Treading a careful line between candor and contradiction, Dan Beldy addressed the New York Venture Group last week in an attempt to answer questions over why his firm, Hummer Winblad Venture Partners (HWVP), agreed to pump $13 million into controversial file sharing software provider Napster Inc. earlier this year.
While the deal – which included a provision to name HWVP Partner Hank Barry as interim CEO of Napster – has received almost unanimous praise from tech-based entrepreneurs, the VC community has responded with a barrage of heavy criticism despite rumors that the deal had numerous institutional bidders.
More specifically, investors and analysts alike have questioned why a respected VC firm would take an ownership stake in a company just one judicial ruling away from being shut down. In fact, some have even gone so far as to say that the decision to officially dedicate Barry to Napster could open up HWVP itself to legal action from the recording industry.
In his talk to industry professionals, however, Beldy assured the crowd that HWVP had enacted an exhaustive five month-long due diligence with Napster and felt confident that the law was on their side.
“No investor wants to take on market risk, let alone legal risk,” Beldy said. “But we are very confident in this company and, for us, we wouldn’t have made the investment if we thought there was even a chance of something happening from the liability perspective. Of course, you can’t prevent someone from suing you, but we don’t see it happening.”
As for further discussion on the legal topic, Beldy expressed optimism that all parties will soon agree on a solution, but declined to answer questions dealing with any specific potential or existing settlements between Napster and music copyright holders.
He was also cagey when it came to specific details over how Napster plans to generate revenue beyond T-shirt sales. While suggesting a vague variety of subscription-based or pay-per-play options, he repeatedly refrained from engaging further.
How Limited Is The Partnership?
While the broader Napster debate has mostly focused on legal compatibility with rapidly evolving Internet technologies, there are also some significant implications for HWVP beyond possibly losing its $13 million investment.
When asked by Private Equity Week after the talk whether or not his firm had consulted its LPs prior to making the Napster deal, Beldy said that he did not believe such discussions had taken place. After all, existing limited partners may be a bit hesitant to reinvest with a firm that took the idea of risk-based investing to its extreme.
“Like with most firms, we have an implicit agreement with our LPs that trusts us with this type of decision-making,” he said.
As for whether it could have an impact on future fund raising, Beldy noted that the firm held a $315 million first close on its newest venture vehicle and hasn’t suffered any fallout from the Napster partnership with either current or new LPs.
“With the new fund it really hasn’t been an issue at all,” he said. People may have had a few more questions, but there is no liability to the current LPs.”