Crosslink's Michael Stark says hybrid hedge-VC fund investing helps beat markets

Even as hedge funds become more active in venture capital investment and traditional venture investors get more active in later-stage investing, the firm with the most established model as a true hybrid has closed its largest fund to date.

Crosslink Capital of San Francisco announced Wednesday, Jan. 30, it has closed Crosslink Crossover Fund V LP with $400 million, up from its $280 million Crossover IV Fund, to invest in multistage venture capital deals and in the public markets. The fund continues a 12-year record of concentrating on traditional venture technology investments, but with an active sideline of public market trading in the same sectors.

Crosslink co-founder Michael Stark said the firm uses its hybrid structure to alter its investment strategy depending on market cycles, noting that Crosslink made only one venture investment from June 2000 to December 2001, but that it has made 11 in the past nine months alone. The firm typically invests all of its committed capital from new funds in liquid investments, then draws down funds for its venture deals.

Crosslink finished making new investments from its Fund IV last March when it completed a first close on the new fund, and it began investing from Fund V, leading a $15 million Series D round for Santa Barbara, Calif.-based OpSource Inc., a hosted Web applications delivery company.

Crossover has about $800 million of its $1.4 billion under management invested in the public market. The firm takes both trading positions in public companies, and long-term investments through negotiated private investment in public equity, or PIPE, deals.

"We have an active trading desk that is buying stocks every day, but we have a longer term approach than a hedge fund, though with a similar structure," Stark said. "The fund really is a true hybrid between a hedge fund and a venture capital fund, and we believe this investing strategy represents a superior risk-adjusted way to invest in growth equities."

Crosslink maintains a management fee of 2% with a carried interest of 20%, as do most venture firms, and Stark said investors with strict allocation budgets typically invest from allocations for venture capital and private equity.

As with the previous fund, Crosslink's Fund V will focus on investments in alternative energy, consumer Internet, IP services, software-as-a-service and specialty chip companies. Stark said the firm maintains the same sector focus in public investments and frequently plays a venture-like role with public companies, including taking board seats in PIPE deals. The firm also engages in short-term trading, such as short-selling of stocks.

Stark said that since raising its first fund in 1995, Crosslink has expanded its work force and gradually increased deal size, noting that the firm is not specifically bulking up for the new fund. But Crosslink is adding two general partners to the new fund, with head trader Paul Sabo and early-stage Internet and software investor Peter Rip stepping up.

Stark said Crosslink raised about $300 million of the new fund from previous investors, with all of the firm's major limited partners returning, and $100 million from a small group of new investors.

Crosslink used no outside financial adviser. It had legal services from Shartsis Friese LLP in San Francisco.