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Institutional Investor Profile: Spur Capital
22/08/2007. Source: AltAssets. 
AltAssets spoke to the team at Spur Capital Partners to find out about their views on early stage venture capital, on venture in the US and worldwide, on due diligence, on competition in the fund of funds market, and on what they think it takes to be successful in private equity investing.  Spur Capital Partners, established by Paul Fetsch, Paul Gompers, Joan Heidorn and Brad Kelly in 2001, is an early stage venture capital fund of funds manager with $340m of capital under management, split between Spur Ventures I and Spur Ventures II. Spur Ventures II is now just over 50 per cent committed.
Spur Capital is led by all four partners on an equal basis. Why did you choose this model?
'We are by our nature a very flat organisation. We believe that only people with extensive investment experience should invest in venture capital partnerships and that their decisions should be subjected to rigorous peer reviews.
At Spur Capital, every potential investment is assigned a "champion", a partner who will have to "defend" his investment proposal in front of the other three partners. It is our aim to create an environment where we can have an open dialogue, a critical debate, where each individual understands that it is not personal but about the topic of discussion.'
You worked together as a team before you established Spur Capital. Why did you decide to start your own firm?
'We felt we needed an unencumbered platform to invest in early stage, technology-focused venture capital partnerships. The four of us had worked together for quite a number of years, we had enjoyed each others' company, and had respect for each other professionally, but we felt we could make improvements in the process and wanted the firm to more fully reflect our own priorities and values, free from outside distractions.'
What type of investments do you look for?
'Our focus is on early stage venture capital. We remain convinced that if you invest with the right firms whose partners have deep operating experience, and if you stick with them over time, you can achieve outstanding returns. Industry data substantiates that early stage venture capital outperforms all other stages of venture capital over longer periods of time and through most cycles.
However, not many funds of funds operate solely in this space. The problem typically is that it can be difficult to get sufficient exposure to early stage venture capital. And for funds of funds that are balanced across all private equity sectors, the sheer weight of dollars committed to other sectors tends to overshadow the capital committed to early stage venture.
By backing funds that are focused on early stage companies we also get exposure to mid and late stage venture as those venture capitalists generally stay with their portfolio companies right through their various stages of development, up to an IPO or sale. We back early stage venture capital partnerships because we feel it is important that a venture fund gets involved early enough to have a positive influence on the ultimate outcome.'
Is access an issue for you?
'Our segment is still very competitive. Our tenure, extensive relationships and networks, do give us an advantage. There are a number of groups that we have backed consistently over very long periods of time.'
How many fund relationships do you currently have?
'Approximately 30 - mostly US and some overseas. Outside of the US, we have a strong position in Israel, largely attributable to our partner Paul Gompers. We have been saying for at least a decade now that we view Israel as a natural extension of the US West Coast model.'
Do you look at Asia?
'We have supported our US venture capitalists as they have moved into China. Our approach towards new markets is that we enter them through our existing US relationships before we start looking at local managers.
As Spur, we have not done investments in non US-linked funds based outside of the US and Israel yet. We gained experience investing in venture capital partnerships based in Europe and Southeast Asia at a previous institution. We prefer to be a little late to the party and get it right, rather than be premature.'
Within the US, where is your geographic focus?
'It is largely on Silicon Valley and a little bit on the North West. We are watching very closely the Southern California marketplace. Our two poles remain Silicon Valley and Boston.'
How do you put together a new portfolio?
'We always have a concept of the general mix in our portfolio, the mix between life sciences and IT, for example. We have been pretty consistent at running 75 per cent IT and 25 per cent life sciences. More specifically, we map out well in advance the funds we want in our fund's portfolio and when our targeted firms are expected to raise their new funds. We only back groups that we anticipate investing with fund over fund.'
How do you conduct your due diligence?
'Our due diligence starts prior to the first meeting. We are keen observers of the venture universe - we watch deals being done and who is backing those deals. The funds participating in the best deals are the ones we are keen to meet.
We spend an extensive amount of time meeting with the groups. Ideally, we build a relationship with a group over a number of years before we commit to one of its funds.
As discussions get more serious, we will drill down deep into past performance, the deals and personal track records. We need to feel confident that the people who made it happen in the past are the people who are available to make it happen in the future.
During the due diligence process all four partners at our firm speak with the fund manager. We have periodic team meetings and decide whether a proposition is worth others' time than the champion's. The champion keeps the strings together but the other three partners also get detailed insights into a fund's operations. We strongly believe in consensus. If the fund champion cannot convince the other three partners, there is something wrong with the proposition.'
How many funds do you look at in a year?
'This is not a numbers game for us, but we meet with a lot of groups.'
What do you look for in a good private equity manager?
'We like teams with a relatively narrow focus but deep domain expertise. Paul Gompers' research substantiates the correlation between domain expertise, focus and performance. The demonstrated outperformance is significant.'
What is your bite size per fund?
'Our range is $10-15m. That is the right range for our funds.'
What is your appetite for first-time funds?
'You need fresh teams. We always consider - and have in the past occasionally committed to - first-time funds.
It is important to us that at least one of the founders has some venture capital experience that we can test and validate. This is a dynamic industry, people do shift, groups reform, but you can usually follow the thread.'
Are you interested in co-investment opportunities and secondaries?
'We take a selective view of co-investments and secondary transactions as a possibility. It is within our remit to do them if the opportunity is right. We will only consider a secondary purchase of a firm we have already targeted for investment.'
Who are the investors in your funds of funds?
'We do not wish to name them but we are keen to stress that we are as focused on our LP base as we are on our venture capital investment opportunities. We have made the conscious decision to exclude from our LP base US governmental funds and other institutions that have issues regarding the Freedom of Information Act. If we allowed those LPs to participate in our fund of funds programme, it would have an impact on our access to certain venture capital funds that do not allow LPs with Freedom of Information Act issues to come into their funds. Our attitude is that we should not accept any LP that would not be acceptable to the most selective of our venture capitalists on a direct basis.
Much as we like to become acquainted with venture capital groups well before they are raising capital, we also take the same approach in becoming familiar with our potential LPs well in advance of our fundraisings. We want adequate time to get to know them and we want them to have adequate time to get to know us.
Just to give you a flavour, our client base consists of roughly 50 per cent Western European and 50 per cent US investors. In the US our LPs are almost exclusively university endowments and foundations, and in Europe they are large financial institutions, including pension funds.'
How competitive is the fund of funds market?
'No question, there are a lot of new entrants. There are certainly the asset gatherers (and in some respect it is easier to raise a $1bn fund of funds than it is to raise a focused multi-hundred-million dollar fund of funds), but we do not really view them as true competitors. They might be, to some extent, on the fundraising front, but not when it comes to accessing the best fund investment opportunities because we are very focused investors and we are well known in our niche.'
What advice would you give to an investor new to private equity investing?
'Do your homework, look at private equity as a relationship business and be very patient. In this asset class you just cannot get your exposure overnight. Establish the right relationships and stick with them over time.'
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