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MENLO PARK, CA – December 8, 2004 – ONSET Ventures announced today that it has closed a new, $200 million venture investment fund — its 7th since the pioneering, early-stage firm was founded 20 years ago. ONSET V brings total funds under management to $700 million, and will continue the firm's increasingly-refined investment approach for identifying and encouraging successful businesses. ONSET believes that its approach is especially important in light of significant changes the firm believes will emerge in venture capital over the next decade.
"ONSET has evolved a clearly thought out methodology for identifying, underwriting and nurturing new business ventures which yields companies that consistently meet their milestones," said ONSET general partner Terry L. Opdendyk. "This methodology, which we call 'craftsmanship', influences us from our initial engagement with a new entrepreneur, and continues throughout ONSET's active involvement. Craftsmanship will drive our investment strategies for ONSET V."
Opdendyk explained the methodology as follows: "In terms of optimizing its probability of success," said Opdendyk, "the ideal new venture has both a provable business model and satisfies an immediate, unsatisfied market need. Product offerings vary from those that enable new applications — typically the province of startups and early-stage investors, to those that improve upon existing applications — favored by established corporations and later-stage investors. 'Craftsmanship' refers to the collaborative process of a venture successively refining its business — up front, and as it progresses — to one that meets these criteria, in the most cash-efficient manner possible."
For example, said Opdendyk, a venture with an exciting application — but only vague presumptions of how to make money from it — fails the 'provable business model' test. Or, a company that proposes that its application will create a new market — but cannot identify potential customers — fails the 'immediate market test'. "In many cases," said Opdendyk, "it is quite possible to carefully re-craft the core elements of the business into products that have both an immediate market, and a proven business model, virtually from the outset. We seek out A-level entrepreneurs who are eager and able to apply such refinements to their ideas."
ONSET estimates that the craftsmanship philosophy has resulted in ventures that, over the last 20 years, have achieved greater than an 80% success rate in reaching financing milestones, compared to an industry average of about 20% to 30%.
"Our craftsmanship philosophy, and the focus and specialization that it implies, is particularly important in light of major changes we see coming in venture capital," added ONSET general partner Mark Hilderbrand. "The venture capital industry appears to be splitting into two distinct groups characterized by substantive differences in their operating styles and in their investment strategies," he said. "On one side will be firms like ONSET that are highly specialized and bring differentiated value in focused ways. On the other side will be a new breed of firm that competes on the scale of its resources, the pervasiveness of its brand, the scope of its activities, and the velocity of its invested capital."
According to Hilderbrand, these latter firms will be characterized by large portfolios of companies that require little or no active involvement, as well as significantly large investments in each company. "The effect," he said, "will be to drive such firms away from early-stage companies — and active collaboration in the company-building process (i.e. "craftsmanship") — to proven, lower-risk ventures that are able to absorb large amounts of capital."
For executives of later-stage companies whose risks have been substantively eliminated (i.e., having proven business models, complete teams, critical mass, and/or substantial revenues), this is good news, said Hilderbrand. Such executives will have a variety of financing options available to them. "Like highly-visible companies seeking underwriters for a public offering, there will be an abundance of large firms competing with one another for 'the business'," he said. "They will all encourage larger individual financings, compete aggressively on price, and tout their breadth of services and capabilities in order, to win the 'beauty contest'."
However, Hilderbrand believes that such scale-driven firms will be a significant mismatch with most entrepreneurs and early-stage ventures, and will thereby lose out on some of the most interesting — and potentially rewarding — deals. The bulk of entrepreneurs, who typically operate in environments of greater risk — perhaps pioneering a new technology, serving the needs of a new industry, or are at an earlier stage of their development — will be forced to look elsewhere for resources. They will be obligated to seek out smaller, more focused investors who are experienced in their sector, and have proven capable of managing the specific risks associated with their unique opportunity. Clusters of these specialty firms will emerge, consolidated around specific risk categories, industries, technologies, or markets.
And this suits both Opdendyk and Hilderbrand just fine. "We feel that ONSET is in what is now an ideal, long-term sweet spot," said Opdendyk. Hilderbrand concurs, and predicts that a large number of today's venture capital firms that simultaneously try to manage creative high-risk ventures and a high-velocity of investment will be forced to migrate to one side or the other. "The two strategies are inconsistent," Hilderbrand asserted. Venture capital firms must either get very big or very focused."
This coming metamorphosis is not unprecedented, Hilderbrand concluded. "The industry is evolving in a fashion similar to what happened in other professional services industries such as consulting or investment banking," he said. "There will emerge an oligopoly consisting of branded, globally-known, 'one-stop shops', and a bevy of specialized 'boutique-like' firms that are smaller, but best at something specific. The middle will disappear."
While that is happening, ONSET will be carefully encouraging new ventures — one or two per partner per year — using its principles of craftsmanship and sound business sense. "It's what we do," said Opdendyk.
ONSET Ventures specializes in providing an ideal mix of start-up, follow-on, and intellectual capital to entrepreneurs and early-stage technology ventures, to help transform world-class ideas into sustainable and valuable businesses. The firm has backed nearly 100 companies since 1984 and now has more than $700 million under management.
ONSET pioneered, and has refined over 20 years, a highly-optimized tool set for risk and capital management, and a shirt-sleeves style of active collaboration with entrepreneurs that leverages the firm's substantial operating experience. That collaboration frequently begins before the closing of any financing, and typically continues throughout the life of the venture. The combined process, which has become the hallmark of the firm, has resulted in ventures that have consistently met their operational and financing milestones. In addition, it has resulted in a franchise that not only brings successful, serial entrepreneurs back to ONSET Ventures time and again, but also attracts investors who want the increasingly rare opportunity to participate in very early stage venture investing.
ONSET Ventures focuses exclusively on information and medical technology-based start-ups, and has a long history of successful ventures in each of these sectors.