They’re Searching for New Stars in the Tech Universe
They’re old-fashioned in their style, eschewing the high-profile “dot-coms,” the sexy Hollywood content plays and the big-money investments.
Instead, the partners at Palomar Ventures, a 1-year-old Santa Monica venture capital firm, describe their approach to investing in downright stodgy terms: They focus on early-stage funding of companies in such industries as data communications and e-business infrastructure software.
Whether their style will be successful remains to be seen, but at previous ventures the four partners helped create more than 50 public companies in the last five years.
Formed in 1999 with an initial fund of $80 million, Palomar this week will announce it has raised a second fund totaling $220 million.
That’s a relatively small venture pool in an era when $1-billion funds are becoming the norm. Palomar said it raised the money in just 10 days and could have raised more, but prefers to keep the fund on a manageable scale.
“There are a lot of venture capitalists out there with way too much money and too little time,” said Jim Gauer, who co-founded Palomar with Randall R. Lunn “We’re entrepreneurial. We do [it] the way venture capital used to be done: We roll up our sleeves and help people.”
Investors in Palomar’s second fund include banking giant J.P. Morgan & Co., telecom-equipment leader Lucent Technologies, brokerage Lehman Bros., Bank of America’s venture arm and Lockheed Corp.’s pension fund.
The name Palomar comes from Mt. Palomar in northern San Diego County, home of the Hale telescope. Built in 1948 and named in honor of the American astronomer George Ellery Hale, the telescope was the largest instrument of its kind until 1976.
Not unlike the telescope, “We wanted to look for the stars,” said co-founder Lunn.
The new Palomar fund will primarily focus on investments in the telecom, high-speed data infrastructure, software and fiber-optical arenas, the partners said.
Bob Obuch, general partner at BA Venture Partners, the Bank of America arm that invested in both Palomar funds, said he was attracted by “the quality of investments they are making and their strength of management team. They are really an outstanding group of people.”
Gauer, 48, was formerly with another Southern California venture fund, Enterprise Partners. A former computer scientist, he has helped start and run several companies, including SAT US, a supplier of fiber-optic products now called SAGEM.
Lunn has more than 20 years of venture capital experience since founding the venture arm of Texaco Inc. in 1979. He has helped finance such companies as telecom equipment maker PairGain Technologies (now part of ADC Telecom) and SCM Microsystems, a maker of digital TV receivers and other products.
Other Palomar partners include George Abe, the former manager of business development for Cisco Systems; and Rick Smith, who led the venture investment activities for SunAmerica, the retirement-investing firm that now is part of American International Group.
Palomar, which also has offices in Irvine, invested in 11 companies with its first fund, including Continuous Computer Corp., a San Diego-based provider of portals for telecom equipment makers, and Pasadena-based YellowShirt, a Gauer brainchild that is a business-to-business Net commerce firm still under development.
YellowShirt is run by Doug Gray, who helped develop Travelocity.com. Kleiner Perkins, the big-time Silicon Valley venture fund, is a co-investor.
“The reason I came on board was Jim [Gauer],” Gray said. “He has an amazing combination of technical skills, an understanding of the business of technology, an understanding of the trends. He’s what entrepreneurs call ‘smart money.’ ”
Palomar expects to announce investments in four wireless and optical-networking companies in the next few weeks. All of the firms are in Southern California.
The venture fund’s biggest successes so far are Efficient Networks, a Dallas-based developer of DSL equipment that went public in July 1999, returning $60 million on Palomar’s initial investment of $2 million; and TeleCore Inc., a DSL-related company launched in tiny offices near John Wayne Airport and sold this year to Viasource Communications of Fort Lauderdale, Fla., for $172.5 million. Palomar earned more than five times its $2.5-million investment in TeleCore, the fund says.
But with the tougher market for initial public offerings since spring, some of Palomar’s ventures haven’t ramped up as fast as expected.
One example: the online division of Right Start, a Westlake Village-based retailer of products for infants and toddlers. Rightstart.com had to pull a planned IPO earlier this year and needed additional funds from its venture investors.
“We stand by them,” Gauer said. “We stand by all our entrepreneurs, so if they don’t hit their milestones, we’ll still be there for them.”
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In other Southland venture funding news, online business resource firm Business.com, the brainchild of Jake Winebaum, co-founder of Santa Monica incubator ECompanies, today will announce it’s getting a venture round of $61 million, its first major financing from outside investors.
Those investors include the Financial Times Group, a division of Pearson; Cahners Business Information; McGraw-Hill Cos.; and Mort Zuckerman, owner of U.S. News and World Report.
“This gives us a tremendous breadth of investors, which is really unique,” said Winebaum, acting CEO of Business.com.
The financing will enable Business.com to expand content and other features of its Web site, fund international expansion and develop the company’s operating systems, Winebaum said.
“What this round does is give us sufficient capital to become profitable,” he said, though he wouldn’t speculate on when the company might go public.
Business.com is about a year old, has 128 employees and has received $71 million in venture funding including the round to be announced today, Winebaum said.
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Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at debora.vrana@latimes.com or Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.
