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As it adds Jeremy Milken to the partnership, Watertower Ventures nears $50 million close for its new fund

Derek Norton and Jeremy Milken have known each other for twenty years. Over their longtime personal and professional relationship, the two Los Angeles-based serial entrepreneurs have invested in each other’s companies and investment firms, but never worked together until now.

Milken is taking the plunge into institutional investing, joining Norton as a partner in Watertower Ventures just as the firm prepares to close on a $50 million new fund.

It’s an auspicious time for both Los Angeles-based businessmen, as the LA venture community sees a wave of technology talent relocating from New York and San Francisco in the newly remote work culture created by the COVID-19 epidemic.

“I see two things happen. One people look at the effects of where the market’s going. We’re seeing a lot more companies that are starting up now as a result of a [the pandemic],” said Norton. “New company formation is happening faster than before covid. [And] a lot of venture capitalists that have relocated to LA. They’ve moved down to LA for lifestyle reasons and they’re saying that they don’t need to go back to San Francisco.”

For Milken, the opportunity to get into venture now is a function of the company creation and acceleration of digital adoption that Norton referenced. “The pandemic is accelerating change in the marketplace. Things that might have taken a decade are taking two years now,” Milken said.

These opportunities are creating an opening for Watertower Ventures in markets far beyond the Hollywood hills. The firm, whose original thesis focused on Los Angeles, San Francisco, and New York, is now cutting checks on investments in Texas and Utah, and spending much less time looking for companies in the Bay Area.

Derek Norton, founder, Watertower Ventures: Image Credit: Watertower Ventures

Norton’s latest fund is the only the most recent act in a career that has seen the investor traverse the financial services digital media and the early days of the internet. Norton built Digital Boardwalk, a pioneering internet service provider and the second commercial partner for the trailblazing browser service, Netscape.

Later, at Jeffries Technologies, and the $120 million Entertainment Media Ventures seed and early stage venture capital fund, Norton was intimately involved in bringing tech to market and focusing on early stage investments. With that in mind, the Watertower Ventures group, which launched in 2017 with a small, $5 million fund, is a return to those roots.

The plan, even at the time, was always to raise a larger fund. After founding and running the boutique investment banking business at Watertower Group, Norton knew he had to raise a starter fund to prove the thesis he was working on.

That thesis was to provide a bridge between early stage companies and large technology companies using the network that Norton has built in the Southern California tech and entertainment community over decades.

“We want to take our contacts at Google, Apple, Facebook, Disney, Microsoft, Cisco, Verizon, AT&T, Comcast, and other companies we believe should have a relationship with our portfolio companies, and help the CEOs and management teams more effectively do business development,” Norton told SoCal Tech when he closed his first fund in 2017. “We want to connect them to the right person at those companies to create a commercial relationship. That has a really large impact on early stage companies, who typically don’t have a deep network of relationships, and the ability to get to those type of people. It’s because of our advisory business that we have those relationships, and that’s also why those relationships stay fresh and active, versus people who aren’t in those businesses. It’s almost a full time job to maintain that, and that’s where our value-add is.”

Milken, who has spent his professional career in entrepreneurship, was ready to try investing, and was intimately familiar with Watertower and its portfolio, as an investor in the firm’s first $5 million fund.

“Two years ago we started having those conversations,” said Norton in an interview. “As Jeremy exited his business in September it created the opportunity to go out and raise together as the evolution of our partnership.”

Jeremy Milken, general partner, Watertower Ventures. Image Credit: Watertower Ventures

With the new capital coming in, Norton expects to back some 30 to 35 companies, he said. And, in a testament to the first fund’s performance, which has it in the top decile of venture funds for its vintage, Norton said he was able to raise the capital amidst the economic uncertainty caused by the COVID-19 pandemic. Some 70 percent of the existing portfolio has been marked up, according to Norton.

Even though limited partners, the investors who back venture funds, were reluctant to commit capital to new firms in March and April, fundraising returned with a vengeance in June and July, according to Norton. The paper performance likely was enough to woo additional limited partners and individual investors including TikTok chief executive Kevin Mayer, the former head of streaming at Disney.

Mayer’s presence in the firm’s investor base is a testament to the firm’s pitch to founders. “We view fundraising as a massive distraction for these early stage companies from their business. We try to deliver that network that’s ours to those founders,” said Norton.

“I think we’re in a unique position starting with a fresh fund here,” says Norton. “Uncertainty creates opportunity and people are bringing solutions. We haven’t noticed any slowdown whatsoever, we’re working with twenty five companies per week. Since the inception of the fund, we haven’t seen deal flow at this level.”

Kleiner Perkins has already blown through much of the $600 million it raised last year

Kleiner Perkins, one of the most storied franchises in venture capital, has already invested much of the $600 million it raised last year and is now going back out to the market to raise its 19th fund, according to multiple sources.

The firm, which underwent a significant restructuring over the last two years, went on an investment tear over the course of 2019 as new partners went out to build up a new portfolio for the firm — almost of a whole cloth.

