Wellesley, Mass.-Based Venture Capital Firm to Cut Employees in Strategy Shift
The Boston Globe
December 4, 2002
Battery Ventures yesterday said it would let go of nine employees, including two investing partners, and forgo $51 million in fees over five years in a shift of strategy aimed at boosting the prospects of a portfolio launched in 1999.
The restructuring, which Battery announced to employees Monday, is a first for the 19-year-old Wellesley venture capital firm. Battery has redefined its technology focus, the type of deals it's pursuing, and its talents, in the latest shakeup for an industry going through the worst times in its history.
Telecommunications services, communications equipment, and semiconductors -- sectors that historically have dominated Battery's deals and profits -- are now the "most damaged food chain in all of technology," Battery general partner Tom Crotty said. "It's not going to recover to the point that it will be an attractive place to make money until at least 2005 or 2006." In addition, the firm is returning to its "balanced" investing approach of the past, Crotty said, meaning it will pursue companies of all stages, including more mature start-ups and later-stage companies.
In the late 1990s, like much of the industry, Battery had turned its attention almost entirely to the youngest of companies, start- ups like Akamai Technologies Inc., founded at MIT.
Battery was among the first New England firms to push fund- raising to the $1 billion level, launching its giant sixth fund in June 2000. But it's not the megafund that has Battery worried just now; it's the $450 million fund kicked off the prior year, at what turned out to be the market's peak.
Thanks to some early wins, the fund already has returned $250 million of the capital to its investors -- institutions like the Harvard University endowment and large companies such as General Motors, and Verizon Investment Management. There are 15 companies left in the portfolio, some of which may be successful, Crotty explained.
But Battery, preparing for the worst, has decided not to collect the remaining $51.4 million in fees on the fund, rather than having to send money back to its investors down the road to cover losses in a so-called clawback.
Instead of waiting to settle up at the end of the fund's life, in 2009, Crotty said, "We decided, let's deal with it now. Let's deal with it in a way that's friendly to the [investors] and good for the fund."
But the fee cut on Fund V means less money to pay executives and cover the firm's expenses. As a result, Battery is shedding two out of 12 investing partners, both of whom specialized in deals in the troubled communications realm: Tony Abate in Wellesley and Michael Darby in the firm's San Mateo, Calif., office.
Both had been considered young up-and-comers at the firm. Darby joined in 2000, having previously worked on acquisitions for Cisco Systems Inc. Abate hailed from venture competitor J.H. Whitney & Co. in 1999.
The firm also is letting go three venture partners, two analysts, and two administrative staff members. A 10th employee, chief financial officer Don Stanley, recently resigned.
Crotty said the firm regrets having to cut back its 55-member staff, one of the largest in the venture business. Dick McGlinchey, an executive who assisted Battery's portfolio companies with marketing and sales strategy, is one of the venture partners affected. "As painful as this is," McGlinchey said, "I think it's the right thing to do. It's going to pay off in the long run." McGlinchey and the firm's West Coast venture partner for marketing, Rich Moore, may continue to consult to Battery companies, Crotty said.
Several of Battery's rivals previously have eliminated partners; in most cases, it's been the executives in the most troubled industries to go. Limited partners, who invest in venture funds, have been pressing VCs for more than a year to slash fees and take other measures to shore up troubled funds.
Some investors are particularly concerned about clawbacks, which are looming for the first time in memory because many funds took their 20 percent cut of deal profits back when the market was soaring and will have to send some of that money back if the remaining deals in the portfolio aren't profitable.
The fund faces pressure to make good on current and future investments despite the difficult environment.
"What it's going to take to be successful over the next five years, in our estimation, is very different from what it took to be successful over the past 10 to 15 years," Crotty said. With the hangover of technology investment from the boom years, coupled with the slow economy and the wounded stock market, Crotty said, venture investing is going through a fundamental change.
"If you're still trying to do the same old thing, still pouring money into your old bread-and-butter areas, you're going to have a problem. You're going to lose a lot of money for your investors." |
