge would invest in both new funds.

Project Pinnacle is the interim name given to the health-care firm, which will begin marketing a $150 million to $200 million fund this November. The firm includes IVP partners Sam Colella and Beckie Robertson and Brentwood partners Brian Atwood, Ross Jaffe and Bill Link. Jaffe said Pinnacle has recruited two additional partners from other firms to manage the fund who will be identified later this week. Terms for the fund were not disclosed, although Horsley Bridge’s Giuffrida said the firm would not seek 30%.

“To LPs with an interest in health care, this will be among the most attractive funds to invest in,” Jaffe said. “We realized that functioning as separate groups within the same firm was not the best way to organize going forward.”

Partners from both firms said both Brentwood and IVP were in the early stages of raising future funds but don’t expect any backlash from limited partners.

“You take some risks when you change something that has been so positive,” Dyal said. “Brentwood and IVP each have a great list of LPs, and we will figure out a way to integrate them into the right mix.”

Founded in 1972, Brentwood’s past portfolio includes Apple Computer, Stamps.com and WebTV. The firm closed the $300 million Brentwood Venture Capital Partners IX last year. Jaffe said the fund is nearly fully committed, with room for one more new investment and few follow-up investments in existing portfolio companies.

Founded in 1980, IVP has invested in Excite, Seagate and Ask Jeeves. Dyle said the $350 million Institutional Venture Partners VIII has room for one or two additional investments. Both firms will officially cease to exist in 2008, when each remaining fund fully matures.

Aggressive Carried Interest Split

While established firms such as Kleiner Perkins Caufield & Byers and Accel Partners have successfully raised funds with a 70%/30% split, first-timer T-Rex writing in the same terms is an indication of how much limited partners are willing to sacrifice for a piece of the IT gold rush.

“This is a game about net returns for an LP,” said Charles Merritt of the University of North Carolina at Chapel Hill, which has $750 million in assets under management. “If they can deliver triple digit returns, why should I care about a net 30%?”

Merritt added that it is more common for firms with a history of three to four funds asking for 30% than it is for a first-time fund.

“We are taking a hard look at top-tier firms in terms of terms and performance,” Walecka said. “Given our track record, we feel we belong at the top of that market.”