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An inside look at high-tech start-ups and their investors
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Kevin Kinsella founded Avalon Ventures in 1983, which seems like eons ago in the history of venture capital.
The Avalon Ventures team
But the San Francisco area was getting crowded even back then, and Kinsella figured, “I want to be at least a medium-size fish in a small pond.” So he set up shop in the San Diego area, where the weather is better and “in the summertime you can swim in the ocean.”
The years have been good to the La Jolla, Calif.-based firm, which recently blasted by a $150 million target to close its ninth fund at $200 million, its biggest yet.
Meanwhile, other VCs in the San Diego pond have struggled. In 2007, Enterprise Partners Venture Capital scuttled plans for a seventh fund after several key life-sciences investors left. Mission Ventures hasn’t raised a fund since 2005. And Forward Ventures closed its last fund in 2004, well below its target.
It certainly helps that Avalon has a very hot company in its portfolio, Zynga Game Network Inc., which The Wall Street Journal reports could be valued at more than $7 billion. But that alone isn’t going to draw limited partners like Harvard Management Co. and Grove Street Advisors.
What Avalon has done over nearly three decades is stayed small – it has six managing directors – and focused on early-stage deals in information technology and life sciences. “We’re small enough or flat enough so I’ve got to say there’s no politics in our firm,” said Kinsella, a Massachusetts Institute of Technology grad who previously ran international joint ventures for Solar Turbines International, now part of Caterpillar Inc. “We’ve always been a partners-only firm,” he said. “We’ve never had associates.” Kinsella thinks this is especially important now when competition and smaller deal sizes place a premium on fast decisions. He said one of his partners jokes that with a $200,000 investment, “due diligence is what you do when you don’t want to do a deal.”
Avalon also has established a presence on the East Coast, although the majority of companies it has backed since its start are based in California. The Cambridge, Mass., office was opened in 2007, sharing space with Masthead Venture Partners, a firm where Avalon’s two Cambridge partners previously worked.
Currently, though, Avalon is worried about its health-care business. With IPOs representing unlikely exit strategies and big pharma in the driver’s seat on mergers and acquisitions, Kinsella called it a “very predatory environment for deal making.” In his view, “We’re getting very close to a breaking point in the ecosystem between the pharmaceutical companies and biotech.”
The firm is being careful about making biotech investments and is looking to areas such as animal health, where the players are different. Avalon recently backed Aratana Therapeutics Inc., a Kansas City, Kan.-based company developing drugs to treat diseases in pets such as cancer. Avalon led the $20 million Series A round along with MPM Capital.
Meanwhile, the consumer Internet sector is super hot, and Zynga is one of its stars. The social-gaming company has drawn big money from later-stage investors including Russia’s Digital Sky Technologies. But Avalon was in on the ground floor, joining the company’s $10 million first round in 2008, which was led by Foundry Group and Union Square Ventures. Avalon’s Rich Levandov has known Zynga founder and Chief Executive Mark Pincus for years, Kinsella said. When Pincus came up with the idea of using Facebook as a platform to spread social games virally, Levandov was impressed.
“It was an easy investment decision for us,” said Kinsella. |
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