Stephen Lisson December 2014

Stephen Lisson, Stephen Lisson Austin Texas, Stephen N. Lisson, Stephen N. Lisson Austin TX, Steve Lisson, Steve Lisson Austin TX





Steve Lisson Austin TX 2014




Stephen Lisson


Steve Lisson, Steve Lisson Austin TX, Stephen Lisson, Stephen Lisson Austin Texas, Stephen N. Lisson, Stephen N. Lisson Austin TX

















Tuesday, January 7, 2014





Steve Lisson Austin TX 2014



Stephen Lisson, Stephen Lisson Austin Texas, Stephen N. Lisson, Stephen N. Lisson Austin TX, Steve Lisson, Steve Lisson Austin TX LEFT TO RIGHT: RICK RICKERTSEN, HENRY BARRATT, JOHN HIGGINBOTHAM, PETER BARRIS AND GINA DUBBÉ. CLIMBING the Capital Hill When Big Money Is Harder to Come by Than Ever, What Will Become of the Rock Stars of the New Economy? by Rachel L. Dodes When Kevin Burns took the podium at the Mid-Atlantic Venture Association's February "Venture Outlook" conference at the Morino Building in Reston, VA, the mustached money maven started by talking about what a long, strange trip it's been. "We did deals we never did before and hope to never do again," said the managing principal of Bethesda, MD-based Lazard Technology Partners, which just raised its second ($300- million) fund. With an affectation that conjured the frenetic investing pace of early last year, Burns noted, "It was like, 'Gimme the term sheet before someone steals the deal.'" The recollection elicited empathetic laughter from the 75 technology lawyers, VCs, entrepreneurs and reporters who attended Burns's speech. After all, most of them were experiencing the same bull-market hangover. John Taylor, the National Venture Capital Association's vice president of research, went into standup mode as well; amid charts and graphs tracking Greater Washington's economic performance, he included a cartoon depicting cavemen and an erupting volcano in his PowerPoint presentation. In the drawing, a nerdy analyst caveman says, "All of our polls indicated that the gods were very happy," as the volcano spews molten rock in the 2 MAR 2010 BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 1 of 12 3/3/2010 12:00 PM background. Being a venture capitalist used to be so cool. "We were rock stars," says Ed Mathias, a 58-year-old managing director of District-based The Carlyle Group, which oversees a $245-million venture fund targeting early-stage technology companies. The silver-haired VC veteran remains silent for a moment, nostalgically, and repeats himself in a hushed tone. "Rock. Stars." But today, the nation's economic landscape is riddled with the remains of more than 200 defunct Internet companies. The NASDAQ composite index has fallen below 2,000, less than half of where it stood at its zenith in March 2000. More than $3 trillion in paper wealth has evaporated as a result. Pension funds, university endowments, corporations and high-net-worth individuals, the people and organizations that make up the limited partners (LPs) in a venture fund, watched as the value of their assets shriveled. And so for the first time in recent years, venture shops all over are feeling the pain: VCs at smaller, newer outfits in particular are having trouble raising money for their next funds. The inability of a venture firm to garner sufficient capital is tantamount to hanging a "going out of business" sign in the window. "You either raise another fund, or you can become a consultant or a business writer," jokes Mark Slusar, an associate at Davidson Capital Group, a hybrid consulting, investment-banking and venture outfit in Tysons Corner, VA. Charles Heller, general partner at Annapolis, MD-based Gabriel Venture Partners, says it is taking longer than expected to raise money for his firm's second fund, which reportedly will amount to $300 million. "But at the same time," he says, "we are heartened by the fact that we are able to do as well as we have done. Some of my friends can't even get appointments, much less raise any money. Forget about it." Mark Benson, a partner at Reston, VA-based Mid-Atlantic Venture Funds (MAVF), says that a few prospective limited partners lost interest in investing in his firm's next fund after assessing the impact of the current economic climate. "We had some favorable early meetings with new investors - this doesn't apply to the old ones - and we seemed to be on a pretty positive track," he recalls. "But after the blowup, they decided they'd rather be cautious." MAVF will probably wind up raising $125 million by the time it holds its final closing sometime this spring; the firm was planning on raising 20 percent more, $150 million. Partners at other local venture concerns - notably FBR Technology Venture BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 