Firm staying power: OVP Venture Partners marks 20 years

There was a point when Chad Waite was so unsure about raising another venture-capital fund that he started boxing up his belongings and looking for jobs.

"My house was half-packed to move back to San Francisco," said Waite, general partner at OVP Venture Partners. "I was thinking seriously about it." So were his colleagues at the Kirkland-based company.

Given the state of the market, it may sound like this happened a year ago. But it was actually the early '90s. The company, then known as Olympic Venture Partners, had to endure two struggling years to close its third, $37 million fund.

The problem wasn't finding enough investors, but finding those willing to look beyond OVP's short, unproven track record.

That's all changed.

In celebrating its 20th anniversary this year, OVP can claim to be part of an elite class of venture companies that have lasted two decades.

Not many funds in the Northwest or Silicon Valley can say they've been around for 20 years pumping money into startup enterprises. When OVP started in the early '80s, there were roughly 87 companies in the United States managing $3 billion, according to the National Venture Capital Association, which itself was founded in 1973. Most of the big players did not enter the market until the mid-'90s when nearly 400 firms managed $40.2 billion. Those numbers swelled in the current decade to 693 companies managing $209 billion.

OVP today has close to $500 million under management. It has helped spawn some of the Northwest's most successful companies. Of the 80 startups it has invested in, 22 have gone public and 11 were acquired. They include:

• Verity, which went public in 1995.

• WatchGuard Technologies, public in 1999.

• Logic Modeling Systems, sold to Synopsis for $100 million in 1994.

• @mobile, sold to Software.com for $400 million in 2001.

• Signalsoft, public in 2000.

• Seattle Genetics, public in 2001.

When VCs talk of hitting home runs, OVP has definitely swatted a few. Seattle-based WatchGuard alone returned $121.4 million on a $4.4 million investment — a big enough payout to give all of the investors in the fund their money back and then some.

Growing up

OVP's roots reach back to Rainier Bank, a Seattle institution that disappeared with a line of bank mergers finally ending up as part of Bank of America.

Called Rainier Venture Partners at the time, OVP was formed through the efforts of George Clute, who was working at Rainier as a lender. Clute enlisted the help of Hambrecht & Quist, an investment bank in San Francisco that would grow into the company's main financial contributor and adviser.

That's when Waite came on board. He had been working as a venture capitalist at H&Q for a year and a half before helping Rainier learn the business.

Early on, OVP found that investors were attracted to it because of its focus on Seattle.

"We thought it was an area that could spawn new companies and ideas, and I think they've done that," said Jerry Burroughs, who first invested in OVP while he was at Dow Chemical and is now retired.

"They were off the beaten path. We had a lot of investments on the East Coast, West Coast, in Boston and San Francisco. They fit the bill. They were in Seattle, where Microsoft was, and we thought it was a place we ought to look."

But that's also what made it more difficult, said Clute, now retired and living in California. Seattle was underdeveloped, with few companies really getting their start by raising venture capital.

As a result, the VCs had to spend a lot of time explaining what it was and how it worked. Very few lawyers or bankers in town were knowledgeable enough to offer legal and financial expertise when drafting proposals and agreements.

"We got a few deals done, and that raised the visibility," Clute said. "It snowballs and more people understand, and see people making successful uses of money and expertise."

Enter Waite

On Waite's first trip to Seattle, he remembers thinking of the Northwest as a frontier. The first startup he met was Quantum, an ultrasound company in Issaquah that later became Rainier's first investment. It ended up paying off 12 years later when Quantum was sold to Siemens for about $80 million.

It was after Rainier raised its second fund, in 1987, that it changed its name to Olympic Venture Partners. (That stuck until the Olympic Committee said a couple of years ago to stop using the word "Olympic," even if it referred to the mountain range. That led to OVP Venture Partners.) At this point, after the first two funds eked out only single-digit returns to investors, it was significantly harder to raise a third first.

It was a time of reflection, Waite said. He and one of the fund's new partners, Gerry Langeler, looked at what went wrong.

In the first fund, 50 percent of the deals were completed outside of the Northwest. In about 10 of those deals, OVP relied on other firms to evaluate the business idea, rather than doing its own homework. OVP lost its money in eight of the 10.

In hindsight, the partners realized their difficulties arose because they had not taken control of the deals. They also realized that if a much larger venture fund from California tried to interest OVP in a startup, it was probably because that fund had found no one else that was interested in investing.