A spokesperson for KPCB declined to comment on the firm’s fundraising plans citing SEC regulations.

The quick turnaround for KPCB is indicative of a broader industry trend, which has investors pulling the trigger on term sheets for new startups in days rather than weeks.

Speaking onstage at the Upfront Summit, an event at the Rose Bowl in Pasadena, Calif. organized by the Los Angeles-based venture firm Upfront Ventures as a showcase for technology and investment talent in Southern California, venture investor Josh Kopelman spoke to the heightened pace of dealmaking at his own firm.

The founder of First Round Ventures said that the average time from first contact with a startup to drawing up a term sheet has collapsed from 90 days in 2004 to 9 days today.

Josh Kopelman of First Round Capital: we can look at every company we’ve ever funded, and learned that the time from first email/contact to term sheet has shrunk from 90 days in 2004 to just 9 today.

— Dan Primack (@danprimack) January 29, 2020

 

“This could also be due to changes in the competitive landscape … and there may be changes with First Round Capital itself,” says one investor. “It may have been once upon a time that they were looking at really early raw stuff… But, today, First Round is not really in the first round anymore. Companies are raising some angel money or Y Combinator money.”

At KPCB, the once-troubled firm has been buoyed by recent exits in companies like Beyond Meat, a deal spearheaded by the firm’s former partner Amol Deshpande (who now serves as the chief executive of Farmers Business Network) and Slack.

And its new partners are clearly angling to make names for themselves.

“KP used to be a small team doing hands-on company building. We’re moving away from being this institution with multiple products and really just focusing on early-stage venture capital,” Kleiner Perkins  partner Ilya Fushman said when the firm announced its last fund.

Kleiner Perkins partner Ilya Fushman

“We went out to market to LPs. We got a lot of interest. We were significantly oversubscribed,” Fushman said of the firm’s raise at the time.

In some ways, it’s likely the kind of rejuvenation that John Doerr was hoping for when he approached Social + Capital’s Chamath Palihapitiya about “acquiring” that upstart firm back in 2015.

At the time, as Fortune reported, Palihapitiya and the other Social + Capital partners, Ted Maidenberg and Mamoon Hamid would have become partners in the venture firm under the terms of the proposed deal.

Instead, Social + Capital walked away, the firm eventually imploded and Hamid joined Kleiner Perkins two years later.

The new Kleiner Perkins is a much more streamlined operation. Gone are the sidecar and thematic funds that were a hallmark of earlier strategies and gone too are the superstars brought in by Mary Meeker to manage Kleiner Perkins’ growth equity investments. Meeker absconded with much of that late stage investment team to form Bond — and subsequently raised hundreds of millions of dollars herself.

Those strategies have been replaced by a clutch of young investors and seasoned Kleiner veterans including Ted Schlein who has long been an expert in enterprise software and security.

“Maybe at this point they think they can raise based on the whole story about Mamoon taking over and a few years from now they won’t be able to raise on that story and will have to raise on the results,” says one investor with knowledge of the industry. “Mamoon is a pretty legit, good investor. But the legacy of the firm is going to be tough to overcome.”

All of these changes are not necessarily sitting well with limited partners.

“LPs are not really happy about what’s going on,” says one investor with knowledge of the venture space. “Everybody thinks valuations are too high since 2011 and people are thinking there’s going to be a recession. LPs think funds are coming back to market too fast and they’re being greedy and there’s not enough vintage diversification but LPs … feel almost obligated that they have to do these things… Investing in Sequoia is like that saying that you don’t get fired for buying IBM .”

Chipmaker Renesas goes deeper into autonomous vehicles with $6.7B acquisition

Japan-based semiconductor firm Renesas — one of the world’s largest supplier of chips for the automotive industry — is scooping up U.S. chip company IDT in a $6.7 billion deal that increases its focus on self-driving technology.

Renesas produces microprocessor and circuits that power devices, and automotive is its core focus. It is second only to NXP on supply, and more than half of its revenue comes from automotive. IDT, meanwhile, includes power management and memory among its products, which focus on wireless networks and the converting and storing of data. Those are two areas that are increasingly important with the growth of connected devices and particularly vehicles which demand high levels of data streaming and interaction.

The acquisition of IDT — which is being made a 29.5 percent on its share price — is set to expand Renesas’ expertise on autonomous vehicles. The firm said it would also broaden its business into the “data economy” space, such as robotics, data centers and other types of connected devices.

Renesas has already demoed self-driving car tech, which puts it into direct competition with the likes of Intel . Last year, the firm paid $3.2 billion to buy up Intersil, which develops technology for controlling battery voltage in hybrid and electric vehicles, and IDT deal pushes it further in that direction.

“There’s little overlap between their product portfolios, so it’s a strategically sound move for Renesas. But it does seem like the price is a little high,” said Bloomberg analyst Masahiro Wakasugi.

The IDT deal has been on the table for a couple of weeks after Renesas first revealed its interest in an acquisition last month. It is expected to close in the first half of 2019 following relevant approvals.

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