2 of 12 3/3/2010 12:00 PM Partners, Blue Water Capital, Draper Atlantic, Mercator Broadband and Updata Capital - all relate similar stories. It's the first-time funds that appear to be looking at the highest hurdles when it comes to raising cash, especially from wary institutional investors. "There will be people who want to raise a first-time fund now and will never get it done," says Gene Riechers, managing director at FBR Technology Venture Partners, which is raising its third fund. (Riechers would not give exact numbers, but sources say the firm is trying to hit the $300-million mark by this spring.) In fact, partners at many venture firms in Greater Washington were unwilling to discuss where they stood in the fundraising process and requested that their names not be mentioned in this article, as sure a sign as any that the venture business has changed. As recently as last fall, VCs throughout the region were only too happy to talk with the press about their lofty goals. There are two primary routes for venture capitalists to raise a fund - a task that puts them in the role of supplicant for, rather than dispenser of, big money. It's not an activity the VCs really enjoy, and they raise money at most every couple of years. Ironically, given their line of work, some VCs find raising money so distasteful that they farm the dirty work out to investment banks to do as private placements. The bankers take a negotiated percentage of the fund, run through an extensive due-diligence process and then "help introduce the fund's managing partners to [potential] limited partners," says Rich Harris, a partner at Reston-based SpaceVest, which is expected to have its first closing on a $150-million fund, the firm's third, early this year. "Essentially, you do a road show," he says, adding that the process can take four to 12 months. Harris says SpaceVest used investment bankers for its first two funds, but is not using one to raise the third. This is not an unusual pattern. Some firms, typically those with an established track record, do not use an investment bank to raise a new fund. "You go to contacts in your own database" of deep-pocketed individuals and institutions, says Harris. The amount of time spent in fundraising mode depends on "how long you've been in the business and your breadth and depth of limited partners." The trackrecord factor is particularly important for institutional investors, and the network effect should not be underestimated among high net-worth individuals. It is important to bear in mind a key distinction: There is a big difference between having, say, $100 million in commitments and actually closing a $100-million venture BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 3 of 12 3/3/2010 12:00 PM fund. The state of "being closed" implies that the limited partners have signed all the binding legal documents and the fund is free to call in the capital to invest in actual companies. Up until the closing, potential LPs can back out or change the amount of their committed investment. "We have closed on $110 million," says Jack Biddle, cofounder of McLean-based Novak Biddle Venture Partners, which just raised its third fund. "It is done. We have already started calling down the money, and we can admit new partners for the first 180 days." So are small funds now at a particular disadvantage when it comes to fundraising? "I think that smaller funds that have a stable base of limited partners that they have made money for in the past will be OK," says Harris. "Other funds who do not have as strong a track record will have a tough time raising the next fund. It is inevitable. That is the way business works - always in cycles." Being a venture capitalist used to be so cool. Lazard's Burns, a former entrepreneur who's been in the venture-investing business for the past five years, says that as the NASDAQ soared ever higher through 1999 and into 2000, he was the envy of all his friends: "Last year, everybody wanted to be a VC," he recalls. In the current climate, however, the fun factor has diminished in the venture world, as VCs are spending 80 percent of their time - as opposed to the 40 to 50 percent they once spent - managing their existing portfolios: "It's not just like, 'Hey, cool, let's give away some money, yeah,'" sighs Burns. April Young, senior vice president of Imperial Bank, which loans money primarily to venture-backed businesses, rose from her seat at the end of the February Mid Atlantic Venture Association (MAVA) event to ask a question. The Netpreneur program's Mary MacPherson offered Young a microphone, but she didn't need one. "My voice carries well," joked Young. "I am used