Atlas Fund VI Goes To Choppin’ Block, Again

Atlas Venture has once again taken the axe to its sixth investment fund, this time chopping its size from $850 million to $600 million. Unlike what happened during a smaller cut this past June, however, the Atlas woodshed is now also home to some of the firm’s own investment professionals and satellite offices.

“The need for a larger restructuring is much more obvious to us now than it was six months ago,” says Christopher Spray, a London-based senior principal with Atlas. “We are trying to get a fund size that can generate the best returns… but a smaller fund means less revenue [from management fees], so we need to reduce expenses.”

Atlas first raised $967 million for Fund VI in April 2001, but falling company valuations and dampened burn rates meant that the firm soon had more money than it knew what to do with. Compounding this over-affluence was the continued existence of over $100 million in uncommitted capital from a fifth fund raised in 2000. In an attempt to rectify both situations, Atlas received limited partner approval for a plan that both reduced the size of Fund VI and permitted Fund V to co-invest in Fund VI deals for up to 18 months.

But the numbers never really added up. The document sent to LPs in June said that Atlas would reduce its average investment in each portfolio company from $15 million to $20 million down to $10 million to $15 million. That represents a 25% reduction in the amount Fund VI would have to invest in each deal, without even accounting for committed capital from the predecessor fund, but the initial Fund VI size reduction was only 12% ($967 million down to $850 million). Spray explained the discrepancy last week by saying that Atlas expected to make up the difference by investing in additional portfolio companies over an extended time period, although he acknowledged that such plans have been scrapped now that the fund size has been reduced by a total of 38%.

Also being scrapped by Atlas is a West Coast presence that includes two satellite offices and nine employees. The firm expects to shutter its Menlo Park, Calif. and Seattle offices by the end of January, at which point it will no longer actively seek out new West Coast deal opportunities. Of the approximately 240 companies in the Atlas portfolio, about 45 of them are based in California.

“If you look at where we have the longest track record and competitive position, it’s in Boston and Europe,” Spray explains. “We are basically doing the same type of thing we’ve been advising our portfolio companies to do.”

The employees being laid off as part of the office closures include principals Laura Jennings (Seattle) and Jay Shively (Menlo Park), each of whom will maintain a carried interest in Fund VI and continue their responsibility for certain portfolio investments. Other West Coast layoffs include venture principal Bill Bryant (Seattle), an associate, an analyst and four members of the firm’s administrative support staff. In addition, Atlas plans to lay off three European officers, with one pink slip going to each of its London, Munich and Paris offices.

“We obviously signed up for a larger firm that was doing deals on the West Coast, but we believe that Atlas is doing the right thing with these moves and have complete confidence in the management team,” says one limited partner in Fund VI. “They have given this a lot of thought and done a great job communicating with us.”

Atlas’ limited partners include Alliance Private Equity Partners, Commonfund Capital, Grove Street Advisors, Pennsylvania State Employees’ Retirement System, Virginia Retirement System and the University of Texas Investment Management Co. (UTIMCO). That last LP is of particular interest given its recent decision to release internal performance data on its general partnerships. According to the information released by UTIMCO, Fund VI had an internal rate of return (IRR) of -39.46% as of Sept. 30, 2002. While it is important to note that the fund is still very young with just 15 portfolio companies under its belt, its performance is below the Venture Economics vintage year benchmark for venture funds closed in 2000 of -20.6%.

Contact Dan Primack