About
PINTEREST | SOUNDCLOUD | RESEARCH | Steve Lisson | Austin TX | Stephen N. Lisson | Austin Texas: and | STEVE LISSON | Austin, Texas | Monday, February 16, 2015: Profile | Website | STEVE LISSON | Internet | AUSTIN TEXAS | February 2015 | Directory | Review : Elite VC giants still investing | Search | Steve Lisson | Austin, TX | February 2015 | Review: STEVE.LISSON, STEVE LISSON, STEPHEN LISSON, STEPHAN N. LISSON, STEPHAN LISSON, LISSON STEPHAN, AUSTIN, TX, TEXAS, STEPHEN N. LISSON, TRAVIS COUNTY, TEXAS, LISSON STEPHEN N., STEVE N. LISSON, STEVE, LISSON, INSIDER, VC, INSIDERVC, INSIDERVC.COM, (512), STEPHEN.LISSON, FACEBOOK, LINKEDIN, LINKED IN, TWITTER,
Charles River Ventures (CRV) - Charles River's Matrix Envy | Steve Lisson
InsiderVC.com
*Following is a draft excerpt from*
*Beardstown, err, Battery Ventures:*
*The most overrated venture firm*
*Part A: The three runners-up, and who to blame*
IX. WILDNERNESS OF MIRRORS - Charles River Ventures (CRV)
"I tell you, I've been over this stuff a bunch of times - it just
doesn't add up. Who does these books? I mean, if I ran my business
this way, I'd be out of business" (Murray Blum CPA to The President in
the movie/Dave/, while the two friends were analyzing the Federal budget
looking for savings). When the Federal government wants more money to
spend on programs or people, it prints the money, borrows it, or raises
taxes. If CRV needs money, then it can resort to extending the life of
an ancient, almost fully wound-down fund. Only if a partnership can't
raise more money does it goes into this mode, so the GPs can make their
car and mortgage payments; otherwise, it's stubbornness, hopefulness,
and nickel-chasing.
/Wilderness of Mirrors/ was the title of a book about delusions induced
by the inherent paranoia of a counterintelligence officer. Subtly, the
principle works here, too. Anecdotally, every time a firm has extended
the life of a fund, the performance has not improved appreciably if at
all; frequently, the returns go down, not up. Why should a firm even
concern itself with returns of an eleven-years old fund, especially if
it has raised several more and should be more concerned with how to
deploy the billion(s) it now manages - many times more than the runway
left in or which could be squeezed out of a tiny, ancient fund from a
decade ago? After all, that fund's performance has already been used to
raised all the new billion(s) of fresh capital. Moreover, any marginal
gain will be more than outweighed both by management fees and management
"time-sink", further depressing any possible ROI.
Answer? Those additional management fees. Depressing the IRR at this
point, with all those new funds and fresh capital already raised, is the
current (not former) CRV GPs' gift to themselves - enrichment -- however
just it might be. Charles River Partnership VI (1990 - $50MM) as of
9/30 still held five investments costing $12.3MM but with, of course,
all purported appreciation in value already factored into the IRR. Like
proving perjury and conspiracy to defraud, it's not necessary to extract
from the perpetrators a confession (and they usually aren't stupid
enough to allow such a thing anyway). One need only look at the result,
the practical effect, of extending the term of the partnership for two
years (was 11 years commencing September 1990 subject to two one-year
extensions) through 31 Dec 2002. Where's the measly $200,000 sum total
going? Our vote says to the marketing partner hired around the same time
as approval for the extension. Funny, that's also when the
well-scripted, verbatim-like transcripts of Benchmark rumors began.
Perversely, this twisted, sordid wilderness of mirrors (extending the
life a fund to depress rather than juice or at best eke-out at most an
imperceptible and possibly counterproductive gain) is further
exacerbated by CRV capping the extension of Fund VI's fees, for
liquidating those five investments, at $100,000 a year. How touching -
and misplaced is the current group's priorities. Like the national
Democratic Party, which lost the 1984 and 1988 U.S. presidential
elections because it was still obsessed with holding congressional
hearings into a fantastical "October Surprise" scenario (Reagan campaign
manager William Casey ostensibly negotiating release of the Iranian
hostages on the eve of the 1980 election) CRV's obsession with an eleven
year-old fund is both product and end-result of one thing and one thing
only. Matrix envy.
