FROM THE INSIDERVC.COM NEWSLETTER ARCHIVE | Monday, February 02, 2015 | Steve Lisson | Austin, TX
InsiderVC.com Fall 2001 Newsletters: Beardstown Ventures (Part A)Beardstown, err, Battery Ventures: The most overrated VC firm
Part A: The three runners-up
Previously, your first two installments:
I. Preface
II. Table of Contents to Parts A, B & C
III. Debunking Myths
IV. Beardstown Ladies
Below, your third installment:
V. Déjà Vu All Over Again
"Nice piece, Steve. You've unpacked the subtleties of this stuff very nicely, dealing out
both criticism and credit with an eye for fairness."
V. DÉJÀ VU ALL OVER AGAIN
"The only thing new in the world is the history you do not know." (Harry Truman). In
that spirit, I love regaling people with the following quote, by a very experienced GP
who, you will see, practices something else Pres. Truman recognized --"If you can't
convince them, confuse them" --but in the course of a rare stretch of unadulterated
candor said:
"Again, some of these questions I can't answer because it would take days to talk about
them, but there were inexperienced venture capitalists, there were inexperienced
entrepreneurs, there were too many companies venture-financed in the same industry
segment, there were unrealistic business plans and goals set. One of the biggest mistakes
the industry has made --and we have made it as well --is the 'negative follow-on
financing' where venture guys put up a couple of million dollars and by incrementalism,
even though the plan wasn't being met and sales line ramp-up wasn't happening or the
product doesn't work, there's always 'manana, manana' and companies that should have
been shut down with three or four million dollars in them were shut down with 15 million
in them. Today the venture industry is shutting down companies more quickly, which
may sound bad from the entrepreneurs' perspective, but in fact it's a very healthy thing.
That [negative follow-on financing] was the single biggest mistake the industry made."
Sound like the current environment? A post-mortem on the last year? Could be, should be
--especially "shutting down companies more quickly", rather than raising annex/bailout
money to postpone the paying the IRR piper and swallowing the bitter pill of today's new
valuation realities --but, alas, no. He was talking to us about the period a decade ago. I've
taken the time to answer these questions during the seven intervening years since he told
.
us this, when the industry was righting itself following the last downturn, caused by the
same all too familiar by now excesses and excuses, and found that he is not the only one
repeating his same mistakes.
Nor is this simply a business cycle (like ex perjurer-in-chief Clinton, business cycles are
still around and not going anywhere) at work, or as simple as history repeating itself.
Going forward, it's the experience factor and intellectual honesty in addressing mistakes
and learning from them, i.e., who seems to have learned from them, which is how we
sorted through who are the most overrated VCs versus the surprisingly close runners-up.
If only history was merely repeating itself, because that would be a good thing, and better
than what occurs presently at the most overrated firms.
As for this VC, who also agreed with us that one learns more from failures than from
successes, well, writhing in cognitive dissonance, he's plunged into the most incredible
denial, and is trying to cover-up the fact we know through such ruses as the following
example, which is, right upfront, the opening to his recent General Partners' Letters.
Shows where lay his priorities! Before even summarizing performance of the funds: "We
would like to take this opportunity to remind you that all information in this report is
confidential. Our portfolio companies work in highly competitive environments, and they
trust us to protect information concerning their financial and operating situations. We
appreciate your continued vigilance in this regard."
Now you may suspect why we have received more, not less, unsolicited cooperation,
including additional copies since then, more than we know what to do with, from those
very recipients. Precisely because these are the folks most in need of paying us to point
out for them that this VC raided in part his Fund VI [6!] Affiliates' to prop up a Fund IV
[4!] portfolio company, kept afloat via a dubious, last-ditch "bridge loan", in one of the
most egregious examples of crossover investing.
The so-called "bridge loan" was structured so he could mark up --yea, up, not down! -by
the amount of the "bridge loan", the value of a faltering investment in a company on
its last legs. He then goes out and raises a new fund, followed, of course, by immediately
writing off his entire equity investment, hoping only for partial payment on the Notes. By
the way, Internet Capital Group (finest non-sequitur since a leveraged-to-the-hilt hedge
fund had the gall to name itself Long Term Capital Management) had by this juncture
become the largest investor in the company.
"A bridge to what?" goes the unsophisticated, unoriginal, oft-asked question. If there's
ever a Lemon Law or Deceptive Trade Practices Act for VCs, then make Exhibit A
valuing an equity stake, in a company bleeding red ink, at the price of a pre-IPO round
(but with the aging S-1 filing long since a no-go), convertible at the price of a nonexistent
next round of financing. It's a "bridge" only if the company has a term sheet, a
known financing event. This was a bridge to stonewalling, to dancing upon the fine line
of deceit, dishonesty, deception, delusion and, if all fails, which it did, shooting the
messenger. Obfuscation. Cognitive Dissonance.
.
That Fund has by now distributed over seven times partners' capital while, naturally,
experiencing Venture Economics' "negative returns". So what does this VC have to worry
about from us? His judgment, honesty, integrity and veracity, past, present and future,
plus the health of his much younger funds. He knows we neither have nor ever will
release confidential information about portfolio companies no matter how hard he tries to
thwart or frustrate us. At least no current plans to do so relative to him. Unless he
continues falsely accusing us. "I hear them whisper, you won't believe it. I just ignore it,
but they keep saying. Let's give them something to talk about. A little mystery to figure
out." (Let's give 'em something to talk about, by Bonnie Raitt).
