For years, upstart venture capital firms have leveraged limited partner commitments by tapping into the Small Business Administration?s popular SBIC program. The only problem, however, is that not everyone who asks for an SBIC license gets one.
Such is the current catastrophe at NextLevel Venture Partners, a New York-based investment house that was turned down by the SBA earlier this month. The denial came as a shock to the firm, which since has been forced to respond by aborting outside fund-raising efforts and parting ways with two of its three managing directors.
NextLevel was formed in late 2000, and launched its freshman fund the following January with a target of $60 million to $100 million. It got off to a quick start, calling down cash from a few small anchor investors and lining up more traditional LP commitments that would be contingent on securing the SBIC license. In fact, NextLevel was so confident of its future stability that it used those anchor dollars to make a handful of early-stage plays in companies like supply-chain software developer Riva Commerce and information security provider BioNetrix Systems Corp.
The first possible sign of trouble for NextLevel arose last October, when co-founder Rahul Bhandari stepped down to build a separate venture organization named Paras Ventures. Despite having still not received the SBIC license, and thus not holding a formal first close on the NextLevel fund, remaining co-founder Joe Heller went in search of new blood.
First up was Albert “Buddy” Coffrin, who was previously a partner at North Atlantic Capital Corp., and before that CEO of Green Mountain Bank. That hire came near the end of last December, with Coffrin then successfully bringing along a computer scientist from IBM Corp. named David Epstein. Both men were formally named managing directors in a press release dated January 23, 2002.
Just over a month later, however, NextLevel received word that its fund had been turned down for SBIC status. Not only did this mean it would have to turn down the existing LP commitments, it also would not have enough management fees left to pay the new managing directors. The firm sent out a tersely worded letter to all potential LPs that it had cancelled its fund-raising effort (without ever holding a first close), and then quietly let Coffrin and Epstein go their separate ways.
“Getting the [SBIC license] was a key for us because it would have given us two-to-one leverage,” explains Heller. “Without it, and given the current fund-raising environment, it just made more sense to focus on the capital we already had on hand? which requires much less of everything.”
Heller insists that NextLevel is still viable, but acknowledges that the massive capital void will lead to significant changes in the firm?s investment strategy. Given the recent need for significant follow-on reserves when making early-stage deals, the firm could possibly move toward doing select later-stage deals. Heller also has not ruled out a future fund-raising drive if market conditions improve.
In the meantime, both Coffrin and Epstein are looking for work. NextLevel also has taken its outside PR representative off retainer and temporarily disabled its Web site. The only loose end that doesn?t seem to have been tied was letting firm co-founder Rahul Bhandari know what had happened to his former endeavor. In an e-mail response to a Private Equity Week inquiry, Bhandari said he was previously unaware of the recent developments at NextLevel, but that he wished the firm well.
As of press time, the Small Business Administration had not returned calls requesting an explanation as to why NextLevel did not receive an SBIC license. Also, both Heller and other sources close to the firm declined to reveal how much capital NextLevel currently has under management.
Dan Primack can be contacted at Daniel.Primack@tfn.com
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