Dallas Business Journal - by Jeff Bounds Staff writer

A pair of venture capital industry veterans have started an investment shop with a unique approach to taking stakes in privately held technology companies.

Delta-v Capital plans to put about two-thirds of its investment capital to work in acquiring equity stakes in tech businesses from other investors, ranging from venture capitalists and hedge funds to corporations, wealthy individuals and current and former executives. The other third of its business involves making direct injections of money into the tech businesses as part of a restructuring or recapitalization.

Delta-v may also make direct investments into the companies in conjunction with buying out other investors, said Dave Schaller, a Dallas-based co-founder and managing director.

Schaller launched the business last year with the firm's other managing director, Rand Lewis, who is based in Denver.

Using this combination of buying other parties and making direct investments, Delta-v has acquired stakes in three businesses: California-based Brand.net, which runs an online advertising network; Illinois-based Extenet Systems Inc., which provides advanced antennas to improve the call quality of wireless phones; and the Colorado medical-device company Lanx.

Analysts say that Delta-v's investment strategy makes sense because many private company investors need to cash out, for one reason or another.

"I can't say that I've seen a lot of people doing this, but (Delta-v's) presence doesn't surprise me," said Ricky Richter, venture capital advisory group leader at Ernst & Young LLP's Austin office.

Delta-v takes its name from an astrodynamics term for "the effort required to go from one trajectory level to another," Schaller said.

The firm will typically invest $3 million to $7 million per portfolio company, Schaller said. Unlike venture capital firms- in which both Schaller and Lewis have lengthy experience - Delta-v invests in growing companies whose products and business models are established, and that have at least $20 million in revenue.

"We expect to do six to eight investments" in the current fund, Schaller said.

Up to $30M to invest
Delta-v will invest about $25 million to $30 million per year. The firm launched its first fund in September 2009 and plans to raise a larger fund late this year or early in 2011.

The firm raised its money last year from a group of unnamed backers from outside North Texas, including the investment arms of a few wealthy families and a large "fund of funds."

A fund of funds puts capital to work by investing in select private equity or venture capital funds, which in turn deploy the cash directly into companies.

"We were encouraged to spend our time making investments rather than raising larger funds throughout 2010," Schaller said.

He and Lewis didn't have to go far from their previous jobs to find office space. Schaller previously was a member of the investment team at CenterPoint Ventures and now has an office on the 16th floor of Two Galleria Tower in Dallas alongside CenterPoint and Sevin Rosen Funds. Meanwhile, Lewis' Denver office is in the same space as his previous employer, Centennial Ventures.

jbounds@bizjournals.com | 214-706-7122

Two venture capital pros are forming a shop that would buy portfolio-company stakes from private equity firms. The men, Rand Lewis and David Schaller, are calling their secondary-direct project Delta-v Capital. The plans still aren't solid, but in sit-downs with investors in recent weeks the pair has suggested that a formal fund-raising campaign could come within a couple of months.

In addition to his work on Delta-v, Lewis is a managing director at Centennial Ventures of Denver. Schaller holds the same title at Dallas-based CenterPoint Ventures. Both plan to phase out of their present jobs as the effort takes shape.

Lewis and Schaller are characterizing Delta-v as a firm that would focus on so-called orphan investments - companies at all stages of development that received prior funding from venture capital shops but have lost access to further backing as those firms scale back their activities. As those deals would often amount to turnaround plays, the duo is describing Delta-v as having a special-situations bent.

Lewis and Schaller are also touting their experience in the venture capital field as a particular advantage in identifying attractive technology-company investments. The situation is somewhat reminiscent of one in which Zone Ventures of Los Angeles is trying to start a secondarymarket exchange. But that effort, led by managing director N. Darius Sankey, would cater specifically to smaller angel investors interested in buying and selling investments. One thing the Zone initiative and Delta-v have in common is that both seek to fill a need among private equity investors to liquidate holdings as the global financial crisis drags on.

It's unclear how quickly Lewis will transition out of his job at Centennial. His exit comes as little surprise, as market players have long speculated that the firm wouldn't assemble a follow-up to its seventh fund, which collected $340 million in 2001. CenterPoint's fate is also uncertain. Sources said Schaller plans to leave later this year.

By Laura Kreutzer

It's do-or-die time for many venture-backed start-ups as consolidation in the venture capital world leaves a growing number of investors short on cash to support even their most promising portfolio companies. But two venture capitalists from Centennial Ventures and Centerpoint Ventures are forming a new firm that aims to help those start-ups in part by purchasing the stakes of their cash-strapped shareholders.

Rand Lewis, a managing director at Centennial, and David Schaller, a managing director at Centerpoint, are still in the early stages of forming Delta-v Capital but eventually aim to raise a direct secondary fund that will focus heavily on growth technology companies, according to one limited partner that is considering an anchor commitment to the firm. As part of its investment strategy, the firm would also provide some additional money to help fund the companies' growth going forward.

Schaller and Lewis understand all too well the dilemmas facing venture capital firms, as neither of their firms have current plans to raise new funds. The pair will be able to draw heavily on their venture capital experience not only to source deals but also to bring expertise to the portfolio companies that they back. Schaller joined Centerpoint as a partner in 2002 after founding three companies and became a managing director in 2005. Lewis has been with Centennial since 1999. Before that, he worked as a consultant with McKinsey & Co. in the U.S. and Brazil focusing on telecommunications and also had experience as a software engineer at U.S. West.

Schaller declined to discuss any of Delta-v's plans, citing SEC regulations. However, Schaller predicted that investment opportunities for direct buyers will extend well beyond those start-ups backed during the 1999 and 2000 period. He pointed to a second venture fund-raising bubble that took place between 2004 and 2007, which he calls the "mulligan bubble." "Funds that had good records in the 1990's got hall passes for their 1999 funds, because none of those did well," he said. "But often many things had changed within their strategies or their partnerships. We see that the direct secondary opportunity will be a long-term option for shareholders seeking liquidity."