Prospect Venture Partners I



Two partners of Kleiner Perkins Caufield & Byers have left the Menlo Park, CA-based venture capital firm to form a venture firm that will invest exclusively in young health care companies.

Alexander E. Barkas and David Schnell, M.D. have formed Prospect Management Co., LLC, Palo Alto, CA, which is seeking to raise a $75 million fund, Prospect Venture Partners, L.P. (Prospect Ventures). Mr. Barkas and Dr. Schnell decided to strike out on their own in order [to] build a firm whose sole focus is health care and biomedical investing. By contrast, health care accounts for only about a quart of the investments at KPCB. The great bulk of the firm’s investments are in information technology.

Prospect Venture Partners would make investments of $3 million to $5 million apiece in early- and late-stage companies, including public companies. Target technologies would include biopharmaceuticals, health care services, “informatics,” medical devices and tools. Mr. Barkas and Dr. Schnell pursued similar investments at KPCB, where they led 12 transactions totaling $47 million over the past five years. Among the investments were Connetics, GeneMedicine, Geron, Microcide, Healtheon and TherOx. On the 12 investments, the partners report a 35% internal rate of return before fees and carried interest.

Merrill Lynch & Co.’s Private Equity Group is marketing Prospect Venture Partners’ fund.

The Prospect [Venture Partners] general partners are proposing to receive an industry-standard 20% share of fund profits, not the 30% share that KPCB’s partners, alone in the private equity community, enjoy. They also are seeking an annual management fee that would start at 2.5% of committed capital, and be adjusted upward for inflation annually.

At KPCB, meanwhile, the departures won’t alter the pace of health care investing, according to Partner Brook H. Byers. Mr. Byers said the firm intends to recruit a partner for its health care practice by year-end. Currently, the practice consists of Mr. Byers, who heads it, and Partners Dr. Cynthia T. Healy and Joseph S. Lacob. In the first half of this year, KPCB has invested in four health care companies.

Kleiner Perkins Pair Departs To Form New Life Sciences Firm

Venture Capital Journal

MENLO PARK, Calif. -- A pair of Kleiner Perkins partners have formed their own Silicon Valley venture firm, leaving the venerable partnership after five years. Alexander Barkas and David Schnell formally departed June 30 to form Prospect Venture Partners, according to Brook Byers, a partner at Kleiner Perkins Caufield & Byers. Prospect will concentrate on life, sciences investments.

Dr. Barkas was reluctant to discuss fund-raising efforts, citing concerns about Securities and Exchange Commission regulations regarding marketing, but did confirm Prospect Venture Partners had begun fund raising “recently, very recently.” Mr. Byers said he thought the new fund would be targeted at $75 million. The new firm was operating out of temporary space in Palo Alto as Venture Capital Journal went to press and looking for a permanent office in the area, according to Dr. Barkas.

The departure doesn’t seem to have engendered hard feelings, and Mr. Byers expects to co-invest with Prospect Venture Partners. “These guys are guys we know," he said, noting that Kleiner Perkins likes to know the strengths and weaknesses of potential co-investors. “Obviously, we’ve got that from them.” In fact, Mr. Byers said he’d already shown some potential deals to the Prospect Venture Partners team. Also, he said he introduced them to Merrill Lynch & Co.’s advising group in New York to help with the fund raising.

Mr. Byers acknowledged that the health-care field is well stocked with opportunities and that “this is a very good time to raise a fund.” “We’ve been talking about it for a year,” he said. “This has a lot to do with just how people want to spend their time.” Drs. Barkas and Schnell want their own industry-focused fund, as opposed to being part of a large, diversified fund, Mr. Byers explained.

He said Kleiner Perkins’s life sciences investing would not be altered by Drs. Barkas and Schnell leaving. He noted that while each partner is expected to do two deals a year, and he’d already done three. Led by Mr. Byers, the firm’s life sciences team also includes Joseph Lacob and Cynthia Healy. “We’ve got some creative ideas about the life sciences group here, but we’re not ready to talk about that yet,” said Mr. Byers.           --S.N.

Merrill’s Fund Mix Reflects Evolving Investor Appetites

The Private Equity Analyst

When two partners of Kleiner Perkins Caufield & Byers decided last spring to go out on their own, they found an unexpected suitor seeking their fund-raising business: Merrill Lynch & Co.’s Private Equity Group. Sure, the Merrill group is one of the biggest partnership placement agents around, but the New York firm generally has shunned venture capital funds as too small to be worth the effort.

Indeed, the two KPCB partners – Alexander E. Barkas and David Schnell, MD – were looking to raise just $75 million for their fund, Prospect Venture Partners, L.P.  That’s peanuts for Merrill, which is used to raising hundreds of millions, if not billions, of dollars for firms like Clayton, Dubilier & Rice, Inc., and E.M. Warburg Pincus & Co.

In the end, Messrs. Barkas and Schnell signed on with Merrill. And their firm, Prospect Management Co., LLC, Palo Alto, Calif. (Prospect Ventures), expects to close its fund next month at or above its target.

Merrill’s eagerness to represent the Prospect [Venture Partners] fund is a reflection of how Merrill perceives institutional appetites for alternative investments are changing. It also is an indication of how the Merrill private equity placement group is broadening its product mix to meet those appetites.

In the past year or so, Merrill has stepped up its offerings of real estate, emerging market and hedge funds, as well as its marketing of direct private equity investments. In the past, Merrill -- like most other fund placement firms -- marketed buyout and similar kinds of corporate finance funds almost exclusively. 

Merrill courted Messrs. Barkas and Schnell, for example, because it wanted to offer a technology-oriented venture capital partnership to institutional investors that worry the buyout business might be too heavily funded. The Kleiner Perkins pedigree made managing the Prospect offering all the more desirable. Those benefits made Merrill willing to overlook the fund’s small size. And Merrill executives make no secret of the fact that they hope Prospect Venture Partners will tap Merrill to raise subsequent – and larger – funds.

Prospect Venture Partners Tops Goal For Debut Fund With $100 Million

Venture Capital & Health Care Journal

Prospect Management Co., LLC, Palo Alto (Prospect Ventures), has closed its debut fund at $100 million, which is $25 million above target.

Prospect Venture Partners’ partners, Alexander E. Barkas and Dr. David Schnell, last year left Kleiner, Perkins, Caufield & Byers, Menlo Park, to create an investment firm with an exclusive focus on health care. Health care accounts for only about a quarter of KPCB’s investments. The Prospect partners expect to add a third partner within the next 12 months.

Prospect [Venture Partners] is looking at all health care segments, but it's concentrating on target validation for genomic platform companies, early-stage medical devices and information services in health care. It will make both early- and late-stage investments.

So far, the firm has made two investments: Health Systems Technologies, Inc., a Seattle developer of software for managed care, and TherOx, Inc., a Costa Mesa, Calif., developer of minimally invasive products for the delivery of super-saturated oxygen solutions to oxygen-deprived (ischemic) tissue. Mr. Barkas and Dr. Schnell were familiar with the companies from investments in them by KPCB.

On average, Prospect [Venture Partners] will invest $3 million to $5 million per company.

New Bio-Med Fund Hits $100 Million Cap

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