Over six months after it failed to approve an investment advisory agreement at its last shareholders’ meeting, the board of directors of MeVC Draper Fisher Jurvetson Fund I Inc. (MeVC) has apparently settled on a management structure.
The board of the publicly-traded venture capital fund named Director John Grillos as the permanent internal investment manager and appointed Boots Del Biaggio as president of MeVC to lead a new strategy for investing part of the fund’s capital in debt instruments offered to venture-backed companies.
MeVC’s largest shareholder, Millennium Partners, which has filed two suits against it, was critical of the new direction and of MeVC’s plan to buy back $20 million of its stock on the open market.
MeVC raised $330 million in its IPO, and, as of Oct. 3, had a market capitalization of $130.4 million, which is $17 million below the listed value of its liquid assets.
In the letter to shareholders announcing the repurchase plan and the appointments of Del Biaggio and Grillos, three MeVC directors say: “A repurchase program is a prudent and sound use of the fund’s cash when the share price is below the cash per share.” Grillos, who didn’t sign the letter, says he intends to be in the market every day buying shares, but it could take the fund an entire year to buy $20 million of its own stock due to SEC regulations limiting share buyback programs based on the company’s trading volume, which for MeVC is pretty light.
It should be noted that just because the board approved the plan to buy shares, that doesn’t guarantee that the company actually will buy any or all of the $20 million allotment. Millennium Partners, whose agitation led MeVC to shake up its structure, released a statement that characterized the buyback plan as inadequate, suggesting that MeVC instead return the cash through a dividend.
Millennium appears equally unimpressed with the debt idea. However, MeVC’s newest executive is ready to get going. Del Biaggio says the venture lending program will be substantially similar to the strategy of his former firm, Sand Hill Capital, which is based on a model, he says, developed by Silicon Valley Bank in the early 80s.
“One of the key things for us is to follow top-tier VCs,” he says. He says MeVC will offer debt to venture-backed information technology companies all through the stage spectrum, with a sweet spot in companies that have last received Series A to Series C financing rounds.
He says he will focus on companies with revenue. However, these companies don’t have to be break-even or cash-flow positive. Del Biaggio says MeVC will offer secured debt instruments in return for interest payments and warrants, and he expects the loans to be between $2 million and $5 million and to mature in one to three years.
Grillos says he’s actually been kicking the idea around with Del Biaggio for a year, and MeVC also picked up three other former employees of Sand Hill, a company with investments including LookSmart, Isadra, which was acquired by VerticalNet, and Bluesteel Networks. Another company listed on Sand Hill’s Web site, Personic, is a MeVC portfolio company, and Sand Hill investment Wine.com also has a connection to MeVC.
In addition to unfriendly press releases, Millennium has filed two lawsuits against MeVC. Millenco LP v. MeVC Advisers alleges that an entity, which was formerly affiliated with MeVC, charged investors excessive management fees.
A second case, Millenco LP v. MeVC Draper Fisher Jurvetson Fund I Inc., et. al., alleges that directors Larry Gerhard and Grillos were elected on the basis of proxies with material misrepresentations and omissions and seeks to force new elections for these two of the five directors’ seats and a third seat from which Peter Freudenthal resigned in June.
Most of the allegations concern the relationships between Gerhard, Grillos and Director Harold Hughes in EVineyard, an online wine distributor. The suit alleges that proxies did not disclose that Grillos, an investor in EVineyard and its chairman, had oversight over Hughes and Gerhard in their management roles at EVineyard. In turn, Hughes and Gerhard had oversight over Grillos in his management role at Draper Advisers, the sub-adviser that formerly ran MeVC’s money. MeVC calls these claims frivolous.
The litigation wasn’t enough to dissuade Del Biaggio from taking the new post. “I did a lot of due diligence on what was being alleged by these shareholders,” he says.
There’s the Rub
In its letter, MeVC’s board says it interviewed and reviewed proposals from seven candidates. “We selected the plan that, in our judgment, offered the best prospects for meeting the objectives of the long-term individual investors for whom this fund was created. Then, we selected the team best equipped to implement that plan,” it states.
Millennium isn’t buying it.
“We are disappointed, but not surprised, by MVC’s (sic) continued efforts to circumvent shareholder approval by appointing key members of Draper Advisers-whom investors already overwhelmingly voted to terminate as investment adviser-as internal manager of the fund,” Millennium’s statement read. “We are skeptical of the Board’s plan to invest in venture capital debt financing, an asset class with all of the downside of equity venture capital investments, but only a fraction of the upside. Moreover, we have reservations about their choice to partner with a team whose performance track record is mediocre at best.”
Millennium’s statement didn’t qualify its attacks on Sand Hill’s track-record, but the group’s opposition to the strategy is interesting, because MeVC’s announcement resembles some of Millennium’s recommendations. Robert Knapp, managing director at Millennium, has stated that his ideal resolution involved a return of capital, a change in management and a reduction of fees.
Knapp has said before that he had recommended to the board that the fund adopt strategies similar to a traditional business development company (BDC), a noteworthy example of which is Allied Capital. BDCs invest in debt in part to allow them to offer a dividend yield, but that debt is often mezzanine debt, which may account for Millennium’s opposition.
Knapp has also repeatedly stated that he disapproves of MeVC’s board’s efforts to change the fund’s structure without seeking shareholder approval.
In a twist of the vine that is likely nothing but ironic, Del Biaggio, while at Sand Hill, made a $10 million loan to Wine.com and later foreclosed on the company. During Wine.com’s liquidation, Del Biaggio sold some of the company’s intellectual property for cash and equity to … EVineyard.
Contact Charles Fellers