Reacting to the first appearance of our Pecking Order, CRV's in-house
fluffer began inserting the following mantra into press releases:
"Throughout the past decade, Charles River funds have been among the
industry's highest performing funds according to Venture Economics, a
division of Thomson Financial Securities Data that covers investment,
exit and performance activity in the private equity industry."
Panicking after Waltham's Matrix Leading Venture Pack On Both Coasts in
/The Boston Globe/, and despite our vociferously, vituperatively,
pedantically discouraging such head-to-head comparisons, CRV went around
loudly, persistently whining to anyone (notably /Upside's/ Patrick
Meadows, who fell early and hard) willing and gullible enough to
succumb, that it outperforms Waltham, Mass. neighbor Matrix.
But the only same vintage year in which both raised money was . . . you
guessed correctly. This same one at issue here. The fact is the
performance of Charles River Partnership VI (1990 - $50MM) fails when
measured against Matrix Partners III (1990 - $80MM): only two-thirds
the IRR% and less than half the POM% (Piles of Money: actual
distributions of stock or cash expressed as a percentage of committed
capital). However, the current iteration of CRV can console itself with
the knowledge that this performance of their prior group does, in turn,
top the results turned in by NEA V (1990 - $199MM). Regardless,
industry practice should not leave fund extensions up to the personality
of a preening, narcissistic GP already burdened with more time than
sense, willing to saddle itself with such outsized, meaningless at best,
and potentially harmful distractions.
In the first weeks alone of its new $1.2BB Fund XI, CRV's drawdowns
amounted to more than the 1.5 times the entire size of Fund VI. It
bears repeating: the firm spent within mere weeks a greater sum out of
just its newest fund alone (not counting the other active, large, quite
young funds) than the total invested from this eleven years old
partnership during its entire lifetime. Moral? Come to your senses!
Get a life! Deal with your paranoia, cease the delusions, accept your
place in the industry, congratulate yourself on superb (albeit
deceptive) media-relations ROI, and move on. This shameless insecurity
reveals CRV as a caricature of what it once was; nowadays, the firm is
totally different -- people and profile -- from the days of Jack Neises
and Rick Burnes, then later Don Fedderson. "Facts that are not frankly
faced have a habit of stabbing us in the back." (Sir Harold Bowden). So,
unfortunately, you can't look at the stellar history and make positive
judgments about today's group. Too great a contrast. Apples vs. oranges.
*/See Also:/*
*crv@InsiderVC.com*
Copyright © 2015 All Rights Reserved
This page reviewed and/or edited:
Monday, 25 February 2002 12:13 AM
Labels:
STEVE LISSON
BOOK | Tuesday, March 10, 2015
Steve Lisson, Stephen N. Lisson, Stephen Lisson, Austin, Texas, Facebook, Twitter, Pinterest, Tumblr, Instagram, FourSquare
TheStandard.comFallen VC Idols
By Gary Rivlin and Lark Park
They talk about it at their children's school plays. They ask the question
at Palo Alto power lunches: Who among them, the Silicon Valley
venture capitalists wonder, will be first to turn in a lousy return for their
funds?
It's a question no one asked in the boom times, but this is a very
different world for VCs. Venture investing in the first quarter of 2001
was down 59 percent from record highs. Dozens of venture-backed
dot-coms have gone out of business, and hundreds of others are still
years away from profits. Funds that invested rapidly at the peak of the
frenzy have seen the value of their investments fall 75 percent or more.
"There are some big-name funds out there in trouble, there's no question
about it," says Kathryn Gould, an 11-year industry veteran and a partner
at Foundation Capital, echoing a sentiment expressed by many VCs. "I
hear it from our limited partners, who are invested in a lot of the big
funds."
The limited partners - wealthy individuals, pension funds and college
endowments that invest in venture funds for double-digit returns - are
bracing for single-digit returns this year, well below the triple-digit
returns seen in 1999 and even the average 27 percent return over the
past 10 years. In the worst-performing funds, the limited partners could
face losing the capital they originally invested.
