Sevin Rosen Funds says it held off on raising a new fund because the traditional venture capital model is broken. But the firm’s troubles have less to do with larger problems confronting the entire industry than they do with its own failure to change with the times, partners at other venture firms say.
While its peers have adapted by changing their focus, adding new partners and exploring new regions, Sevin Rosen has largely stayed on a well worn path. It kept its focus on communications and semiconductor startups even after strategic acquirers stopped gobbling them up and the public lost its appetite for the sector. It failed to attract and keep new, young partners: Not one of its investors is under 40. And it continued to focus solely on Silicon Valley while others went to emerging markets such as China and India.
Staying the course hasn’t proven to be a winning formula for Sevin Rosen. It recorded six IPOs over the past six years, but none has been a big winner. Three of the six portfolio companies it has taken public since 2000 have market caps lower than the total VC they raised. In addition, seven of the 12 portfolio companies it sold since 2003 with announced deal values were priced below the total venture capital they raised. There is evidence to suggest the other seven acquisitions made from its portfolio during that time were substantially written down.
“Lots of people are experimenting with the venture model,” says Erik Straser, a general partner at Mohr Davidow Ventures. “There isn’t one right answer. History will play out and determine who wins and loses, but having no strategy is one of the most dangerous decisions.”Evolution isn’t easy, but fortunately for Sevin Rosen, there are plenty of examples of successful mutations to mimic.
Leave home
Examples: Granite Global Ventures, DFJ
Lots of people are experimenting with the venture model … Having no strategy is one of the most dangerous decisions.”
Erik Straser, General Partner, Mohr Davidow Ventures
Granite Global Ventures became one of the first U.S.-based firms to pursue opportunities in China back in 2000. It dedicates 30% to 50% of its fund to China and has two of its partners working on the ground there. The firm, which recently raised $400 million for its third fund, scored big last year when portfolio company Alibaba, a leading Chinese e-commerce site, sold part of its equity to Yahoo for $1 billion. That helped Granite post an IRR of more than 40% on its first fund. “We’re always thinking we don’t want to be lemmings,” says Managing Director Scott Bonham. “We want to get in front of ideas and stay ahead of the market.”
In contrast to Granite, Sevin Rosen has made just six investments in non-U.S. startups in its entire 25-year history, according to Thomson Financial (publisher of VCJ). “They were still looking in their own backyard,” says Kelly DePonte, of placement agency Probitas Partners.
Going abroad is working for Draper Fisher Jurvetson, too. The firm got a piece of two hot exits in 2005 (Skype and Baidu) thanks to its investment in its DFJ ePlanet Ventures. “I can understand the concerns that isolated, provincial firms have since they are somewhat disconnected from these global opportunities,” says Tim Draper. “But there’s a renaissance at hand for VCs with access to a global network.” While DFJ’s 2000-vintage fund is in the red just like Sevin Rosen’s, it isn’t doing as poorly. DFJ VII posted an IRR of -4.6% as of the end of March, compared to a -12.3% IRR for Sevin Rosen Funds VIII, according to the California Public Employees’ Retirement System, an investor in both.
One particularly nice thing about going abroad is that you can apply the knowledge you have from what has become a mature tech sector in the United States. Communications infrastructure technologies, for example, are doing well in India and China, where telecom companies are building out new networks. Promod Haque of Norwest Venture Partners is now making investments in India in some of the same types of companies that made him a star in the United States in the late ‘90s.
Find fresh faces
Examples: Benchmark and Mayfield
We’re always thinking we don’t want to be lemmings. We want to get in front of ideas and stay ahead of the market.”
Scott Bonham, Managing Director, Granite Global Ventures
Young investors have a lot to prove and are willing to work hard to make their mark. You can grow your own hotshots through a hierarchy system that promotes the most competent investors or you can steal people who have already proven their worth. Benchmark Capital did the latter, luring 34-year-old Peter Fenton away from Accel Partners in April. Fenton had scored with Wily Technology and JBoss. Each sold for over $300 million in 2005.
In early 2005, Mayfield Fund wanted to go after the emerging Web 2.0 market, but it felt it needed more expertise, so it hired Raj Kapoor, founding CEO of online digital photo service Snapfish. Kapoor started out as a venture partner and has since been promoted to managing director. Mayfield bolstered its consumer Internet team in September by hiring serial entrepreneur Navin Chaddha, founder and CTO of VXtreme, a streaming media software company acquired by Microsoft and renamed Windows Media.
Go bigger
Examples: NEA, Sequoia
Some firms with early stage expertise are upping their bets by backing mature companies with a shot at growing quickly. New Enterprise Associates earmarked $1.5 billion of its $2.5 billion 12th fund to what it calls “venture growth equity.” It is making big bets on mature companies it believes will grow fast, like it did successfully with Tele Atlas in July 2004. It did a $210 million PIPE for the publicly traded company alongside Oak Investment Partners. Tele Atlas, which is based in the Netherlands, provides infrastructure for locating mobile devices and delivering services to them. NEA bought in at less than $6 per share. Tele Atlas used the cash to buy GDT, a mapping database company, and started making its earnings numbers thanks to its enhanced product. Its stock is now trading above $15 per share.
