VCs: Sevin Rosen should adapt

Sevin Rosen Funds’ decision to withdraw a 10th fund on the eve of an anticipated $250 million first close is not emblematic of the decline of the VC model, say industry veterans who insist that the asset class is undergoing a renaissance as it embraces new sectors and locations.Though some agree with Sevin Rosen General Partner Steve Dow that there is too much money chasing too few deals, plenty of firms are testing the waters with new approaches to finding and growing tech companies.

Take Draper Fisher Jurvetson. It raised its seventh fund at the height of the dot-com boom in 2000, the same year Sevin Rosen closed fund VIII. Both funds are still in the red, with Draper Fisher Jurventson VII returning negative 4.6% and Sevin Rosen Funds VIII returning negative 12.3%, according to performance data from the California Public Employees’ Retirement System, an investor in both. As the good times went sour, DFJ expanded its deal sourcing capabilities and launched global affiliate DFJ ePlanet Ventures, which brought in two of last year’s most noteworthy exits: Skype and Baidu. “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.”

Granite Global Ventures also evolved into a worldwide investor when, in 2000, it was one of the first U.S.-based firms to take advantage of the opportunities in China. The firm hit more than 40% return on its first fund and just closed on $400 million for its third fund (see story 1). “Clearly there is a lot of money out there,” says Managing Director Scott Bonham. “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.” In comparison, Sevin Rosen has made six investments in non-U.S. startups over its 25-year history, according to Thomson Financial (publisher of PE Week).

While 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.”

Focus is something you have to pick carefully, however. It has to be in line with what LPs want, what potential acquirers will pay for and what entrepreneurs are interested in. When those variables start to get out of whack, it’s time to rethink the focus. James Horn found himself in that situation this year. Horn leads Noventi, a VC firm that dropped its IT investment practice to focus on cleantech because of a surging LP interest in the space. The firm had more than a 30% return on its previous tech fund, but found one of its anchor investors wanted exposure to cleantech. “You have to adapt,” Horn says.

Sevin Rosen has invested more than 55% of its funds in communications and computer hardware deals, according to Thomson Financial. Dow is quick to point out that his firm has moved out into other sectors recently, but that people still consider Sevin Rosen a semiconductor player. “Maybe it’s a residual of the fact that [firm co-founder] L.J. Sevin founded Mostek.”

Dow says Sevin Rosen’s decision to turn down LPs has less to do with the firm and more to do with the viability of the industry. That’s not how it looks to Matthew Pedley, a GP of Minah Ventures, a new firm that has yet to market its first fund. “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,” he says.

Pedley’s firm focuses on companies with high levels of intellectual property. This will help ensure there’s some intrinsic value to the startup and that Minah will see a good return on even a moderate acquisition. The firm will launch its fund-raising efforts soon, he says.