It's no surprise that plenty of also-ran venture shops and incubators that
popped up during the bull market are struggling with soured
investments. Many limited partners sought out the top VC firms
precisely to avoid such a risk. But some of those top firms - the ones
that supposedly had the wisdom and experience to know better - made
what now look like serious missteps at the height of the bubble. They
often focused on dot-coms with little hope for profitability. Worse, they
invested so quickly that they had little left over to nurture startups
through the downturn that followed. Now Draper Fisher Jurvetson,
Hummer Winblad, Redpoint Ventures, Softbank Venture Capital - even
the undisputed superstar of the venture world in the second half of the
1990s, Benchmark Capital - are sitting on at least one problem fund.
REPERCUSSIONS OF THINGS PAST Several leading VC firms
raised funds during the peak of the Internet bubble. But five -
Benchmark Capital, Draper Fisher Jurvetson, Hummer Winblad,
Redpoint Ventures and Softbank Capital Partners - were aggressive
in investing much of their funds early in now-struggling dot-com
startups. FIRM FUND YEAR RAISED AMOUNT (IN MILIONS)
% OF FUND IN- VESTED % OF MONEY RETURNED TO
INVESTORS % OF COMPANIES FUNDED AFTER APRIL 2000
**** DIVERS- IFICATION FACTOR Benchmark Capital
Benchmark III 1998 $149 100%** 0%** 53% Poor Draper Fisher
Jurvetson DFJ V 1998 $180 80%** 24%** 44% Moderate Hummer
Winblad Hummer Winblad IV 1999 $315 75%*** N/A 48% Poor New
Enterprise Associates NEA IX 1999 $871 65.1%* 0%* 68% Good
Redpoint Ventures Redpoint I 1999 $600 60%* 0%* 66% Moderate
Softbank Venture Capital Softbank V 1999 $600 100%** 0.01%**
50% Poor US Venture Partners USVP VI 1999 $278 84.3%* 0% 55%
Good *As of Sept. 30. **As of Dec. 31. ***Estimate. **** Excludes
companies that have gone public or been acquired. Sources: Insider
VC, Venture Economics and Venture One
Of course, many venture funds are still so young that a couple of big hits
could cover a long list of bad bets. In the image-obsessed world of VCs,
however, even one down year is the kind of thing that could tarnish a
firm's reputation.
"The way venture capital works, or at least used to work, was you
invested in a fund over two or three years so you captured several years'
worth of trends," says one longtime venture capitalist who, like most
VCs and limited partners interviewed for this story, would only speak
anonymously. "But in '99, you saw some well-known VCs go through
their whole wad in a six- to nine-month time frame, so they only
captured a partial year of trends. Those are the funds the limiteds are
worried about."
Eighteen months ago, a venture fund reporting a negative return was
unthinkable. The Nasdaq was climbing toward 5000. Tech IPOs were
tumbling out the door, with investment bank analysts minting new
metrics to justify the skyrocketing stock prices. So venture capitalists
blithely laid down tens of billions of dollars on dot-coms. The biggest
risk VCs faced seemed to be missing out on the next eBay.
"If a deal was hot enough, you locked the door and didn't let the
founders out until they had at least verbally committed to a deal," says
Neil Weintraut of 21st Century Internet Venture Partners. "We realized
only once it was too late that we forgot to pay attention to this one
important factor called profitability." It's a confession akin to a pro-ball
scout proclaiming a player has all the intangibles to become a starter in
the NBA - except he can't shoot.
VC money legitimized the dot-coms, and stock investors legitimized the
investments with inflated valuations. The highest-profile VCs got drunk
on their own celebrity and personal wealth. At the peak, stars such as
Redpoint Ventures' Geoff Yang were wondering aloud whether there
was any downside left in the game. "If the company doesn't work out,
we'll sell for $150 million," Yang told Fortune in 1999. "If it does, it'll
be $2 billion to $10 billion. Tell me how that's risk."
