Battery Ventures last week laid off nine employees as part of a firm-wide restructuring that has been three months in the making. In addition, the Wellesley, Mass.-based venture shop has retooled its investment strategy and decided to forego $51.4 million in fund management fees to offset the possibility of future clawback liabilities.
“If revenue is going to be down dramatically, which it is because we’re waiving so much in fees, then you have to look at the organizational element,” says Tom Crotty, general partner with Battery.
The most notable names on the pink slip list were those of general partners Tony Abate and Michael Darby. Abate had joined Battery in 1999 to focus on telecom and Internet services companies like Cbeyond Communications LLC and Looking Glass Networks Inc. Darby had signed on the following year to concentrate on communications and Internet infrastructure opportunities like Black Storm Networks Inc. Among the other who were laid off include Dick McGlinchey and Rich Moore, a pair of venture partners who helped advise portfolio companies on marketing and communications strategies.
“It may seem kind of strange for me to say this, considering that I’m one of the people leaving, but I feel they are doing the right thing,” says McGlinchey, who joined Battery in 1999. “They have spent a lot of time looking at various solutions, and this became their best option.”
The layoffs, which were first reported on Dec. 2, on PrivateEquityWeek.com, affected two general partners, three venture partners, two back-office investment professionals and two operational employees. Four of the nine were based on the East Coast, while the rest worked out of Battery’s San Mateo, Calif., office.
Battery began reevaluating its fiscal and organizational future three months ago, when the firm concluded that its $450 million fifth fund (which includes 1999’s Battery Ventures V and the Battery Ventures Convergence Fund) likely would be hit by clawback provisions at the end of its life cycle in 2009. Rather than wait out the storm and hope for a miraculous rebound, the firm decided to preemptively take its medicine.
“We took a worst-case-scenario look at the clawback situation for our remaining [Fund V] portfolio, in which we assumed that all 15 companies go bust” Crotty explains. “That would make the maximum theoretical clawback $44 million, and then we built in a bit of a cushion to deal with any technicalities that arise.”
In order for the partial fee reduction to go into effect, Battery needs its LPs to ratify a partnership amendment sent out on Nov. 27. In exchange for the fee reduction, LPs would have to agree to eliminate the clawback provisions from the agreement.
Fund V, which so far has returned approximately 50% of drawn-down capital, was closed in 1999 with a 2.5% annual management fee and more than $13 million in committed capital from the general partners themselves. The firm began suspending Fund V management fees in June of 2001, and those LP savings will be rolled into the $51.4 million.
Limited partners in Battery Ventures V LP include: Adams Street Partners, Corning Inc., Cox Enterprises Inc., Crossroads Group, Ewing Marion Kauffman Foundation, General Motors Investment Management Corp., HarbourVest Partners, Harvard Management Co., INVESCO Private Capital, Investment Fund for Foundations, Kansas Public Employees Retirement System, Liberty Mutual Group, Massachusetts Institute of Technology, Pantheon Ventures, University of Washington, Washington State Investment Board, Verizon Investment Management and Wellcome Trust.
Change in Strategy
In conjunction with its layoffs and preemptive clawback actions, Battery told LPs that it plans to return to the investment strategy roots that it had strayed from beginning in 1999. Not only does that mean reincorporating some later-stage and buyout investments into the mix, but it also involves de-emphasizing a recent focus on what has become an unholy trinity of communications services, semiconductors and telecom equipment.
“Around 60% of our dollars have gone into those three areas, and we just don’t see them recovering for several more years,” Crotty explains, although he stresses that the firm’s recent moves are more strategic than just a knee-jerk reaction to the slowed economy.
Battery has added 11 new portfolio companies in 2002 and made another 26 follow-on investments, according to Venture Economics (publisher of PE Week). All of the new additions can be classified as IT, and include Broadbus Technologies Inc., Dirig Software Inc. and ProfitLogic Inc.
“We’re not going away from IT, but the truth is that we’ve got too many guys who know box deals,” Crotty says. “So we’re not just downsizing, but we’re restructuring our skill sets and in 2003 and 2004 we’ll probably bring in some people who know different technologies and have flexed their buyouts muscles more recently than most of us have here.”
Contact Dan Primack