Limited Partners Vote To Pull Plug on VSP’s Newest Fund

VSP Capital’s limited partner advisory board effectively agreed last week to discontinue the firm’s third fund, and now talk has turned to the future of its second fund, PE Week has learned.

VSP’s advisory board, made up of six key LPs, voted unanimously to recommend to all of the San Francisco-based venture capital firm’s investors that they discontinue its third fund, according to four sources. But since the six LPs collectively committed slightly more than three-quarters of the $185 million fund, they don’t actually need permission from any other limited partners to pull the plug on the fund, which held a final close just two months ago. The fund has 14 institutional LPs.

If the matter proceeds much like an unrelated VC fund dissolution, then VSP’s limited partners soon will mail a ballot to formalize their decision. That process could take a few weeks.

A separate process that will likely take months is what the LPs will decide to do with VSP’s second fund of $195 million that closed in 2000, according to a source close to one of the LPs. The source says that VSP founder and Managing Partner Joanna Rees-Gallanter and General Partner John Hamm have made it clear that they want to continue to manage fund II. The LPs could decide to leave it in their hands or sell part or the entire portfolio on the secondary market.

Rees-Gallanter and Hamm did not respond to interview requests via email and voice mail.

It isn’t clear what will happen to three stealth investments VSP has made through fund III. One possibility is that they could be folded into fund II and managed by Rees-Gallanter and Hamm.

Fund II has invested in 28 companies, including two that have gone out of business and eight that have been acquired, according to the MoneyTree Survey from PricewaterhouseCoopers, Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association.

Among the companies that remain in fund II are AccountNow Inc., an online banking service based in San Ramon, Calif.; Danger Inc., a maker of wireless messaging devices based in Palo Alto, Calif.; and E4X Inc., a foreign exchange hedging service based in New York.

VSP’s top co-investor for fund II is Mobius Technology Ventures, which has participated in four rounds with the fund, according to MoneyTree. Four other firms have each participated in three rounds with VSP’s fund II: Draper Richards, Kettle Partners, Redpoint Ventures and Vulcan Capital.

The limited partners who make up the advisory board for fund II are Adams Street Partners, Duke Management Co., Horsley Bridge Partners, Parish Capital, TD Capital and the University of California (UC). One source says that Adams Street, Horsley and UC, in particular, pushed for dissolution of fund III.

All six of the LPs were asked for comment multiple times, but all declined. Of the six, two are also LPs in fund II: UC and Horsley Bridge. VSP has said that fund II has 75 limited partners, a group that includes Wellcome Trust.

“Most agreements do allow the LPs to shut down the firm if they decide that it’s in the best interest to do so,” says Carl Metzger, an attorney in the litigation group of Goodwin Proctor. “They don’t typically need a reason, in other words. What they do need, typically, is a two-thirds vote, or a super majority [of LPs wanting to shut down the fund] of 70 to 80 percent.”

Metzger is not involved in the VSP case and was speaking generally about dissolutions. He says that in similar cases, investors stop the possibility of any future capital calls and that a wind-down period is usually negotiated with a fund’s managers, who continue to oversee investments that they have made, but who see reduced terms in compensation to do so.

VSP appears to have fallen victim to soured relationships in its general partnership. It has lost three of its five general partners in the past six months.

Even during its fund-raising process, VSP appeared to lose some steam. In late November, Tony Conrad, who had been a GP at the firm since 2000, left abruptly. Rees-Gallanter has said that she fired Conrad, which he does not deny. He has since launched a stealth, RSS-related startup in San Francisco. He declined to comment.

Vince Vannelli, who had been with VSP since 2002 and was promoted from venture partner to general partner in November 2004, resigned in late March, according to sources familiar with the situation. Two months later, on May 12, GP Matt Crisp tendered his resignation. Both declined to comment.

It was the resignation of Crisp, along with the departure of Conrad, which triggered a “key man” clause in the limited partnership agreement, allowing LPs to vote on whether the fund should continue.

VSP, previously known as Venture Strategy Partners, has seen a number of people come and go since it closed on its first fund in 1998:

* Jeff Braun joined as a venture partner in 1999 and left in 2000.

* Bob Hambrecht joined as a venture partner in 1999 and left in 2002

* Tony Kamin worked at VSP as a venture partner from 1998 to 2003

* Dan Kranzler was a venture partner from 1999 to 2002.

* And David Likins joined VSP in 1999, was promoted to GP in 2000 and left the following year.

Likins, now president of Kirkwood Mountain Resort and Development Co., couldn’t be reached for comment. Kamin, now president of a private equity company, did not return a phone message. Kranzler, founder and CEO of Mforma, a cell phone entertainment company, also did not respond to a phone message.

Additional reporting by Lawrence Aragon and Dan Primack.