to screaming at my portfolio companies." (Later on, Young explains, "I don't really scream at them, per se; I mother them.") Young says she has been encouraging entrepreneurs to take lower valuations from investors lately, because if they want to make it in this market, they have no real choice: "The entrepreneurs are having to give up more [of the company] than they want to," she says. "And investors are afraid that BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 4 of 12 3/3/2010 12:00 PM they are putting money into something that won't grow up." Indeed, financiers have had to make some particularly difficult decisions lately, like knowing when to pull the plug on an unprofitable company without a viable exit strategy. For example, at the end of December, Reston-based The Dot Com Group shut its doors after the company's board of directors determined that its $900,000-plus monthly burn rate made the venture untenable. The company had $5 million on hand when it closed, which was given back to the same investors who had just plunked down $10 million in June. Fifty cents on the dollar is not ordinarily the return investors seek, but it's a lot better than the alternative - a total wipeout. Experienced VCs note that the down market has taught some lessons to the younger players in their profession who got a little arrogant in the high-flying days of 1999 and early 2000. "Venture capitalists suffering from severe hubris have gotten some religion," observes Carlyle's Mathias, who sat on The Dot Com Group's board. Still, it isn't all bad news. Because of the market rationalization, company valuations have come down more than 50 percent, so the climate for investing, in a sense, is better now than in the very recent past. "Prices were too high for too long," says Jim Lynch, managing partner at Reston-based Draper Atlantic, a firm founded in 1999 that just closed a $75-million fund. "A company cannot sustain a valuation that high; at some point someone is left holding the bag." Draper was seeking $300 million for this same fund, the firm's second, as recently as August 2000. Stephen Lisson, publisher of InsiderVC.com, which closely monitors the venture industry, says now is the time for a venture firm to get in on some fabulously priced deals. "Everyone is glad the feeding frenzy is over," he says. "How can anyone say that the [investing] climate right now isn't happier and better and good?" But falling valuations are, in some respects, a double-edged sword for venture capitalists. That's because residing in the portfolios of many local firms are companies worth much less now than they were when they raised their last round of funding. "I am seeing a lot of companies where the private valuations are not getting written down as aggressively as they were written up," says Lisson. To keep the overall value of portfolios high, which is especially useful when VCs are trying to raise new funds, firms will sometimes wait for an event to occur, i.e. bankruptcy or a down-round of financing (which takes place at a significantly lower valuation than the previous round), before they take write-downs. Lisson, a critic of the ways in BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 5 of 12 3/3/2010 12:00 PM which VCs spin their returns, finds this tactic deceitful and onerous: "The lemons ripen early," he says, "but you don't want to take a write-down, because then you have to pay the IRR [internal rate of return] piper." When a venture firm "writes down" a company, it has the effect of slashing its rolling IRR, a percentage that's calculated differently from fund to fund and tends to obfuscate as much as it clarifies investment results because of the disconnect between paper returns and actual distributions of cash or stock. Carlyle's Mathias put it best: "At the end of the day, it is POM, or piles of money, that matter." For example, Silicon Valley venture behemoth Accel Partners saw its net IRR decline by about 5 percent in the second quarter of last year. But at the same time, the firm's fifth fund was distributing $866 million to its limited partners, more than five times the fund's value in 1996, according to data compiled by InsiderVC.com. Here's how it works: IRR is a number that describes how much money will flow, on an annualized basis, to investors from a given investment. If a venture fund invests $1 million in company X, and one year later the VC gets back $5 million when company X gets acquired by company Y, then the IRR for that investment is 400 percent (minus a few percentage points for the discount rate which takes inflation into account). Calculating the IRR for an entire venture fund is much more complex, as VCs need