FEBRUARY 1, 2006
FELDA HARDYMON JOSH LERNER ANN LEAMON
Adams Capital Management: Fund IV
Joel Adams, founder and general partner of Adams Capital Management (ACM), a $700 million early-stage venture capital firm investing in the information technology, networking infrastructure, and semiconductor industries, glanced up as his fellow general partners trooped into his office on a brisk December morning in 2005 for their annual retrospective and planning meeting. The main topic on the agenda was a new one, —would 2006 be the right time to launch their fourth fund? Since late 2000, ACM had been deploying its $420 million third fund, using its “markets first” strategy, an approach that identified and sought to take advantage of discontinuities within the three industry segments it targeted. Having invested in a company exploiting such a change, the general partners then guided the investment through a five-point structured navigation system. In November 2005, ACM III sold a portfolio company and made its first distribution to its limited partners (LPs). The fund’s portfolio also had 18 other operating companies that were showing steady growth, and two new investments were in the due diligence phase and preparing for final negotiations. “The question as I see it,” said Adams to his partners, “is whether we need to exit more companies and generate additional distributions to our LPs before we start raising ACM IV.” Since ACM's first fund had closed in 1997, the investment environment had gone from robust to hysterical to deflated and now, finally, to what appeared to be a modest recovery. Likewise, ACM’s performance had been whipped about. Fund I was almost top-quartile, Fund II could return capital with a few breaks, and Fund III, a 2000 vintage fund was “too new to tell, “Adams noted (see Exhibit 1 for performance data). The firm had adopted its strategy in part to differentiate itself for potential LPs. But the partners also believed that the pure opportunistic approach of many venture firms—where each general partner was often given wide leeway in determining which, and how many, markets and business models to invest in—could cause the firm to lose sight of the portfolio as a whole. Without a “markets first” strategy, through which the entire firm agreed upon the markets of interest before considering individual companies, the partners felt that firms would invest more on the basis of the fashion of the moment than on business fundamentals or market analysis. In Fund III, ACM had taken more significant ownership positions than in the past—typically 35% or more—led every deal, and held a seat on every board. In 85% of the fund’s investments, it was the first institutional money in the company. Adams believed that this was the only way to respond to the sharply reduced volatility of the venture capital market: “build a collection of really good companies and own enough of them to matter.” ________________________________________________________________________________________________________________ Professors Felda Hardymon, Josh Lerner, and Senior Research Associate Ann Leamon wrote the original version of this case, “Adams Capital Management: March 2002,” HBS Case No. 803-143 which is being replaced by this version prepared by Professor Felda Hardymon and Senior Research Associate Ann Leamon. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,...
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