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Quiet, Successful Venture Firm Is About to Make Some Noise

By Steven Lipin and Kara Scannell
The Asian Wall Street Journal 20 April 2000

With Investment, U.S.-Based General Atlantic Spreads Its Global Wings

American International Group's $1 Billion Shows Tech Investing Lives

GREENWICH, Connecticut -- Silicon Valley this isn't. But in a humdrum office complex in this town known more as home to Wall Street and CEO types than a hotbed of venture investing sits one of the most influential private investment firms in the U.S.

Though General Atlantic Partners LLC is low-profile compared with flashy venture-capital firms elsewhere, its successes aren't: Priceline.com Inc., E*Trade Group Inc., Legent Corp., Sierra Online and Baan Co. In 20 years, the firm hasn't issued a news release on its own letterhead.

That is by design. Known simply as "GA" to venture-capital pros, the firm was founded by two partners from consulting firm McKinsey & Co. to build a private investment firm for Charles F. Feeney, the billionaire co-founder of Duty Free Shoppers Ltd. The firm now has seven limited partners. Between its investors and the firm's own employees, General Atlantic has $3 billion on hand to invest and $6 billion already invested. But it has no institutional money.

That's about to change. Wednesday, in a sign that money continues to pour into tech investments -- even with the pounding that such companies' shares took last week -- big New York insurer American International Group Inc. said it plans to invest $1 billion over five years in General Atlantic and acquire a 5% stake in the firm to help fund a global expansion.

General Atlantic already has 25% of its investments outside the U.S., primarily in Europe, and the AIG venture will not only increase the firm's kitty to $4 billion but allow it to boost its global aspirations.

"It behooves us to find a global partner," said Steve Denning, the firm's managing partner, in his end-of-the-hall office scattered with art and business books. "It wasn't the capital that drove" the AIG partnership, he added, but the "deep global experience AIG had developed over 80 years."

General Atlantic has racked up returns that investors say are 2.5 to three times the average 20-year returns for venture-capital firms of 17% annually, as tabulated by Venture Economics. Its $14.4 million investment in E*Trade is valued at over $500 million.

But with everything going well now, what could throw General Atlantic off its game? The firm faces fierce competition from the flood of capital chasing ideas and early-stage companies. Every banker and leveraged-buyout firm has been cast as a venture capitalist these days. And being low-profile can cut both ways: "They're probably not as well-known as other venture-capital firms," said Bob Emery, president of FleetBoston Financial's Robertson Stephens investment bank.

Also, given the firm's aspirations, it needs "a larger scale of resources to stay in the game the way they want to play it," said William Pade, managing partner at McKinsey, who advises some General Atlantic companies.

Like most venture firms, General Atlantic has had some failures. And some of its stocks have crashed lately, such as Eclipsys Corp., an online health company whose stock has sunk 63% since mid March despite a deal to sell to Neoforma.com. Tickets.com has also been crushed, falling to under $5 a share from highs of $32. And Predictive Systems, a network consulting firm, is off 58% from its highs. Still, those investments remain in the black.

But unlike many venture-capital firms, which expect to lose money on one-third of their investments, General Atlantic says that of more than 80 investments, only three have lost money -- including the first one, a $4 million 1981 investment in Transportation Management Systems, which produced turnkey systems for the moving and storage industry. Nevertheless, its conservatism also resulted in missing a big success with Amdocs Ltd., but the firm had already invested in a rival in the same business who thought it would be too competitive.

Indeed, one of General Atlantic 's strengths is being a close partner for entrepreneurs, willing to be active in management both before and after going public. It has done deals recently with Zagat Survey and Staples.com. At a time when many dot-com companies have watched their share prices plummet, many companies may need a lifeline from their venture capitalists.

"They're the best partners I've ever had," said Jay Walker, the founder of Priceline.com, in which General Atlantic made a major investment, and the head of Walker Digital, an intellectual-property incubator. "I only invited one firm to invest in (Walker Digital). It was GA."

As tech stocks struggle, assuming rallies like Tuesday's don't become the norm, "there's going to be much more discrimination in the marketplace" for initial public stock offerings and private-equity investments, said Richard Braddock, whose ties to General Atlantic helped land him the position of chief executive of Priceline. "As the flight to quality happens, people who are credibly able to place investments on a substantial basis will be much better equipped."

Now, the firm is clearly upping the ante. General Atlantic is doing more deals than ever before -- 20 to 25 investments a year, up from 15 a year -- and will invest in any stage of a company's life. It is also investing $150 million to co-found efinanceworks, a company incubator that is focused on financial-services companies. "The next 10 years will prove to be much more challenging for venture-capital firms, and General Atlantic will have to keep changing," said David Hodgson, a partner at the firm.

Enter AIG. Mr. Denning said General Atlantic retained Greenhill & Co. to review which firm to try to align with and concluded that AIG would be the best partner to maintain its competitive advantage.

M.R. "Hank" Greenberg, AIG's chairman and chief executive, said, "We've had some technology investments but were less than satisfied where we were. That call from Bob Greenhill sparked our interest, and we pursued it from there."

In addition to its cash, AIG brings a global presence, particularly in Asia. AIG hopes to shepherd opportunities to General Atlantic from AIG's private equity business "if it's something in technology where they had the knowledge and are better able to analyze it," said Mr. Greenberg.

General Atlantic 's 11 partners are a mix of McKinseyites and Wall Street bankers, executives with experience at smaller tech companies and International Business Machines Corp.

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