The latest in a growing line of venture backtrackers, Redpoint Ventures late last month told its limited partners that it would draw down 25% less cash than anticipated from its $1.25 billion second fund, according to two sources close to the firm.
At least one LP says the cut still isn’t deep enough to allay concerns among limited partners that the firm is drawing down too much in fees without producing results.
If Redpoint draws down 25% less than anticipated from Redpoint Ventures II, the final size of the vintage 2000 fund will be $937.5 million. To be clear, Redpoint is not cutting the size of its fund; LPs are still contractually obligated to come up with the full amount should Redpoint ask for it.
“It looks like it was intended to relieve pressure, but it’s not really meaningful,” says a Redpoint LP who asked to remain anonymous. “They might as well have cut it to $999 million so they could tell us it’s no longer a billion dollar fund.”
A Redpoint spokeswoman declined to comment.
When The Going Was Good
Redpoint, based in Menlo Park, Calif., launched with much fanfare during the height of the Internet boom. Founded in 1999 by six partners from Institutional Venture Partners (IVP) and Brentwood Venture Capital, it easily raised an inaugural $600 million vehicle plus a $100 million side fund, in the largest first fund ever raised by a VC shop. The firm quickly put most of that money to work – some of it in questionable Internet deals – and went back to LPs for more than $1 billion in 2000.
The LPs were more than happy to fork over the cash, because the Redpoint partners had produced some smash hits at their prior firms. Partner Geoff Yang, for instance, was a backer of Juniper Networks, Agile Networks (bought by Lucent), Crescendo (acquired by Cisco) and Shasta Networks (bought by Nortel).
But after two years and no home runs from the Redpoint team, LPs have grown restless. Redpoint’s only IPO – Multilink (Nasdaq: MLTC) – produced a negative return for its first fund, based on data from the company’s S-1 statement. The firm paid about $4 per share for 2 million shares, and those shares closed at $2.24 each on March 28.
At its current rate of 2% annually, Redpoint is drawing down $25 million a year in fees. If it draws fees based on the new smaller fund size, the firm will still pull down $18.75 million per year. LPs are not only displeased that Redpoint’s partners are drawing fees from their first and second funds – without having produced returns. They’re also irked that Redpoint is collecting those fees in addition to fees from multiple funds at IVP and Brentwood.
“Their actions would imply that they’re in it to suck the fund dry on management fees – irrespective of performance,” says the LP, who asked not to be named.
Wading Into Deeper Cuts
Hoping to avoid charges of keeping too much capital under management, Charles River Ventures is toying with the idea of not calling down as much as $600 million of its $1.2 billion Fund XI.
Ted Dintersmith, a general partner with the Waltham, Mass.-based firm, says his firm is in the process of discussing the fund size issue with its LPs.
“We’re inclined to cut the fund by 50% or more, but we need to do a lot more talking before we do that,” Dintersmith says. “As a firm, we feel uncomfortable doing something like this without first putting together a broad consensus.”
The news, which was first reported in The Wall Street Journal, is the second time CRV has made waves in recent weeks. In early March, the firm fired four of its partners.
No Cuts Here
Despite all the cutback news, at least two firms have decided to stay the course.
Foundation Capital had multiple discussions over the past three months about cutting back its $650 million Fund IV, but ultimately rejected the idea. Bill Elmore, a general partner with the Menlo Park, Calif.-based firm, said that Foundation concluded that it had enough partners to handle the existing commitments without cutting back.
Spectrum Equity Investors has also decided to maintain its $1.95 billion Fund IV, according to one of the firm’s limited partners. The Menlo Park, Calif.-based firm had discussed sizing down, but also seems to have nixed the idea.
Lawrence Aragon can be contacted at Lawrence.Aragon@tfn.comDan Primack can be contacted at Daniel.Primack@tfn.com