Near the height of the tech bubble, your firm raised a $2.3 billion fund. Looking back, was that too big?
I don't think so. We raised that fund in September of 2000. The investing cycle for that fund lasted a little over three years, which is what we targeted. I think it was spot on for the market and our organisation at the time.
We've since shifted our mix of investments and we've made some organisational changes that have led to something of a downsizing. So the smaller fund is more appropriate on a going-forward basis.
What is different about the strategy of the new fund?
If you look at earlier funds [during the early and mid-1990s] we were focused on information technology and healthcare, but the mix between the two was fairly well balanced – fifty-fifty, plus or minus ten percent. Then, as we got into the heyday of the Internet bubble, we found ourselves changing that mix closer to 80/20 or 90/10, IT-bias. We've now recognised that we need to shift that balance back to something that is more evenly balanced.
So your firm has hired healthcare investment professionals and scaled back on it experts?
What did investors talk to you about while you were on the fundraising trail?
Several LPs asked us what kind of returns we thought we could generate. We're not in the business of making predictions like that. Clearly, we know we're not going to be delivering the triple-digit IRRs that were common in the bubble. But we're very comfortable with the concept that we're going to deliver a significant premium to public equities.
Over II funds, what about NEA has remained the sAME, AND WHAT HAS EVOLVED?
If you look back to our earliest funds and compare them to today, there are some common threads. We've always focused on early stage. We've had critical mass organisations on both coasts.
From day one, our terms have been quite different from the industry norm. We've had an expense-based fee structure and an advisory group that we treat like a board of directors in a corporate environment.
We sit down with our investment committee – our board of director made up of many of our largest limiteds and a few independent people – and in the fourth quarter of each year we present them a budget for the next year and get their approval. It's a line-item budget, just like a corporation would present to its board of directors. Inclusive in that is our current compensation. So our compensation doesn't float with fund size, like a management fee does.
Budgeted fees are rare in this industry, but it is something that many LPs find attractive. Has anyone contacted you about this?
Several people in the industry have asked us how we do it – both GPs and LPs. But I don't think you're going to see a lot of GPs making that change. I think it's hard to change the way firms have operated. We've been doing it since day one and we think it aligns our interests with LPs. The quid-pro-quo is we get a carried interest that is at the higher end of the spectrum. It's a 30 percent carry. If we perform well, we do well.
As our fund sizes got larger, we didn't see the commensurate increase in current comp that other firms in the industry did. I think there is now more of an appreciation as to how limited-partner friendly our terms are, and how our terms are aligned with limited partner interests.