Taking the venture capital fund cut phenomenon one giant step forward, Charles River Ventures (CRV) last week told investors that it will reduce its eleventh fund by over 62%.
The Waltham, Mass.-based firm closed on the $1.2 billion vehicle in early 2001, with the understanding that it would invest approximately $300 million annually over a three-year period (See PEW 1/2/01). Remaining capital would be considered dry powder for follow-on investments. However, given the overall drop-off in venture disbursements and lowered early-stage valuations, CRV decided it only needed $450 million to fulfill its three-year investment cycle.
“We felt committed to what we had told LPs about the time it would take to invest the fund, so an adjustment had to be made,” says Ted Dintersmith, a partner at CRV.
And what an adjustment it is.
By handing $750 million back to its limited partners, CRV has now cut more committed capital off an active fund than any other venture firm in history. Moreover, CRV will also return approximately $165 million in management fees originally based on the original fund size.
“Our limited partners said that giving back the [management] fees was up to us, but we felt that you don’t invite someone out to dinner at the Four Seasons and then order Jell-O for dessert,” Dintersmith explains.
Accel Partners also used a rebate strategy as part of its recent decision to reduce $1.6 billion of commitments by just over 32%. Unlike the Accel experience, however, CRV never gave serious consideration to novel capital reduction models such as fund splits. Instead, it tried to keep everything as simple as possible in order to best align its capital gains interests with those of its LPs.
Prelude To A Cut
Market rumors of a CRV fund cut were first stoked in March when the firm fired a pair of investors in both its Silicon Valley and Boston offices (See PEW 3/18/02). Those dismissals followed an earlier decision to dismantle its New York City expansion shop and its staff.
Dintersmith himself legitimized the whispers in April when he said that CRV was toying with the idea of cutting the fund by “50% or more.” He also said that any final decision would have to wait until the firm had held enough additional conversations with LPs that a “broad consensus” could be reached.
The turning point in that effort came during an LP advisory board meeting on May 7. After finding common ground on multiple points, CRV hammered out the final details with a smaller group of investors.
The actual news was delivered to most LPs last week, and was first reported in the Wall Street Journal. Investors will now be asked to ratify the fund reduction before it can go into effect.
Assuming the fund reduction is approved, CRV will likely go back out into the fund-raising market late next year to raise its twelfth investment vehicle. In the meantime, don’t be surprised if the next noise heard from CRV involves the hiring of a new partner.
The management fee structure of Fund XI will not be altered by the reduction, with the exception of the pro rata rebates. The vehicle’s approximate parameters are a 2% management fee and a 30% carried interest structure.
Investors in CRV XI include, but are not limited to: Boston University, Carnegie Corp. of New York, Commonfund Capital, Cornell University, HarbourVest Partners, Harvard Management Co., Hewlett-Packard Co., The Robert Wood Johnson Foundation, John D. and Catherine T. MacAuthur Foundation, Knightsbridge Advisors, Memorial Sloan-Kettering Cancer Care, Northeastern University, Rhode Island State Treasury, University of Notre Dame, University of Pennsylvania, University of Southern California, VenCap International Fund Managers, Virginia Retirement System, Vulcan Materials Co. and the Woods Hole Oceanographic Institution.
Included in both the $1.2 billion and $450 million fund capitalization figures is a small “friends” side fund that invests alongside the general CRV XI fund.
Contact Dan Primack at Daniel.Primack@tfn.com