Early stage VCs raising later stage funds, including private equity/hedge fund

Cleantech companies typically require a lot of capital before they become profitable and bring success to their investors. Investing in them can be rather strange business for all the IT/media/tech investors (which is a majority of the the VCs out there) who are used to deploying smaller capital amounts to reach commercial success. John Doer told us (again) just last week that Google required a total investment of merely $25million!

So what are early stage cleantech venture investors to do when their portfolio companies require >$100 million before scalability of technology is proven and reached? To prevent dilution VCs have to keep on investing in subsequent rounds. But doing so might require slightly difference investment vehicles, and probably a different set of professionals.

So that is exactly what they are doing! Many major VC firms are raising large funds solely focused on later stage financing of energy/cleantech companies. Private equity investors and investment banking professionals are in demand and they are joining leading firms in large numbers. Kleiner Perkins, Sequoia, etc…‘they are all doing it’, as a VC remarked to me. Interesting!

Here’s the news on Seqouia Capital from the PE Week Wire.

Asset diversification has become business as usual in private equity, as many top-tier firms have launched distressed funds, real estate funds, hedge funds, sub-debt funds and other things that don’t involve privacy or equity (let alone both). Venture capital firms, on the other hand, have mostly stuck to their knitting. Sure, you can argue the demerits of certain firms moving toward later-stage deals or raising country-specific funds, it most of it still falls within the conventional rubric of venture capital.

But venture giant Sequoia Capital may be the trailblazer who helps change all that. There have been rumors floating for several months that the firm was planning to launch some sort of hedge fund practice, and now some pieces of the puzzle are starting to come together. First, Sequoia has quietly hired Eric Upin, who most recently served as chief investment officer for the Stanford University endowment. Second, my colleague Alex Haislip reported that Sequoia has been trying to poach hedge talent since last November, and that it’s been talking about a $750 million target.

I spoke to a bunch of Sequoia limited partners yesterday, and only a few had heard about the Upin hire. Those with knowledge declined to get too specific, but indicated that Sequoia is planning something more innovative – and perhaps more comprehensive – than simply creating a hedge fund product (presumably focused on tech). It also seems that these plans also are still in the formative stages, and subject to change.

No word yet on who else Sequoia has hired for this mystery endeavor, except that I do know that Upin is not alone. Just for some brief background: Upin was a senior partner and managing director of equity research at Robertson Stephens between 1993 and 2002, after which he spent two years as director of tech research with Wells Fargo. He then joined Stanford Management Co. In February 2005 to oversee public equity investments, and one year later was named CIO when Mike McCaffrey left to hang his own shingle. He announced that November that he’d be leaving Stanford come February 2008, in order to pursue other opportunities.

More information as it becomes available. Upin did not return my calls, while Sequoia’s Mike Moritz declined comment.

Here is an interesting quip from PE Wire:

*** I’ve probably had a dozen conversations with VC limited partners over the past week, and every one of them has asked me some variation of: “Why are Sequoia Capital and KKR expanding beyond traditional venture capital?”

It’s a great query, and the consensus answer lies somewhere between hubris and a recognition that venture capital rarely produces the outsized returns that it once did (we call this “PE envy”). The principals themselves aren’t talking, so let me suggest another option in which I play pop psychologist: These firms have been at the top forever, and are in little danger of being knocked off (particularly Sequoia). So the only option is to continue being the best VC firms indefinitely (i.e., status quo) or they can try to become the best at something new (i.e., challenge themselves). Plus, the latter option lets them recognize some brand equity without selling a 20% firm ownership stake to Dubai. Just thinking aloud…


3 Responses to Early stage VCs raising later stage funds, including private equity/hedge fund

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    – Richard
    Richard Wilson

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