Venture Capital Journal

PALO ALTO, Calif. — Prospect Venture Partners, a first-time effort by Kleiner Perkins Caufield & Byers alumni Alex Barkas and David Schnell, had such success in fund raising that the partners were bashful about acknowledging their success. The pair targeted their first fund at $75 million (VCJ, August 1997, page 8), marketing it last summer with the help of private equity group agents Merrill Lynch & Co. and notched $85 million in a November first close.

Confident about investment opportunities in life sciences, Drs. Barkas and Schnell agreed to let the fund grow to a $100 million cap, which it reached in April. Investors expressed $130 million in interest. The general partners decided to add either a third partner or two associates sometime next year to help manage the larger pool. Dr. Schnell expects Prospect Venture Partners to wrap up in the second quarter.

The fund features a 2.5% management fee and an 80%/20% carry split. Limited partners include: ARCO Investment Management Co., the California Institute of Technology endowment, the University of Chicago endowment, the Kresge Foundation, the Los Angeles County Employees’ Retirement Association (LACERA), the Michelin Tire Corp. pension, the Rensselaer Polytechnic Institute endowment and high-net-worth individuals. LP commitments typically ranged from $5 million to $10 million each, and about 90% of the investors were domestic, said Dr. Schnell.

The fund will invest $3 million to $5 million in each company, targeting early to mid-stage U.S. health-care companies that focus on biopharmaceuticals, medical devices, health-care services, software, discovery tools and diagnostics , said the partners.

Prospect Venture Partners likely will make some co-investments with Kleiner Perkins, Dr. Barkas said, noting that the two firms have a very cordial relationship. So far, Prospect Venture Partners has made two investments, both in companies the partners had backed earlier through Kleiner Perkins. Prospect Venture Partners invested $3 million in Health Systems Technologies, a Seattle-based maker of managed-care software and $1 million in TherOx, a Costa Mesa, Calif., medical device company.

Investors were not discouraged by the vehicle’s “first time” status. “We were a proven team that had worked together for five years, and we have a strong track record behind us,” explained Dr. Schnell. “We were prepared to make the case that it was a great time to be investing in health care, and I think we were gratified that people understood and actually agreed with us with respect to the market opportunity.