His own lawyer could not have defended us and what we do any better than he did when
exposed (he responded "Touché!" when we told him no attorney of his stature uses a
Hotmail account for sensitive work) surreptitiously soliciting a personal subscription
from us: "I fully understand your being guarded about the information you possess. You
are pretty thorough in your analysis. This is good info from my perspective as our firm
represents at least half of the funds I've seen you analyze. The attorneys normally do not
get to see candid, objective reporting like this."
The particular VC, like the most overrated firm, just wanted to stonewall, err, "bridge"
paying the IRR piper on two different vehicles comprising his track record until joining
the $1BB Club. Though "[s]unlight is the best disinfectant" (Justice Louis Brandeis),
we're not singling out his deceptive use of a bridge loan to postpone --not a prudent
markdown, but a complete write-off --by identifying players' names. That would be
salacious, sensational, and divert attention from the fact that his is one of the most
extreme yet typical we see, even amongst those by the most overrated firms.
His newest fund is one of our $29BB+ raised at a 25-30% carried interest post tech wreck
/ Nasdaq crash. The point is neither to humiliate the Financial Times' Robert Clow (see,
e.g., "A few venture funds grew to more than $1bn in recent years -before the tech
bubble burst -but few have reached that level since") nor at which of those 22+ firms this
very experienced general partner resides, or whether he can manage his new mega-fund.
It's that history is repeating itself whereby the industry, rather than "shutting down
companies more quickly, which may sound bad from the entrepreneurs' perspective, but
in fact it's a very healthy thing", instead raises annex/bailout capital exclusively for
"negative follow-on financings." These were "the single biggest mistake the industry
made" during the last cycle. Now, led by three of the four most overrated firms, in many
cases the same VCs do it again.
"Well I guess I was wrong. I just don't belong. But then, I've been there before." (Friends
in Low Places, by Garth Brooks). Hopefully this VC, who has ceased touting his
purported upper-quartile returns, will reflect for a few moments on what you just read, his
repeating his same mistakes twice in a decade. Otherwise, he risks provoking us into
posting the full-texts of his reports on our site in .pdf format, along with those of anyone
else clumsily, hypocritically obstructing us.
.
He may then explain whether he encourages portfolio companies to ship non-existent
products from inventory to warehouses or raid phantom, fictitious, pyramid-like future
earnings for the current period. Identical behaviors, if you follow my analogy. Only
difference is the rest of us have to employ more honest accounting policies and
procedures. Hence, again, we distinguish between making an example of the practice vs.
the person, between making quite avoidable mistakes vs. being fundamentally unethical.
Personalizing won't help.
I do hope people end up being held accountable for their practices. It's painful seeing the
very people behind some of these practices continue getting funded. Bailout/annex
money serves to stonewall swallowing the bitter pill of new valuation realities, caused in
part by good but not great and vastly overrated firms, some of whom are coasting on their
brand. Good is nothing to be ashamed of, so they needn't make themselves sound better
than they are actually. It's not necessary and will backfire.
The reality today is a "crowding-out" effect whereby emerging or potential new groups
made up of the same types that founded Matrix, Mayfield, etc. --operational guys
passionate about building companies --confront or are outright deterred by a skeptical
investor base holding them accountable for the overrated firms' avoidable and continuing
mistakes. The perceived collapse (a perception I vehemently dispute) of venture investing
has soured many institutional investors on new or young partnerships.
Yet we all know that a down economy is always the best time to start or buy something.
Fresh blood and competition, which may help cure the industry's self-described malaise,
is held to a different and unfair standard. This translates into those groups doing more
later-rather than earlier-stage investments raising additional capital. In other words,
greater amounts of "negative follow-on financings", into more companies that maybe
should already have been shutdown, versus innovation.
Building value nowadays requires a lot of the right kind of work. Obstetrics, not triage.
Some firms who merely "cleared the decks", writing off large swaths of their portfolios,
have done so without much if any effort to re-set strategies, recruit better leadership,
restructure debt on balance sheets, and adapt to today's new valuation realities.
Hopefully, they will work to assist ventures and teams they've backed. They need to
avoid both complacency and sloppiness brought on by out-sized management fees, and
over-dependence on their brand names.
The critical measure is where, and with whom, they are spending their time. With the
hype days generating grist to feed a cynical view of the industry long over, the
environment today requires uncompromising integrity. And, generally, becoming one's
own harshest critic. Only getting these basics down will allow moving from possible
exposé pieces to an emphasis on the positive contributions of venture investing: more
jobs, tax revenue, productivity, wealth, and building the new tech/service economy
absorbing job losses from the old.
.
Speaking for myself, I know that's where I want to take things from here. There's just a
little more garbage to clean out first.
NEXT:
VI. Act Like You've Been There -New Enterprise Associates (NEA)
"I was not aware of VC firms puffing up their market position by announcing 'closed
funds' which are, in fact, not closed."
Copyright (c) 2001. All Rights Reserved.
beardstown3@InsiderVC.com