Joel Adams: Founder and General Partner

Originally the lead engineer for General Dynamics, a nuclear submarine

manufacturer, but moved to work part time for Fostin Capital, a small VC firm. Then
became involved with APA/Fostin 1, a joint 40 million dollar fund that the state of
Pennsylvania wanted to invest in VC.
In 1994, Adams, his CFO Andrea Joseph, Secretary Lynn Patterson and former
partner Bill Hulley formed ACM to hand the Fostin portion of the $60 million
APA/Fostin 2 that was raised in 1992.
ACM Fund 1 was raised in 1997 for a fund value of $55 million using its
characteristic markets first strategy.
Adams Capital Management and Fund 3:
Adams Capital Management (ACM) is a $700 million venture capital firm that invests
in early stage companies in the IT, networking infrastructure and semiconductor
industries, found by Joel Adams.
As of late 2000, ACM has been deploying its third fund worth $420 million dollars
using its market first strategy where the entire firm agrees on the markets on
interest before considering the individual companies. The reason being that would
invest more on a spur of the moment decision opposed to relying on business
fundamentals or market analysis and also to differentiate the firm for potential
future LPs.
Compared to previous funds, ACM Fund 3 has a more ownership orientated focus
with 35 higher ownership stakes and 85% of its investments being the first
institutional money entering the company. Quoting Adams build a collection of
really good companies and own enough of them to matter. However, also has
higher risk as ACM holds higher portions in companies and in the event they fail,
more money is lost.

ACM Fund 3 made its first distribution in 2005, November to its LPs by selling a
portfolio company. Fund 3 also has 18 other companies with steady growth and 2
new investments in due diligence.
Discontinuity Based Investing:
With his time at Fostin, Adams was confused at how the investment strategy there
was to just invest in a diversified way with no approach to learning the market or
targeting specific deals.

Adams attributed a good investment strategy to identifying what he called

discontinuitys, which is a sudden and dramatic change in a large and established
market. For example, Adams invested in PCs limited in 1987 which ended up
becoming Dells Computers. He attributed this success to Dells ability to exploit the
lack of distribution that the market leaders had at that time, a discontinuity.
This experience meant that as ACM expanded, Adams was keen to have partners
who had technical training and experience to bring to the company which would
allow ACMs investment strategy to benefit from their market experience and
subsequent recommendations. ACMs investment strategy would thus focus on
investments in markets that these new partners already had experience in and
identified as attractive. This would tend to be companies in IT or other technology
sectors that as many of the partners were engineers and had the relevant
experience. Furthermore, these sectors were in their view, experiencing significant
discontinuities which would allow opportunities for startup companies to become
market leaders.
Given these sectors with discontinuities, ACM would invest in companies with
attractive return on investment which would be recommended by the CFO. The
company would also be one that uses a specific technology for a specific
application, just a personal criteria.
ACM identified the 4 main causes of a discontinuity:
1. Standards. Even when a new technology standard emerges, some companies
cling to the proprietary technologies in an attempt to preserve their current
customer base, even if the customers demanded the new tech standard.
2. Regulation. Unexpected regulation could force existing market players to adapt
quickly to a new system which could allow a smaller company to gain traction based
on their propriety technology.
3. Technology, just having better technology that would take competitors time to
replicate
4. Distribution, the rise of different distribution systems that may overturn the
original established one.
ACMs approach to identifying these was grouping advisors called the Discontinuity
Roundtable periodically and discussing discontinuities that could be fruitful
investments. It comprised of 20 industry experts and observers including Clayton
Christensen of Harvard Business School, George Kozmetsky, founder and backer of
over 200 companies and Atiq Raza, the former CEO of AMD.
Once an investment thesis was discussed thoroughly by this group, ACM partners
would systematically search for deals in that designated space. This process gave
the partners deep knowledge of company opportunities which in turn made them
more attractive as an investment partner.

Managing Investments: Structured Navigation

Early stage technology share many of the same bench marks and need the same
elements to succeed.
1. Round Out Management team for entrepreneur firm. As ACM invests in a lot of
early stage, the management team is usually incomplete or nonexistent due to a
lack of capital
2. Obtain a corporate partner or endorsement would allow more exit opportunities
3. Gain early exposure to industry and investment banking analysts
4. Expand the product line
5. Implement the best practices, entrepreneurs should focus on developing products
and selling them.

Fund 1:
15 companies for total cost basis of $55 million. IT (49%), TeleC (30%), Medical
Devices (11%) and Networking Infrastructure (10%).
Exited at a stock distribution valued at $122.7 million, net IRR of 46%.
Fund 2:
14 companies. Cost basis. $150 million. 3 were acquired, 5 written off as losses and
6 still active and growing. IT (45%), Semiconductors (38%) and TeleC (17%).
Currently stands at 40% discount to cost.
Fund 3:
$420 million cost basis. September 2005 and the fund has called 74% of its
committed capital. On track to have a 1 3 times of IRR.
FUND 4: Considerations
Smaller positions in a larger amount of firms increases the changes of hitting a
home run and larger overall returns.
Waiting for a year and returning to the market with a maturing portfolio with more
completed exits which would give the fund a compelling story e.g. they could return
in a tough environment and be more attractive to investors.
Reconsideration of sector focus. Discontinuities in sectors such as life science.