Rob, which insider has taken the most out of Amazon.com?
It's not Bezos, as most might think. Actually its a Seattle boy called Tom Alberg.
>Seattle Times business reporter
GREG GILBERT / THE SEATTLE TIMES
Jon Staenberg, managing director of Staenberg Venture Partners, is spending more time on the companies his venture-capital fund has invested in.
For the past few months, like many venture capitalists throughout the country, Jon Staenberg has been busy juggling his portfolio. He's working so hard, he halted his monthly Schmoozefest, a networking function he started while the market was hot.
He is spending more time on the companies his venture-capital fund has invested in as they attempt to become profitable in a now slowing economy.
But what is not so commonly spoken about among venture capitalists is the increased time that fund managers are having to spend with their individual investors, the limited partners who have invested money in the VC fund.
As the stock market heads downward, investors have also watched their net worth on paper hit all-time lows, making venture-capital payments increasingly painful. It's getting to the point where some can't make the payment at all.
So far, local venture capitalists say they've heard of only a few examples of investors bailing on commitments, but as the markets continue to slide, venture capitalists and industry experts think forfeiture of investments may become more prevalent.
Staenberg said he hasn't had anyone drop out of his $100 million fund yet, but he's had serious discussions with a couple of investors.
Chad Waite, partner at OVP Venture Partners, said the extent of the stock market slide has surprised everyone.
"You may have a stock that was trading at $5 last year and maybe it is worth $1 now," he said. "Even if the fund is doing everything the fund should do, there is a portion of your net worth that you no longer have. No one predicted that the Nasdaq would drop so much. Maybe half, but 80 or 90 percent?"
Staenberg said that during the current tax season his individual investors have become particularly sensitive to turning over the money they've promised him. "There isn't a venture fund that isn't facing some of this," he said.
Generally speaking, it works like this: Venture capitalists put out the word that they are raising a new private equity fund. As investors or institutions become interested, they write a check for 5 percent to 10 percent of what they are willing to invest. When a venture capitalist says it has a $100 million fund, there isn't actually that much money in the bank.
As a fund begins making investments and needs money beyond what the investors have already put in, it makes "capital calls." The investor normally has around two weeks to pay an amount calculated on how much money is needed and how much was committed.
The fund draws the money over three to five years, depending on how aggressively it is investing.
It is rare when an investor - usually a limited partner in the fund - refuses to write a check.
"I am aware of several firms working with (limited partners) to manage through the capital call process, and I am aware of firms throughout our region... experiencing difficulty in meeting calls," said Tim Hardin, who helps in the credit-approval process at the Silicon Valley Bank in Kirkland.
Jason Hausske, who works at Exodus Communications and invests in Madrona Venture Group, said he wouldn't conceive of not making a call.
"As you look at asset allocation, (venture capital) only represents 10 percent of your holdings. Now, with the stock market down, it represents 50 percent. It's obviously a concern," Hausske said.
But he still sees venture capital as a promising investment.
"You look at public markets and see how much you can lose so quickly," Hausske said. "There's no more risk in going towards start-ups. There's no safe haven."
At Madrona Venture Group "one or two extensions" have been granted to investors in the $250 million fund, according to Tom Alberg, one of the first investors in Amazon.com.
"Throughout the industry it is a concern," Alberg said.
There may be more instances of investors missing capital calls , but since word of defaulting benefits no one, they are usually kept under wraps. "It casts a stigma on them that it is a failed fund even if it's not true," said Anthony Romanello, manager of investment analytics at Venture Economics, a venture-capital research firm. "The investment could be good and the (general partner) could feel rightly or wrongly about any publicity getting out."
Venture capitalists find that the consequences of not fulfilling a commitment, as well as the amount of money they may have already invested in a fund, keep most people from defaulting.
"There is a heavy penalty involved for not meeting capital calls - including partial, significant or even entire forfeiture of their partnership interest," said Jeff Tung, managing partner of Timberline Venture Partners' Seattle office.
Clauses are also sometimes written into the partnership agreement that allow the fund to sue the limited partner.
Or the general partner in the fund may ask the remaining investors to buy out that person's stake, probably at a lower price than what the investor paid.
How significant is the problem of limited partners missing capital calls? That won't actually be tested until they next ask for money.
"In the end, I think people will return," Staenberg said. "It's just a little painful period to get through." |