to account for inflows and outflows of multiple sums over an array of time frames. To do this, a complicated equation, which can yield multiple solutions based on how each variable is assigned, is used. And not surprisingly, venture firms typically pick the methodology that will allow them to report the best possible IRR to their LPs. Long story short, IRR can be manipulated; it is not absolute. One local VC who requested anonymity went so far as to call the metric "voodoo." But the fact that IRR is not standardized from firm to firm is not the main reason it is so widely criticized. Rather, IRR raises eyebrows because it is not necessarily based on actual, realized returns. "A lot of funds put IRR to the public in terms of unrealized [returns]," says Allen Wolff, and associate at Space Vest. "This [percentage] shows what their positions are worth right now in nonliquid companies - you don't have access to that money." So if a VC invested that same $1 million in the aforementioned company X, and X were acquired a year later by company Y for stock rather than cash, the venture firm's stake in company Y would likely be locked up for a BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 6 of 12 3/3/2010 12:00 PM period of time before it could return anything to its limited partners. Assuming that at the time of the acquisition the stock in company Y were worth the same $5 million, the VC could still post the near-400 percent IRR, even though he or she couldn't actually realize the gain. Henry Barratt, managing director of Blue Water Capital, a McLean, VA-based outfit that's seeking to raise $150 million for its third fund, recalls a situation in which a local venture fund - he wouldn't name names - valued a technology company at $100 million. After the market turned, a partner at the firm offered Blue Water an opportunity to invest in the company at a $10-million valuation, one-tenth of the previous figure. "It's still not worth $10 million," says Barratt, a relatively conservative investor who has been in the venture business since 1995. "But you know what they're doing?" he asks. "Carrying it on their books at $100 million." However, venture firms can only maintain overvalued companies on their books for so long. At some point, insiders say, you either have to toss more cash at the money-losing enterprise, a tactic that InsiderVC.com's Lisson calls "negative follow-on financing," or take the loss. Barratt expects to see many write-downs in venture portfolios in the coming months. "In the first and second quarters, you're going to see a significant decline in IRRs," he says. Once the dust settles, the venture capital market might heat up again. Or it might not. It depends on who you ask. The reason for much of the uncertainty: Institutional investors are experiencing allocation issues that are yet to be fully resolved. Most of the big institutions that are the bread and butter LPs for the best venture funds allocate their overall portfolios on a percentage basis. The piece that typically gets allocated to higher-risk investments like venture capital is small, maybe 5 percent, and rarely more than 10 percent. The rest gets invested in stocks, bonds and other financial instruments. But if the sum total of an institution's assets changes dramatically - with a sudden Wall Street technology sector meltdown, let's say - then the venture portion of the portfolio can quickly represent a much greater portion of the overall than the institution is comfortable with, and thus needs to be adjusted downward. "What they intended to be 5 percent of their assets, for example, is now 10 percent," says FBR's Riechers. "You get in a position where you have to allocate money out of private equity [including venture investing] and back into the public markets." BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 7 of 12 3/3/2010 12:00 PM The flip side of this trend, which bodes well for the VCs, at least in the near term, is that the largest institutions, especially universities, are not the most agile financial creatures in the world. Big institutions are typically unable to turn on a dime in response to day-to-day, or even month-to-month or quarter-to-quarter, shifts in the economy. Bill Snow, treasurer of Baltimore-based Johns Hopkins University, whose endowment exceeds $1.7 billion, says that over the course of the next year the university will actually increase its venture allocation from 8 to 10 percent. "We made that decision in '96," says Snow, who notes that these choices are not swayed by the vagaries of the public markets. Ironically, the fundraising situation could improve in the second half of 2001 after the VCs take significant