Seattle venture firms Encompass and Digital plan to merge

In a rare move, two Seattle-area venture capital companies this week decided to
merge.

Seattle-based Digital Partners, with $36 million under management, and
Bellevue-based Encompass Ventures, with $64 million under management,
combined in what partners at the two firms called a unique but powerful
relationship.

By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER

The merger is one of the first signs of consolidation in Seattle’s venture capital
community, which during the past two years has been hit hard by slumping
returns brought on by the dot-com bust.

"It is a little different," said Bill Tenneson, managing partner at Digital Partners.
"But the combined companies have a track record that stacks up with any other
information technology venture fund in the Northwest."

The new firm, which will keep the Encompass Ventures name and headquarters,
will have a staff of 11, including five partners. No layoffs are planned.

Partners at the combined firm hope the merger will help them as they set out to
raise about $200 million in what would be their first fund.

Although Encompass Ventures and Digital Partners have been around for less
than five years, they have established a solid record in the Pacific Northwest. Of
their 50 investments, 16 have gone public and five have been acquired by public
companies on favorable terms. Together, the two firms have distributed more than
$300 million to limited partners. Encompass Ventures, which spun off from its
corporate parent last year, was an early investor in Bsquare, Data Critical, F5
Networks and RealNetworks. Digital Partners, formed by Tenneson and former
Price Waterhouse managing partner Dan Regis, has stakes in Entomo,
LizardTech, Ontain Corp. and Wavelink Corp.

Some of their failed bets include Portland-based Djangos, Mount Vernon-based
Etera, Point.com, formerly of Bothell, and HomeGrocer.com, formerly of Kirkland.

The merger comes amid uncertain times in the venture capital business. In the
past three months, several firms — including Silicon Valley heavyweights Kleiner
Perkins Caufield & Byers and Mohr Davidow Ventures — have reduced fund size
because of fewer investment opportunities and pressure from limited partners.

Meanwhile, smaller funds such as The Barksdale Group of Menlo Park, Calif.,
have dissolved rather than face the uncertainties of the rocky fund-raising market.

Returns to venture funds fell by 32 percent for the 12 months ending in
September, according to Venture Economics and the National Venture Capital
Association. Some industry watchers have predicted that those returns could get
much worse in the coming months as venture investors further write down the
value of poorly performing companies.

Many have predicted a major shakeout among venture capital firms in the next
three years.

Although Tenneson and Wayne Wager, managing partner at Encompass
Ventures, admit that the current fund-raising environment is tough, they said the
merger is not a signal of distress at either firm.

"We would be doing this if it was a positive, frothy venture capital market," said
Wager, who first discussed the idea with Tenneson over lunch at the Metropolitan
Grill six months ago. "This is a just a good thing for us to do fundamentally."

Yet, both Wager and Tenneson admit that they will have a better chance of
success raising money as a combined organization.

Wager also said the merger will provide more management horsepower for his
firm’s portfolio companies. For the institutional investors in the fund, Wager said
they are "really getting two for the price of one."

Tenneson said he is looking forward to exposing his firm’s portfolio companies to
Encompass Ventures, which over the years has established strong ties in Asia.

Existing funds of the two companies will not be combined as part of the merger,
with Tenneson saying both organizations will manage that money independently.

Digital Partners has about $15 million leftover from its $36 million fund.
Encompass Ventures has about $5 million remaining.

P-I reporter John Cook can be reached at 206-448-8075 or
[email protected]

http://seattlepi.nwsource.com/business/64594_venture30.shtml