Three partners bolt from Bay Partners

Three of Bay Partners’ six partners all resigned on the same day two weeks ago, according to a knowledgeable source.

The source also said that the departures triggered a “key man” provision in Bay’s most recent fund, which means the firm’s limited partners will have the option to cease any new investments from the fund and essentially have the remaining GPs manage the existing investments. Since Bay raised its last fund five years ago, it isn’t clear if there is enough dry powder left to make cessation of new investments a significant issue for LPs.

Eric Chin, Salil Deshpande and Sandesh Patnam have quit the 34-year-old venture firm, leaving behind firm co-founder and Managing General Partner Neal Dempsey, Managing General Partner Atul Kapadia and General Partner Neil Sadaranganey, according to multiple sources.

It may have had something to do with division of labor. The CEO of a Bay Partners’ portfolio company said that he had never met or seen Dempsey or Kapadia after nearly three years of quarterly visits to the firm. The CEO says he met Sadaranganey once, but regularly met with Chin, Deshpande and Patnam.

Deshpande led investments in three of the five portfolio companies acquired from Bay’s most recent fund, including SpringSource Global, a developer of open source software that was acquired by VMware for $362 million in August 2009. Deshpande also was responsible for the firm’s push to invest in startups via its AppFactory, which focused on developers of Facebook applications, and the firm’s seed investment program, which invested in a broader spectrum of early stage tech companies.

Both the seed program and the AppFactory were designed to invest between $25,000 and $250,000 into promising startups. When Bay launched the AppFactory in 2007, it said it planned to invest in 30 to 50 developers.

Bay has removed the profiles of Chin, Deshpande and Patnam from its website. All three declined to comment or did not respond to requests for comment. Chin’s profile on LinkedIn says he founded Portola Venture Partners this year. The LinkedIn profiles for Deshpande and Patnam do not show new employer information.

Dempsey did not respond to an email request for comment.

It is unclear if Chin, Deshpande and Patnam quit to start their own fund. Bay Partners was rumored to be talking to LPs about a new fund twice in the past two years, according to two sources, but the firm never filed a formal fund-raising document with the Securities and Exchange Commission.

If Bay was trying to raise a new fund, it wouldn’t be surprising if LPs were lukewarm to the idea. Its $364.5 million 10th fund, raised in 2001, produced a net IRR of -10.1% as of September 2009, according to the California Public Employees’ Retirement System, which committed $20 million to the fund. Fund XI, which received a $5 million commitment from CalPERS, had a net IRR of -14.6% as of September 2009.

It is unclear at this time how Bay will handle the departed partners’ board seats, which number at least nine, according to a knowledgeable source.

Patnam sits on the boards of Akros, Code Green Networks, Daptiv, ParAccel, PulsewaveRF and Staccato, according to a cached version of his bio that Bay removed from its website. However, a source close to the firm said Patnam did not invest in two of the companies on that list: PulsewaveRF and Staccato. Patnam also invested in Enphase and Live Media, the source said.

The cached version of Bay’s website did not indicate whether Chin or Deshpande held any board seats. It said that Chin’s investments included Eventful, Pureplay, Riya, Wallop and Yapta.

In an email to PE Week, Chin said that Eventful and Riya were not his investments. He also noted that he invested in Interact911 with Warren “Bunny” Weiss of Foundation Capital and seed funded PlasticJungle with Tod Francis of Shasta Ventures.

As for his board seats, Chin said his seats at Interact911 and Pureplay would transition to the remaining GPs at Bay, but he declined to elaborate. He also declined to talk about why he left Bay.

A source close to the firm said Deshpande’s major investments for Bay were Buddy Media, Dynatrace, Engine Yard, G2One, Jambool, Lending Club, Mulesoft, Sonatype and SpringSource. The source added that Deshpande also made seed investments totaling less than $2 million combined in Cake Financial, DankApps, FantasyBook, Marketocracy, SocialPicks, Triggit and Vaxart. Deshpande sits on the board or is an observer at DynaTrace, Engine Yard, Jambool, Lending Club, Mulesoft and Sonatype, the source said.

The recent departures from Bay are reminiscent of the significant personnel changes that the Palo Alto, Calif.-based firm went through several years ago. Loring Knoblauch, who had been a general partner with Bay since 1999, left in 2005 for an undisclosed reason; Dino Vendetti, who had been with the firm since 2001, left in 2006 to be a partner at Formative Ventures; Bob Williams, who joined the firm in 1997, left in 2007 to be a VC at Saratoga Technology Ventures; and Chris Noble, who had been with the firm since at least 2000, left in 2007 for an undisclosed reason.

In 2007, Dempsey worked with limited partners and lawyers, promising to re-staff the firm while Kapadia went on a hiring spree. Kapadia said at the time that the changes resonated with limited partners. “They felt a new sense of relief that we were not afraid to talk through our losses and our warts,” he told PE Week affiliated publication Venture Capital Journal.

The new partners were anxious to put Bay’s turbulent past behind them. “Media likes hyperbole,” Deshpande told VCJ in 2007. “Things are often not as bad or dark as they seem. When you see a star exploding, you’re really looking back into the past. By the time everybody else started talking about [the departing partners], it had already happened and we had moved on.”

Bay is currently investing from its 11th fund, which it raised in 2005. (It also raised $5.1 million for the Bay Partners XI Parallel Fund in 2005.) It is unclear how much capital the 11th fund has to left to deploy. It has invested in at least 27 companies to date, including 22 that are still active and five that were acquired, according to Thomson Reuters (publisher of PE Week).