writedowns, says Blue Water's Barratt. In other words, the portion of assets that institutional investors have devoted to venture capital may actually be much lower now than it appears to be when seen through the current IRR lens. "Two [endowment] funds we are talking to say that they are over allocated to venture right now," he says. "But both of them say that they expect all that will change once they see all the write-downs." That is, when the individual venture capital firms fess up that the value of an institution's investment is actually $25 million, not $50 million, it will free up some piece of the difference to be recommitted to venture, while keeping their target allocation percentage in line. The other real culprit driving the slowdown in venture investing is the initial public offering market, or the lack thereof. Although VCs invested more than $500 million in early-stage companies in Greater Washington in the fourth quarter of last year, that marked a 40 percent decline from the third quarter, according to PriceWaterhouseCoopers' MoneyTree survey. "The news is mixed," said Art Marks, general partner at NEA, at the MAVA event in February. Marks expects to see continued growth in the region in the long term, but not at the frantic pace of 1999. "The numbers reveal that the MAVA venture community has become more disciplined in new investments while working harder with its portfolio BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 8 of 12 3/3/2010 12:00 PM companies." Only 63 U.S. companies went public in the fourth quarter of 2000, compared with 172 in the same period a year earlier, according to Newark, NJ-based Thompson Financial. Overall, 449 companies went public in 2000, an 18 percent decline compared with 547 in 1999. The concern is that unless the IPO window reopens, and reopens wide, many of the companies in the venture firms' existing portfolios are going to find themselves in serious trouble. "I expect many of these startups to be merged with other firms [if the IPO remains unavailable as an exit strategy]," says Sam Hayes, a professor of finance at Harvard Business School. "Many will receive securities with no definite market value, and this may help the venture firms postpone the pain a little longer." Even companies that did make it out of the IPO gates last year experienced the pain of diminished returns. Instead of seeing a 200 percent average first-day gain, which is what occurred in 1999, the value of new issues, to investors' chagrin, sunk an average 15 percent on day one. It's telling that one of the top three performing IPOs of last year was a deliciously Old Economy outfit, Krispy Kreme donuts, whose stock soared more than 200 percent following its April offering. Since then, the role of VCs, or at least their imagined role, has changed substantially, and perhaps irrevocably. As Michael Lewis (author of Liar's Poker and The New New Thing) pointed out in a recent column for Bloomberg News, after the meltdown, VCs showed themselves to be "not the ally of the entrepreneur, but neutral parties without heart or soul, like Switzerland." Venture capitalists as a group have become choosier than in the recent past. Entrepreneurs have caught on by stretching to make their cash reserves last, trying to avoid the fate of the damned: We've already seen more than 25,000 Internet company layoffs across the country, including more than 2,000 in Greater Washington. For the right VCs, however, all the gloom and doom may actually turn out to be a blessing. "The best always get better in a downturn," says InsiderVC.com's Lisson. "While other VCs are reading self-help books, spending time throwing good money after bad and looking for Dr. Kevorkian's phone number, you can be sure the best are getting better." Take 23-year-old New Enterprise Associates (NEA) for example. The firm, with offices in Baltimore, Reston and Silicon Valley, closed in November on a mammoth $2.3 BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 9 of 12 3/3/2010 12:00 PM billion fund. Peter Barris, managing partner at NEA, says that his initial fundraising target was $1.5 billion. "Somewhat to our surprise, we found a demand that exceeded what we set out to raise," he says nonchalantly, adding that the fund took on 12 new limited partners in addition to those that had been investing with NEA for years. Lisson is quick to note that NEA may not really have been so surprised that it could raise more than $2 billion: "[Barris] is spinning," he says. "$1.5 billion was never a hard cap…. From a marketing perspective, it's a great tactic." With valuations falling so precipitously, though, it may take NEA a long time to put that $2.3 billion to