Sequoia Capital is another successful early stage investor looking to tap into late stage. It has poached three young bucks from Summit Partners and Technology Crossover Ventures to source deals for its $861 million growth fund. The firm has already backed companies such as airfare pricing company ITA Software, which raised a $100 million Series A financing in January, and security company Blue Coat Systems (Nasdaq: BCSI), which raised $42 million from Sequoia and Francisco Partners in June.
There’s a renaissance at hand for VCs with access to a global network.
Tim Draper, Managing Director, Draper Fisher Jurvetson
Go smaller
Examples: Sightline Partners, Mangrove, Greycroft
Big isn’t the only direction to evolve. Some small funds have produced outsized returns recently. Consider Sightline Partners. The firm’s $40 million SightLine Healthcare Fund IV, raised in 2002, has seen some impressive exits. Sightline invested in Suros Surgical, which raised $14.75 million and sold for $250 million earlier this year, and Dynavax Technologies (Nasdaq: DVAX), which went public in 2004 and now has a market cap of $233 million after collecting $96 million worth of venture backing. Sightline invests across stages but keeps its focus on health care. It is currently investing out of a $23 million fund called the SightLine Healthcare Vintage Fund.
Another little firm producing big results is Mangrove Capital Partners. Its first fund, a $73 million vehicle raised in 2000, was an early investor in Skype, which was acquired by eBay for $2.6 billion last year. Mangrove, based in Luxembourg, didn’t let the success of Skype got to its head. Its second fund, raised last year, is just $120 million.
While Sevin Rosen and others see the glut of dollars flowing into venture capital as a detriment, Apax Partners’ founder Alan Patricof sees it as an opportunity. His new firm, Greycroft Partners, invests in digital media and focuses on Series A deals in which he puts $500,000 to $3 million to work. He says he zeroed in on the early stage space because a growing number of bloated VC funds abandoned it. “We’re returning to the roots of the industry,” Patricof says. “I think we’re going to see more boutique firms, and that’s a healthy thing.”
Mine new sectors
There’s nothing that says semiconductor investments should make money in perpetuity, just as there’s nothing that says buggy whips should make money in perpetuity.”
Kelly DePonte, Partner, Probitas Partners
Examples: Noventi, Kleiner Perkins, Spark Capital
When the well of innovation in one sector dries up, it’s time to find a new watering hole. Venture firms and investors who have changed their strategy to address new sectors often point to entrepreneurs as the catalyst for change. It’s still too early to say if the new investment sectors will pay off.Sevin Rosen is largely doing the same kinds of deals it did six years ago. More than 55% of its money is invested in communications and computer hardware deals, according to Thomson Financial. “There’s nothing that says semiconductor investments should make money in perpetuity, just as there’s nothing that says buggy whips should make money in perpetuity,” says DePonte.
It’s hard to find a successful firm that hasn’t embraced new industries. Kleiner Perkins Caufield & Byers has bored down into pandemic bio-defense, and “greentech,” while KPCB Partner Vinod Khosla, who once was a force in hardware and communications infrastructure, has become one of the biggest backers of ethanol production plants.
Another IT shop that has moved in a new direction is Noventi. Even though the firm had an IRR of more than 30% on its previous tech fund, it dropped its IT practice to focus on clean technology deals. “You have to adapt,” says James Horn, a Noventi managing director.Cleantech isn’t the only game in town. Consider what Spark Capital is doing. Founded by former investors of Charles River Ventures and Battery Ventures, the firm focuses on media and entertainment investments. It raised $260 million for its first fund last year.
Get out of VC
Examples: Vector, G&H
Our plan is to take the time to see if there is a new model that can better address the troubled exit environment than the traditional venture model has over the last decade.”
General Partners, Sevin Rosen Funds
There’s no law that says a VC has to remain a VC. Alex Slusky, once a partner at NEA, founded Vector Capital in 1997 to do spinouts, buyouts and PIPES. Vector recently had a big win with LanDesk Software, which it spun out of Intel in 2002. Avocent Corp. (Nasdaq: AVCT) bought LanDesk for $416 million this year, reportedly returning more than 10x to Vector and the others who backed the spinout.
Former VCs Terry Garnett and David Helfrich hope to follow in Slusky’s footsteps. Garnett, formerly a GP with Venrock Associates, and Helfrich, once a GP with ComVentures, founded Garnett & Helfrich Capital in 2004. Like Slusky, they are looking for under-achieving divisions buried in large tech companies.Some VCs have turned to hedge funds in hopes of leveraging their understanding of tech trends and startups. Bill Burnham, formerly a GP at Mobius Venture Capital, now runs a $10 million hedge fund called Inductive Capital.
What’s next
It isn’t clear which direction Sevin Rosen will go, but it understands that it needs to change. “Our plan is to take the time to see if there is a new model that can better address the troubled exit environment than the traditional venture model has over the last decade,” the firm says in a letter to LPs about it decision to postpone fund-raising.
Whatever new plan Sevin Rosen comes up with, it had better be compelling. “LPs would rather back a new set of managers that are hungry and have a new strategy that works within the environment today and that don’t have the baggage of a 2000-era fund that went belly up or didn’t outperform,” says Matthew Pedley, a GP of Minah Ventures.
Pedley is so certain that the venture model still works that he is about to market his first fund, an early stage fund that will target … well, he won’t say exactly. He wants to keep a competitive edge.
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