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Atlas Venture cuts fund

Atlas Venture has cut Atlas Venture VI LP by 12 per cent, reducing its size from $967 million to $850 million. Following a quarterly cash flow review of its entire portfolio, the firm has also decided to amend the partnership agreements of two other funds, Atlas Venture III LP, a $232 million fund raised in 1996, and Atlas Venture V LP, a $757 million fund raised in 2000.

“In discussions with our investors, we said we thought deal flow and the quality of the deals were as interesting, but the thing that has changed is that we would not be investing the same amount in each portfolio company as we had originally thought,” says Christopher Spray, based in London.

In a letter sent to limited partners two weeks ago, the firm argued that companies are requiring less capital to execute on their business plans, and thus the firm would cut the size of its average investment in each portfolio company from $15 million to $20 million to an average investment of $10 million to $15 million. The fund has invested approximately $50 million in 14 companies since it was raised last year, deals that will amount to $120 million over subsequent rounds of financing. Following the reduction in fund size, the firm expects to maintain its pace of investment at five deals per quarter.

“We believe we’re in an era where we expect lower valuations in the portfolio and need to review [capital-investment businesses and how much we’re willing to invest in them] in order to make the same returns,” Spray says.

There will be a pro rata reduction in the fund’s management fee and no change in the firm’s carry.

At the same time, the firm is asking LPs to allow Atlas Venture V LP to co-invest alongside Fund VI in new deals for the next 12 to 18 months. The firm has not allowed funds to make crossover investments in new deals in the past, but has allowed its funds to co-invest in follow-up rounds. Fund V has invested in 50 companies since its inception, deals worth about $630 million.

LPs are expected to vote to approve the reduction of Fund VI and the change to Fund V over the next several weeks.

Meanwhile, LPs have already approved a change in the partnership agreement of Atlas Venture III LP, one that would allow the firm to invest up to 110 per cent of the firm’s committed capital directly in portfolio companies. That means the firm will recycle early returns back into its portfolio, giving it an additional $23 million of investment capital to support maturing portfolio companies that will need another round of private capital to support operations before the firm can make a public exit. The change allows Atlas Venture to keep its portfolio humming while the IPO and M&A markets remain sour.