work. "It could take us five years, compared with two or three," says Marks. That NEA was able to raise such a huge some of money while its smaller, less established peers struggle to meet their more modest goals underlines the reality of the venture world circa spring 2001: The established funds are the headliners, and the newer players are the opening acts. What's to become of the region's former VC rock stars? Some will tour forever. Some will put out a few great albums before they hang it up. And some may be ready for their stint on VH1's Behind the Music. FUNDRAISING AT A GLANCE Firm Location Firm’s announced fundraising goals last summer Fundraising status (at press time) Blue Water Capital III McLean, VA $100-150 million Has $30 million and expects to close on $150 million this spring. Boulder Ventures IV Owings Mills, MD $100-300 million Expects to close on slightly north of $200 million in the spring. BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 10 of 12 3/3/2010 12:00 PM Carlyle Ventures II Washington, DC $750 million - $1 billion Target remains $750 million. Still fundraising. Columbia Capital III Alexandria, VA $870 million Closed in July on $870 million. Draper Atlantic II Reston, VA $300 million Closed on $75 million in February. FBR Technology Venture Partners III Reston, VA $300-400 million Won’t discuss numbers. Still fundraising. Gabriel Venture Partners II Annapolis, MD $300 million Won’t discuss numbers. Still fundraising. GroTech VI Timonium, MD $400 million Aimed to close in March 2001 on $400 million. Mercator Broadband* Reston, VA $200 million Raised in excess of $100 million and completed first closing. Mid-Atlantic Venture Funds IV Reston, VA $150 million Aims to close this spring on $125 million. New Enterprise Associates X Reston, VA $1.5 million - $2 billion Closed on $2.3 billion in November. NextCom Ventures* McLean, VA $50 million Won’t disclose numbers. Novak Biddle III McLean, VA $125 million Closed on $110 million. BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 11 of 12 3/3/2010 12:00 PM Potomac Bioscience Venture Fund* Potomac, MD $50-100 million Won’t disclose numbers. SpaceVest III Reston, VA $150-250 million Should close on $150 million in the first half of 2001. VENTURE FIRMS ARE PROHIBITED FROM DISCUSSING FUNDRAISING WHILE IT IS ONGOING. THE ABOVE NUMBERS ARE ESTIMATES BASED ON KNOWLEDGEABLE SOURCE INFORMATION. *FIRST-TIME FUND BUSINESS FORWARD - April 2001 - Climbing the Capital Hill http://web.archive.org/web/20061017080443/http://www.bizforward.co... 12 of 12 3/3/2010 12:00 PM

As Start-Ups Fail, Venture Investors Back Out in Droves

Steve Lisson, Steve Lisson Austin TX, Stephen Lisson, Stephen Lisson Austin Texas, Stephen N. Lisson, Stephen N. Lisson Austin TX
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As Start-Ups Fail, Venture Investors Back Out in Droves
Financing: The stampede to put money into tech has reversed direction, with some partners selling out at a loss.
April 14, 2001 | JOSEPH MENN | TIMES STAFF WRITER
For the last three years, investors large and small have been clamoring at the gates of American venture capital funds, begging for a chance
to put money into technology start-ups.
The funds provided early financing for such companies as Amazon.com Inc., Sun Microsystems Inc. and America Online Inc. before their
initial stock offerings, turning millions of dollars into billions for an elite group of university endowments, pension funds and individuals
worth at least $1 million.
Just as suddenly, the stampede to get in has reversed direction. And some of the dot-com chief executives who made it into the party,
committing to invest millions over a decade or so, are trying to back out of their obligations.
"It's hard to imagine the speed with which it has happened," said Jon Staenberg of Staenberg Venture Partners, based in Seattle. He has
fielded withdrawal inquiries from two investors in his $100-million venture fund who now have cold feet. Both are executives at
companies whose market value tumbled by 90% or more.
An overall decline in venture financing this year was already expected, since the amount put into start-ups soared 80% to a record $68.8
billion last year, according to research firm VentureOne. Fund returns to investors went negative in the fourth quarter of 2000 for the first
time in more than two years, research firm Venture Economics said this week.
It won't be hard for the top venture capital firms, such as Amazon funder Kleiner Perkins Caufield & Byers, to raise cash. Those firms have
turned away hundreds of would-be limited partners in the past, instead rewarding executives at companies they backed with permission
to invest.