"When you are a small fund anywhere and you are going into the deal that the big guys have, the likelihood that they let you into the best deal is fairly small," said Bill Miller, a general partner, who has been added to the team more recently.

"For the deals that are shaky, they will go out to the hinterlands and try to find anyone that's willing to invest."

That was lesson No. 1.

But they found it hard to get investors being asked to invest again to understand how OVP had learned from that lesson.

The turning point in that difficult third fund came when Waite decided to pitch his alma mater, Kenyon College in Gambier, Ohio.

The whole OVP team flew out. Arriving late, they found Burger King was the only place left to eat in town. Waite felt ashamed, afraid his partners would judge the place where he spent four years by having to eat at a fast-food place because nothing else was open.

But it turned out to be good luck. Kenyon College decided to become an investor.

Joseph Nelson, vice president for finance at the college, said he bought in even though he held OVP to a higher standard because of Waite's connection to the college.

Since then, OVP folks eat at Burger King every time they try to raise a new fund. It seems whenever they splurge on a fancy meal, they don't get the money.

Learning lessons

The difficulties of raising that third fund were evident in the amount: $37 million, $5 million less than the second fund.

Waite easily admits to his mistakes. Like many other funds, OVP was burned, too, by investing in a few Internet companies during the boom.

Although Miller said he thinks OVP fared better than most, he did point to an investment in 800.com, a Portland company focused on selling electronics over the Internet.

800.com raised a lot of venture capital quickly, filing for an initial public offering in March 2000, right before the stock market started crashing. OVP eventually was forced to sell 800.com's assets, which Circuit City ended up buying.

OVP faced a similar situation in Bellevue-based Serengeti Law, which develops software that helps law firms track their work. Although Waite thought it could be a viable company, he struggled to see how it would produce the returns it needed to justify investing more money.

The choice was to shut it down or find a buyer.

Neither option appealed to Serengeti's management team, so Waite created a third option, by pulling out and selling OVP's equity to the management team for "something like $1," he said. The management team also assumed the company's debt.

Serengeti's founder Rob Thomas said he understood the situation and commended OVP for handing over the reins.

"This was a situation in which OVP had to make some tough choices," he said. "They were open about it and they were optimistic about the company's long-term prospects.... We acquired the company and it's grown by leaps and bounds."

Because of investments like these, OVP's fifth fund has not yet returned some of the investors' money, let alone some rewards. Until that happens, Waite said the partners have decided not to charge management fees to the limited partners. Those fees are typically how a fund pays for expenses.

The personalities

Today, OVP has two offices, a headquarters in Kirkland and an office in Portland.

Four general partners run the fund. Waite, who has been there the longest, works with Miller at the Kirkland office. Gerry Langeler and David Chen work in Portland.

The firm is raising its sixth fund, which has received investments from such institutions as the Oregon Public Employees Retirement Fund, Washington State Investment Board, Western Metal, California Public Employees' Retirement System, Dow Chemical and the Fred Meyer Trust.

Some of the more recent investments are early-stage companies including UXComm of Beaverton, Ore., Intelligent Results of Bellevue and Portland-based Max Viz.

Waite takes the business seriously, but in a light-hearted way. At 46, he wears his hair long in the back, and drives a fast German car: not a BMW, but a Porsche, he'll correct you. In his spare time, he invested in Bruichladdich, a Scotch distillery in Scotland, and is thinking of opening a winery locally.

The Midas List compiled by Forbes ranks people in the country who have created the most wealth for investors. Last year, Waite was No. 91.

More wins than losses

"It's not luck when you've done it 10 times in a career," Waite said. "In 10 or 15 deals, I've made my firm more than $50 million to $100 million on investments. If you have returns like those, and generated a billion or $700 million in returns, it far outweighs the $20 million to $30 million you lost in bad deals."

To Waite, venture financing is not a science, or at least not yet. The severity of the mistakes made in the investment bubble of the late '90s is a demonstration of that the industry has a long way to go.

"In venture capital, how do you make your money?" he asked. "People, people, people, but OVP's argument is that maybe — if you don't have a market — it doesn't make a difference if you have the best or worst people....

"You can always change the team, but you can never change the market. There were so many failures in 1999 and 2000 because people had enough money to change markets — at least that's what they believed."

Tricia Duryee: 206-464-3283 or tduryee@seattletimes.com