Industry Standard | Fallen VC Idols | Steve Lisson | Austin, Texas

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Monday, March 9, 2015

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

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TheStandard.com

Fallen 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

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