XenSource sale could save Sevin Rosen

Almost a year after Sevin Rosen Funds announced it would not raise another fund and General Partner Steve Dow declared that early stage tech VC is dead, Citrix Systems (Nasdaq: CTXS) agreed to purchase SRF portfolio company XenSource for $500 million in cash and stock. XenSource, a provider of open source virtualization software, was incubated in SRF offices in 2005 and later raised more than $38 million in VC funding from SRF, Accel Partners, Kleiner Perkins Caufield & Byers and New Enterprise Associates.

No firm is probably happier about the sale than SRF, which last fall pulled the plug on its efforts to raise $250 million for its 10th fund. What’s uncertain is whether the return on its seed investment in Palo Alto, Calif.-based XenSource could support a renewed fund-raising effort.

Last week, SRF General Partner Nick Sturiale declined to discuss the effects that the sale will have on SRF. But he told PE Week that the firm may have some official announcement in the coming weeks, though he would not specify its nature.

“We’re feeling good about the portfolio and working very hard to make money for the LPs,” Sturiale says.

Indeed, there are signs of life at the firm, despite having ceased its fund-raising. Sevin Rosen has invested in 26 deals so far this year, mostly follow on rounds for its existing portfolio, according to Thomson Financial (publisher of PE Week). And Sturiale remains with the firm, even after he shopped his resume around Silicon Valley, as PE Week reported in April.

When SRF pulled the plug on its new fund-raising efforts last fall, the firm had good reason to be skeptical of its ability to invest in future deals. Over the last three years it had only seen five of its companies sold for a profit and not one of the six companies it had taken public since 2000 had a market capitalization in excess of the venture capital it had raised, according to Thomson Financial.

Of the firm’s exits, one of its most succesful in recent years had also been thanks to Citrix. SRF had seeded WAN optimization company Orbital Data Corp. in late 2003 with $2.1 million and invested again with Redpoint Ventures in a $12 million round six months later. Citrix bought Orbital Data in April 2006 for $50 million.

That Citrix has again purchased an SRF-backed company is not that unusual. But Citrix has close ties to SRF. SRF partnered with Kleiner Perkins 18 years ago to seed Citrix. The two firms, along with Mayfield Fund, invested $16.25 million in Citrix through 1993. The company filed for a $37.5 million IPO in 1995 and SRF’s Dow has remained on the board of directors since then. He also served as chair of Citrix between 2002 and 2005.

Dow did not attend the Citrix board meeting that approved the XenSource deal and he recused himself from the vote, according to a regulatory filing. Dow can personally expect to gain a $1.9 million payday from the deal, Citrix estimates.

However, it probably wasn’t even necessary for Dow to even suggest to Citrix that it buy XenSource. Virtualization software, which allows multiple operating systems to function on a single server, thereby reducing costs, is a hot sector. One need look no further than XenSource rival VMware Inc. (NYSE: VMW), which went public last week and saw its stock rise about 13% on the first day of trading after the company’s stock debuted at $51 a share.

“The Citrix deal is going to propel XenSource into a new category,” says Sturiale. “You’re putting its software into Citrix’s 5,000-strong channel. It’s rare to see such a hand-in-glove relationship.”