MDV Trims Fat From Fund VII

When Mohr, Davidow Ventures (MDV) hit the fund-raising buffet in the fall of 2000, it appears that the firm’s eyes were larger than its stomach. Last week, MDV decided to trim back its seventh fund by 20%, or approximately $170 million, to about $678 million, due to changes in the venture market since the vehicle closed, said Jon Feiber, a managing partner at the firm.

The vehicle had held a final close on $847 million for Fund VII in December 2000.

“We drew the first capital for the fund in April 2001 and, six months into it, we decided to [reevaluate] the strategy of having a fund that size, because we felt the fund was probably too large,” Feiber noted.

The firm is reducing the fund’s size simply by cutting all of its limited partners’ allocations by 20%. Other than changing the size of its latest vehicle, the firm is not altering its investment strategy at all, Feiber said. The firm’s focus is early-stage plays, with an emphasis on enterprise software, networking communications, infrastructure and semiconductors.

MDV’s decision to cut back its most recent investment vehicle is due in large part to its desire for the fund to have a four-year investment life. Also coming into play was the firm’s investment pace – about 10 to 12 new deals a year – and a current market trend that indicates portfolio companies may be consuming less capital, he noted.

Given the firm’s investment rate, leaving the fund size intact meant the vehicle would have had a five- to six-year investment cycle and a total life span of 12 to 13 years, which MDV felt was a bit unwieldy, Feiber said.

Moreover, the possibility existed that its LPs would be hurt because they would be paying management fees for capital MDV was not putting to work.

Moreover, given that the current exit environment is generating firms with values of between $200 million to $500 million, portfolio companies now need to be more capital-efficient in order to create worthwhile returns.

So with companies now taking in a total of about $25 million to $50 million from an entire investment syndicate rather than from each investor participating in the round, MDV didn’t need to have quite as much cash on hand to build a competitive entity, Feiber noted.

The decision to reduce the fund’s size came solely from MDV and was not a change initiated by its limited partners, Feiber stressed, adding that the firm’s investors were supportive of the decision because they felt it was easier to generate superior returns with a smaller fund.

Additionally, none of the firm’s LPs were having difficulty making their capital calls, he added.

An investor in the fund confirmed Feiber’s comments, saying he thought it was a great idea that the firm was cutting the fund back to what MDV thinks is an appropriate size. “Given what has happened in the market since they raised their [last] vehicle, it just makes sense that funds should shrink,” the LP said.

He added that it was highly unlikely that the firm would cut allocations because some investors were having difficulty meeting their capital calls. “I can think of a dozen LPs who would be happy to buy the position of an institution which could not meet its capital call. We did not get as big an allocation as we would have liked, for instance,” he added.

The current climate for investing is actually quite good, Feiber said, adding the firm is doing deals now with the idea that it is building companies for exits around 2006.

“We do assume the public markets will change at some point in the future and become more receptive,” he noted.

The fund has done six investments to date and should ultimately back a total of 40 companies, Feiber said.

Alistair Christopher can be contacted