Many venture capital firms refuse to discuss the new nervousness among their funders. "People are talking about it in hushed tones, with
great reluctance," Staenberg said.
Those who will talk say the pull-out isn't severe enough to impair the amount they invest in new technologies, one of the major engines for
economic growth in the last decade. That's because individuals provide less than 20% of all venture financing.
But some are concerned that investments from big institutions might decline for another reason: Many of them have financial plans that
call for allocating 5% or 10% of their assets to venture funds. With those institutions' total portfolios shrinking along with the stock market,
that 5% or 10% works out to a lot less cash.
On Friday, the giant California Public Employees' Retirement System reported that it lost 5.3% of its assets in February alone, wiping out
$9 billion in value.
Barry Gonder, a senior investment officer at CalPERS, said it seems unlikely that the system's total assets would slide so far that it would
have to cut back on future venture investments. "We're at about 5% [of total assets] today, and I can go as high as 8%," he said. "We'll
probably become more selective."
The individual attempts to withdraw are putting venture capital funds in a delicate position. If they politely allow cash-crunched limited
partners to back out, others who simply dislike the firms' investment picks might try to follow suit.
"People get caught in the position of do they want to put good money after bad?" said Brent Nicklas of private equity firm Lexington
Partners in New York. "I've never seen it quite as widespread."
Venture capital partnership agreements typically last seven to 10 years, and the penalties for early withdrawal can be harsh. In some cases,
if an investor pulls out when the venture capital firm asks for a new round of promised money, the partner can lose 50% of what it already
put in. The profits that the investor had earned to date also can be rolled over to satisfy at least part of the obligation.
If that's not enough to meet the capital call, the venture capital firm can sue--an unpleasant step in a business built largely on personal
relationships.
The least painful way out for a desperate limited partner is to sell to another partner or to dump an unwanted deal on the little-known but
growing secondary market, where a few firms specialize in buying limited partnership interests.
As tax bills come due, an increasing number of limited partners are doing just that, unloading their holdings for less than 50 cents on the
dollar.
"We are seeing more sellers than we did six months ago, but the quality has gone down," said Jerold Newman, president of secondary
As Start-Ups Fail, Venture Investors Back Out in Droves - Los Angeles Times http://articles.latimes.com/print/2001/apr/14/business/fi-50936
1 of 2 12/21/2013 1:31 PM
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buyer Willow Ridge Inc. in New York.
Another buyer is Nicklas' firm, which takes on soured investment deals worth as little as $1 million--or as much as $1 billion--when a bank
or other major institution decides to sell off an entire portfolio.
Many more calls from individuals are coming into Lexington's Santa Clara office now than six months ago, Nicklas said.
"It's up, and I think it's going to continue to increase through the end of this year," he said. "A lot of last year's money came from new
entrants into the market, including high-net-worth individuals at companies that the VCs had backed."
A significant complication for those trying to sell off their investments is the difficulty in figuring out how much their stakes are worth.
Venture funds often wait until two months after the end of a quarter before estimating how much their portfolio of public and private
holdings is worth. Those trying to sell now are using valuation statements from December, before much of the stock slump.
The funds also often use numbers designed to make their returns look the best, according to Stephen Lisson of InsiderVC.com. It's
common for them to mark up the value of private companies as stocks in similar firms rise, then decline to mark them down again until
forced to do so by an event such as a takeover or a bankruptcy.
And these days, it's impossible to tell which companies are going to be around in a year.
"Valuations are somewhat irrelevant if the company is going to run out of money," Nicklas said. With struggling firms more likely to return
to the hand that fed them for another round of financing, it's up to the venture capital firms to decide whether their offspring live or die.
"How do you predict or handicap or bet on what the venture guys are going to do? When you sit down with them, they tell you that even
they don't know," Nicklas said.
As Start-Ups Fail, Venture Investors Back Out in Droves - Los Angeles Times http://articles.latimes.com/print/2001/apr/14/business/fi-50936
2 of 2 12/21/2013 1:31 PM



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