Yang got his answer when stocks crashed in 2000. Now the wider world
no longer buys the story that dot-coms will rule the world; those flying
the highest during the boom times are today's goats. The technology
world's best-known investment bankers operate under a cloud of
scandal as federal investigators question the legality of their IPO
allotment practices. The Internet's best-known research analysts are
reeling from charges they touted highly speculative stocks more out of
self-interest than in a belief in companies whose shares are now trading
90 percent or more off their highs. And the venture capitalists, once
lionized for their ability to spot huge hits, are getting their comeuppance.
Last week, for instance, Webvan, the ultimate VC poster child last week
was worth $77 million, down from a market capitalization of $2.5 billion
only nine months ago.
Venture capital firms hold information about their funds' performance
close to their chests - especially the current valuation of their
investments. Even so, there are plenty of clues that point to a fund in
trouble: How close is it to prematurely spending all the money it raised?
How many of its companies have been able to raise money since the
stock market crashed? How much of the fund did the firm plunk in the
dot-com pot? How many startups have gone out of business in the fund's
short life? And how much money are limited partners getting back on
their investments?
FIRM DESCRIPTION COMPANIES IN FUND INCLUDE ...
Draper Fisher Jurvetson Led by Tim Draper, DFJ charged into the
online retailing and b-to-b sectors in its fifth and sixth funds. More than
half the companies in the fifth fund have yet to raise new funding in a
tough market. BestOffer.com, DigitalWork, Everdream,
InfoRocket.com, SeeUThere.com Hummer Winblad John Hummer and
Ann Winblad have never produced a home-run investment. It is unlikely
that its fourth fund, the first to focus on the Internet, will improve the
firm's track record. Homes.com, Lavastorm, Mambo.com, Pagoo.com,
Rivals.com Redpoint Ventures Geoff Yang and his five partners
invested in 40 startups in 14 months. Their silver lining: More
investments in infrastructure firms than in dot-coms. BigBand
Networks, eNet China, HelloBrain, MetaTV, TeraOptic Networks
Benchmark Capital The firm's third fund, raised in 1998, was alm! ost
exclusively invested in dot-coms. David Beirne and Benchmark partners
opted to spend most of the fund's capital in nine months. Collab.net,
Epinions.com, Guild.com, Living.com, Respond.com Softbank Capital
Partners Gary Rieschel admits his fund was overweighted in sectors
that "got smashed." He's already telling investors the best they can
expect are money-market-like returns. Asia Online, BlueLight.com,
iChristian.com, Rentals.com, Secure Commerce Services
. Steve Lisson devotes his time to such questions. He is at once an
industry gadfly and a font of information on venture funds; his Web site,
InsiderVC.com, is followed closely by many in the business. With the
help of Lisson and research firm Venture Economics, The Standard has
assembled profiles of major VC funds raised in 1998 and 1999. Because
dozens of funds opened during the peak of the tech bubble, we limited our list to several high-profile firms.
While any fund raised during the last few years is enduring tough times
now, not every one is in the same boat. Funds raised by Battery
Ventures, Kleiner Perkins Caufield & Byers, New Enterprise
Associates, Sequoia Capital and US Venture Partners have their share of
ailing dot-com investments. But they diversified into areas like biotech,
networking and software for big companies. Also, they didn't spend their
money as quickly as Benchmark and Draper did with their vintage 1998
funds, or as Hummer Winblad, Redpoint and Softbank did with their
1999 funds. The latter are the ones slowly coming into focus as strong
candidates for subpar performance.
Any recitation of the funds in greatest jeopardy should start with
Hummer Winblad and Draper Fisher Jurvetson. Ann Winblad and Tim
Draper, the public faces of their respective firms, are better known for
being well-known than for their skill at spotting promising startups.
Winblad is a columnist for Forbes ASAP, and Draper is an investor in
Upside and a long-time friend of Tony Perkins, who founded both
Upside and Red Herring magazines. Yet both firms have suddenly
turned press-shy. Representatives of the two firms declined to comment
for this article.
