Venture capital fund cuts may have lost their shock value, but the trend still continues. Viventures Walden International, Worldview Technology Partners all confirmed last week that they are reducing active funds. Once this new round of cuts is formalized, general partners will have returned more than $4.3 billion in committed capital.
“We raised the money at the tail end of the dotcom bubble, so we’ve had a significant reduction in deal flow,” says Gary Stroy, a San Francisco-based managing director with Walden International. “It’s pretty much the same story throughout the VC community.”
What is interesting about Walden, however, is that the firm already knew trouble was brewing when it originally closed its fifth fund in early 2001. The vehicle had been originally marketed with a $750 million target, but received approximately $1.5 billion worth of investor interest. Rather than going for the big score, Walden took $1 billion because it was the figure most limited partners were comfortable with.
Approximately three months ago that the partnership began discussions about how to maintain its investment strategy in a sized-down market. There was some talk of extending the fund’s investment life, but the idea of fund reduction ultimately prevailed. The $1 billion Pacven Walden Ventures V fund is now being scaled back to $750 million. It’s still dedicated to investing in both the United States and Asia.
Limited partners in the fund include AOL Time Warner Ventures, Commonfund Capital, CSFB, HarbourVest, Harvard Management Co., Goldman Sachs, MIT, Morgan Stanley, Robertson Stephens and Verizon.
Change Of View
Worldview Technology Partners also is making a 25% cut to its $1 billion Fund IV. Rumors of such a move have been floated for months, but the firm had been holding off on an official announcement until LPs ratified the amendment in July.
“We wouldn’t want to be like Accel, where they proposed something and then had it thrown in their face,” Worldview’s Michael Orsak told Private Equity Week during the firm’s first public comments on the matter. “This is a very LP-friendly agreement… We did the spadework ahead of time to make sure they liked it.”
The cut is retroactive to the inception of the fund, which closed at the end of 2000, Orsak says. Worldview’s 2.5% management fee will not change as a result. Worldview closed its $1 billion fourth fund, after having gone out looking for $850 million. Since that time, Worldview has invested less than 25% of its available capital, prompting the fund reduction.
“We have been cautious in this investment environment,” Orsak says. “We have consciously slowed our pace.” Each of the firm’s partners will make 1.5 deals this year, down from two deals previously, which the partners agreed upon earlier this year.
Most Worldview limited partners already have the partnership amendment documents, and a final affirmation should come in the next few weeks. While two LPs contacted for this story said they had hoped for a slightly deeper cut, Orsak says that the perception of widespread LP dissatisfaction largely has been manufactured by the media.
“The press has been conveying that there are a bunch of angry LPs screaming at VCs [for fund cuts], but that’s not happening, except for isolated cases,” Orsak says. “We were pleasantly surprised by how supportive and constructive our LPs have been. They thought long and hard about what we could do to improve our odds of success, and they conveyed that to us.”
Domestic LPs in Worldview IV include City and County of San Francisco, Commonfund Capital, FLAG Venture Partners, Hewlett-Packard, Horsley Bridge Partners, IBM, Invesco, Knightsbridge Advisors, Los Angeles County Employees’ Retirement Association, MacArthur Foundation, Salomon Smith Barney, Sovereign Financial, Stanford University, Thomas Weisel Partners and the University of Michigan.
Vivek On Viventures!
The smallest cut last week came from international venture firm Viventures. The group, which has split headquarters in Paris and San Mateo, Calif., decided on June 20 to reduce its $633 million second fund by 21% to .$494 million).
“The original aim of the fund was to invest between [$19.8 million to $24.7 million] over the life of a portfolio company, but everything has been scaled back by 20% or 25%,” explains Vivek Tandon, a UK-based principal with Viventures. “We had a choice to add investment managers, or to put more burden on the ones we have, but we instead decided to keep the team intact and reduce the fund.”
Viventures II was closed in early 2001 and is focused on telecommunications and Internet-related startups based in the U.S., Europe and Asia. LPs include China Development Industrial Bank, Cisco Systems Inc., GE Capital Telecom, Goldman Sachs & Co., IBM Corp., Procter & Gamble Co., Qualcomm, Siemens Venture Capital, Singapore Power and VivendiNet.
Next?
It is a safe bet to say that a number of other ventures firms are currently considering fund reductions of their own. Another solution is to defer management fees, a strategy recently employed by VantagePoint Venture Partners on its $1.6 billion fourth fund. It had no plans to cut its early stage fund but will defer fees on half the amount for the next 18 months.
On the other hand, not all $1 billion-plus early-stage funds are going to shrink. Spectrum Equity, for example, held discussions earlier this year on a fund or fee reduction, but decided against both.
Another firm dedicated to fund maintenance is Menlo Ventures, which has so far made 16 new investments out of its $1.5 billion ninth fund. DuBose Montgomery, managing director with Menlo Ventures, says that no fund cut will be coming out of his firm’s offices.
“We always told investors that we were going to invest for four to five years, and that is still what we’re going to do,” he says. “The only real change right now is that we’re having to hold on to a bit more capital for reserves.”
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