At least one of the departures triggered the “key man” provision in Bay’s 11th fund, according to three sources, but Dempsey, who co-founded the firm in 1976, told VCJ that was not the case. If the provision was triggered, Bay’s limited partners would have the right to tell the remaining GPs to cease making new investments.
Bay has removed the profiles of Chin, Deshpande and Patnam from its website. All three declined to comment or did not respond to requests for comment. Chin’s profile on LinkedIn says he founded
Dempsey says Bay is focused on managing its 10th and 11th funds following the departures. “Our emphasis now is to manage successfully what we consider our two viable funds and to manage those successfully to the outcomes we expect,” he says. “That may bode well for a future fund. We have our assignment now to manage this fund as it is and drive it to the results.”
Dempsey says he does not know why the three partners quit. When asked if compensation played a role in their departure, Dempsey told VCJ: “I have no idea. This is all speculation. My guess is that you’re hearing this from either other firms or other people who know something maybe about how venture capital partnerships have worked in the past. I really don’t know.” Dempsey declined to discuss how Bay Partners determines the compensation of its investors.
It is unclear if Chin, Deshpande and Patnam quit to start their own fund. Bay Partners was rumored to be talking to LPs about a new fund twice in the past two years, according to one source, but the firm never filed a formal fund-raising document with the SEC.
If Bay was trying to raise a new fund, it wouldn’t be surprising if LPs were lukewarm to the idea. Its $364.5 million 10th fund, raised in 2001, produced a net IRR of -10.1% as of September 2009, according to the
Dempsey says he has bee speaking with limited partners about the situation at Bay, but he declined to discuss the nature of those conversations. “Well I think that’s obviously confidential information, but you can rest assured that we are talking to them about status of the companies we have invested in and exactly what has transpired at those companies,” he says. “That’s what’s most important to them and most important to us.”
Limited partners in Bay X and Bay XI were either unavailable for comment or declined to comment about the general partner departures. LPs in the 11th fund include AlpInvest Partners, BP Pension Fund, CS First Boston, GIC Investments Ltd., Horsley Bridge Partners, Paul Capital Partners and Portfolio Advisors, according to a press release issued by Bay when it closed the fund in 2005.
Dispute Over Key Man
I have no idea [if economics caused the three partners to leave]. This is all speculation. My guess is that you’re hearing this from either other firms or other people who know something maybe about how venture capital partnerships have worked in the past.”
Dempsey says that the departure of the three general partners did not trigger a key man clause that might allow limited partners to halt further investment from Bay’s 11th fund. This runs counter to the reports of three sources who claim to be knowledgeable about the situation at Bay, who say that the key man agreement has been unquestionably been triggered.
“The key man clause, as a legal matter we’re not sure that it has been triggered, but as a practical matter it probably is,” Dempsey says. When pressed for further explanation on how the clause might have been avoided, Dempsey pointed to the nature of the partners’ resignation letters. “The key man clause was not triggered,” he says. “Salil was not part of the key man clause. It was only the other two. They resigned with the understanding that they would keep their board seats. We decided that that doesn’t make good sense. They’re not part of the firm, how can they manage the board seats under those circumstances?”
Both Chin and Patnam had two board seats each, Dempsey says. Deshpande also has two board seats that he will maintain, Dempsey says. Another source familiar with the firm’s plans says that Deshpande will also maintain a number of board observer seats.
Dempsey says Bay does not have plans to hire partners to replace the three that left. “We haven’t really talked about that,” Dempsey says.
Dempsey, 68, says that he has been busy maintaining an active role in managing the firm’s 10th and 11th funds, despite reports that he was all but retired. “I am very active,” he says. “I think you can talk to anybody of our LP base or any of the company’s boards that I am on and you’ll find that I’m not retired at all. I don’t know where people get that. It’s this inaccuracy of reporting in today’s world.”
Dempsey says that he holds five board seats on startups that were financed from Bay X and four startups backed by Bay XI. “We have a lot of active investments that will be harvested in the next year or two years,” he says. “I’m driving all of those that are the main value drivers.”
Two sources familiar with Bay’s portfolio say that Dempsey did not actively source a single deal for fund XI. They say that Dempsey sat on the board of enterprise software company
It is unclear how much capital Bay’s $285 million 11th fund has to left to deploy. It has invested in at least 27 companies to date, including 22 that are still active and five that were acquired, according to Thomson Reuters (publisher of VCJ). Many of the firm’s recent investments have been in early stage Web 2.0 startups, which require small amounts of capital.
The recent departures are reminiscent of the significant personnel changes that Bay went through several years ago. Loring Knoblauch, who had been a GP with Bay since 1999, left in 2005 for an undisclosed reason; Dino Vendetti, who had been with the firm since 2001, left in 2006 to be a partner at
Our emphasis now is to manage successfully what we consider our two viable funds and to manage those successfully to the outcomes we expect. That may bode well for a future fund.”
At the time, Dempsey worked with limited partners and lawyers promising to re-staff the firm while Kapadia went on a hiring spree. “I rebuilt this firm from the ground up, brick by brick,” Kapadia told the VCJ at the time. “I wanted to bring in guys who had as little venture capital experience as possible and had a very confrontational style. That was exactly what we were looking for.”
Kapadia said at the time that the changes resonated with limited partners. “They felt a new sense of relief that we were not afraid to talk through our losses and our warts.”
The new partners were anxious to put Bay’s turbulent past behind them. “Media likes hyperbole,” Deshpande told VCJ in 2007. “Things are often not as bad or dark as they seem. When you see a star exploding, you’re really looking back into the past. By the time everybody else started talking about [the departing partners], it had already happened and we had moved on.”
In this iteration, Dempsey says Bay is focused on managing its current funds but may consider raising another venture fund in the future. “You never know,” he says. “You certainly never want to say never.”
Five companies backed by Bay Partners’ 11th fund have been acquired to date:
• Cake Financial, a social investing service, was bought in January by Etrade for an undisclosed amount. Cake had raised $1.26 million from
• G2One, a provider of consulting and training around the Groovy and Grails technologies, was bought by Bay portfolio company SpringSource Global in November 2008 for an undisclosed amount. G2One had raised a $30,000 bridge loan from Bay’s 11th fund.
• Montalvo Systems, a fables chipmaker, was acquired for an undisclosed amount by Sun Microsystems in April 2008. Montalvo had raised nearly $60 million from
• SocialPicks, an online community for stock investors, was bought by FinancialContent for an undisclosed amount in May 2009. SocialPicks had raised $1.5 million from Bay and individuals.
• SpringSource Global, a developer of open source software, was acquired by VMware for $362 million in August 2009. SpringSource had raised nearly $46 million from
Sources: Thomson Reuters and VCJ reporting