After mixed success in three funds that focused on software companies,
Hummer Winblad raised $315 million for its fourth fund, which it
invested almost entirely in Internet ventures. "It's like the entire
portfolio was made up of dot-com, swing-for-the-fences deals," says a
limited partner for one of its funds, who asked not to be named.
So dismal are the prospects for Hummer's fourth fund - among its were a
laundry list of dot-bombs including Gazoontite, HomeGrocer, Pets.com
and Rivals.com - that general partner John Hummer recently felt
compelled to send a letter to its limited partners. "It is an
understatement to say how bad we feel about this," he wrote.
For his part, Draper took a scattershot approach that not only backfired
when the dot-com sector collapsed, but also made the firm look
careless. "I don't even count Draper as a real venture fund," says an
institutional investor who has money in roughly 50 venture funds.
"They're like this index fund that indiscriminately invested in
everything."
Both Draper V, a $180 million fund, and Draper VI, which raised $375
million, are full of businesses with an online angle. Four companies in
Fund V are already out of business. Draper VI has its share of firms
from the Internet bubble, including Club Mom, a content site for
mothers; Amazing Media, a banner ad technology firm; and Product
Pop, an Internet-marketing services company.
Draper did hit it big recently. Cyras Systems, a fiber-optics firm in Fund
V, was acquired in March for $1.15 billion in Ciena stock. That's a
significant score - but it's questionable whether Draper's take will be
enough to balance out the other dogs in the fund.
Redpoint is a venture capital supergroup, with partners who defected
from Institutional Venture Partners and Brentwood Venture Capital. But
the firm's first fund, which raised $600 million, so far has been short on
successes.
The six partners at Redpoint took just 14 months to invest in 40 startups,
most of them Internet-related. There was an $8 million investment in
BizBuyer.com, a b-to-b company that closed shop last year, and $22
million in NexGenix, one of many companies created to build
e-commerce sites. Other investments include $3 million in an online
beauty site, $4 million in an e-commerce company called eNet China
and $6 million in a sci-fi Web site that shut down operations in April. A
year ago, NexGenix filed to go public - Redpoint's first chance to cash
out and distribute the proceeds to its limited partners - then pulled the
offering in May. Four months later, NexGenix laid off an unspecified
number of employees.
Redpoint's two saving graces were that it set aside about half its fund to
keep its startups going and that it invested outside the dot-com realm.
Yang figures roughly 70 percent of Redpoint's first fund is invested in
infrastructure and software firms, though many were e-commerce
companies that have shifted their focus hoping to stay alive. "At least
we don't have 70 percent of the fund in e-retailing," he says.
Fate has been a little less kind to Softbank Venture Capital. The $600
million Fund V invested in 48 startups in approximately 12 months,
including companies such as Buy.com, eCoverage, eOffering.com,
Perfect.com and Rentals.com. The portfolio also includes iChristian, an
online religious bookstore, More.com and Urban Media
Communications, all of which have gone out of business; BizBlast, a
company that hoped to help small businesses get on the Web but ended
up laying off more than half its staff last fall; and iPrint.com, which
went public just prior to the spring 2000 crash and traded last week at
less than 50 cents a share.
According to Lisson, Softbank V has already parceled out all of the
fund's money yet has distributed no money to investors. Softbank VCs
admit the fund overindulged in vulnerable sectors.
"We were overweighted in services, and when that sector got hit our
fund got smashed," says Gary Rieschel, executive managing director of
Softbank Venture Capital. "We were also overweighted in Internet
consumer and business-to-business, rather than core technologies."
Still, Rieschel pledges, "we'll have a few nice pops and even a couple of
home runs." He's already told the fund's limited partners they can expect
a return of 150 percent to 200 percent. That might sound like a good
payoff, but funds typically have a 10-year life span. Doing even the
more optimistic math means this comes to about 7 percent a year, which
is barely better than a regular money-market account, despite the
enormous risk inherent to venture investments during an economic
slowdown.
Perhaps the biggest disappointment comes from Benchmark, a firm
whose towering reputation gives it that much further to fall. The firm's
success with Ariba and eBay sealed its reputation as one of the most
successful VC firms of the late '90s. How, then, does it get lumped
together with Hummer and Draper when insiders mention troubled VC
funds?
Mainly because of the performance of Benchmark III, the firm's third
fund. The fund raised $149 million in the second half of 1998, and then
spent all that cash in nine months, a fraction of the three-year average
before 1998. In all its other funds, Benchmark has invested in 21
networking-equipment and semiconductor startups, 10 software
companies and another six firms in the wireless market - but fund III has
only one investment in any of these categories: Collabra, a software
company. The fund has three investments in networking services
companies.
According to Lisson's data on Benchmark III, the partners invested in
24 startups, including Epinions.com and Living.com. By last fall,
though, the fund was down to a portfolio of 18, half of which were in
online retailing, with another three in the business-to-business sector.
Four others have since gone out of business, including Great
Entertaining and CharitableWay.com, representing more than $20
million in losses. Of the remaining companies, five have struggled with
cutbacks and layoffs.
Benchmark partner Kevin Harvey denies that Benchmark III is
performing poorly: "I feel confident that fund three will perform at the
top of its class." He also says that Benchmark IV - raised in 1999 - is
already proving a success with two public offerings.
Benchmark had always defined itself strictly as an early-stage investor,
but when it invested $19 million in 1-800-Flowers, the partners rolled
the dice on a "mezzanine" investment - an investment in a company
poised to go public. That proved costly. 1-800-Flowers is the one
company in the fund that has gone public. But by September 30, 2000 it
had racked up a loss exceedig $10 million for the fund, according to
InsiderVC.com. After publication of this story, Benchmark said that loss
has fallen to $2 million.
Compounding its bad bets, Benchmark failed to hold back enough of its
reserves for further financing. VCs usually reserve about half of a fund's
cash to make later investments in its most promising companies. Within
the venture world, it's generally frowned upon to pull money out of a
new fund to salvage a company funded by a previous one. According to
its contract with limited partners, Benchmark is permitted to crosspollinate
between funds, but doing so, experienced VCs say, raises the
question of whether you're trying to cover for old mistakes with new
money.
In general, VCs try to avoid such cross-fund investments. "It's
something you should do very rarely and only when you have complete
confidence in a company," says Geoff Yang, a 16-year VC veteran.
"Otherwise, there are huge opportunities to get second-guessed by your
limited partners, who might think you're using one fund's money to prop
up the investment of another." On at least three occasions, Benchmark
has dipped into fund IV to invest in fund III companies, including a $3
million investment in the now-defunct Living.com.
Still, Benchmark remains confident in fund III's long-term performance.
Despite the carnage so far, the firm is convinced at least five of the
surviving companies could single-handedly provide a $1.5 billion return.
VCs by nature are an optimistic bunch, but the boys of Benchmark may
be an extreme example of the breed. The world around them has
changed dramatically, yet they still believe that a $1 million investment
in fund III will eventually return $150 million to investors.
That would take quite a turnaround. Until then, Benchmark, like other
VC firms with hangover funds, can try again with newer funds, for
which they've so far had little problems raising money. The question is,
will their reputations recover as easily?
Kathi Black, Diana Moore, Katie Motta and Jeff Palfini contributed to
this report.
CORRECTION:
An earlier version of this article should have stated that Benchmark
Capital's third venture fund has invested in a software company,
Collabra. Also, due to an editing error, the story should have stated that
Benchmark III has no investments in networking equipment, and that
the $10 million loss the fund faced on an investment in 1-800-Flowers
was as of Sept. 30, 2000.
Earlier stories from TheStandard.com:
Floyd Kvamme: The Emissary
Dado Banatao: The Adventure Capitalist
The Retreat of the VCs
Money Watch
Venture Buzz: Putting Its Billion to Work
Copyright © 2001 The Industry Standard. All rights reserved.
STEPHEN LISSON, STEPHAN LISSON, STEPHEN N. LISSON, STEVE LISSON, STEVEN LISSON, STEVEN N. LISSON, INSIDER VC, INSIDERVC, INSIDERVC.COM
STEVE LISSON
|
www.stephennlissonpdf.blogspot.com
|
Subscribe to:
Posts (Atom)