Cover Story: Who’s Best for Venture Capital? –

Elections always matter. This one, however, matters more.

So say lefties and righties, the public and the pundits. So say flies on the walls of bars, offices and dining rooms. So say the overflowing campaign coffers of both President George W. Bush and Sen. John Kerry.

Today’s voters are the first in more than three decades to be faced with tangible issues of war and peace. The demarcation line between many of our foreign allies and enemies has blurred, while domestic partisans have become more rigid than ever. And then there is an economic recovery that often looks different on paper than in popular perception.

Venture capitalists also have a lot at stake. They may not be facing issues of national security, but each VC vote undoubtedly will affect the industry’s future fortunes. Bush and Kerry-not to mention the parties to which they belong-have different views on such VC-relevant matters as capital gains taxes, job offshoring, corporate regulation, the digital divide and federal funding for embryonic stem cell research.

For these reasons Venture Capital Journal has devoted the bulk of this issue to a special report covering the upcoming election. We know that there is no

shortage of available political analysis, but we believe that the following pages will provide a perspective not found elsewhere. It is meant to augment informed opinions, and to serve as a reference when you step into the ballot booth on Nov. 2 and ask: “Which presidential candidate and political party will be best for my business?”

Split Decision

As a preamble, it’s worth noting that venture capitalists have been unable to reach consensus on their presidential preference. Instead, they are split down the middle, just like the electorate at large.

On Sept. 1, the PE Week Wire (a sister publication to VCJ) asked readers to participate in an unscientific political poll. Among the 1,609 respondents were 189 VCs, 153 buyout pros, 82 limited partners and 235 “other” private equity professionals. The sample tilted heavily toward the GOP, with 41.4% saying they were registered Republicans. The next largest group (at 24.1%) was made up of Democrats, and the remainder was comprised of independents (31.6%) and “other” (2.6%).

Bush won the poll over Kerry, but only by a razor-thin margin of 10 votes, or 47.6% to 46.7 percent. This statistical dead heat is nearly a mirror image of what was seen in a PE Week Wire poll five months earlier, when 600 respondents selected Kerry by just a single vote. The majority of respondents (57.8%) said that their vote would be influenced by issues related to their job/industry, and the vast majority expect either to definitely vote (86.8%) or probably vote (8.4%). When asked to name the single most important factor when making their electoral decisions, most readers cited the economy (37.7%), followed by “other” (20%), homeland security (19.9%), the War in Iraq (17.7%), the environment (2.83%), education (1.3%) and health care (less than 1 percent).

He Gave How Much?

The most recent poll asked respondents whether or not they had made a political contribution over the past 12 months. An astounding 37.7% answered affirmatively, and this really isn’t the crowd to be sending in tens and twenties. Likewise, a VCJ analysis of contributions recorded with the Federal Election Committee (FEC) found that at least 131 VCs contributed to the Bush and Kerry campaigns between January 2003 and July of this year (see pages 25 to 29). Seventy-six VCs gave to Kerry, 52 gave to Bush and three gave to both. Collectively, they contributed about $236,000, with the largest amount ($135,000) going to John Kerry for President Inc.

Heavy-hitting VCs are lined up on both sides of the aisle. Among those backing Kerry are Brook Byers of Kleiner Perkins Caufield & Byers, Bill Davidow of Mohr, Davidow Ventures, Reid Dennis of Institutional Venture Partners and Ta-Lin Hsu of H&Q Asia Pacific. Bush’s VC supporters include Jim Breyer of Accel Partners, Pitch Johnson of Asset Management Co., Craig A.T. Jones of Ticonderoga Capital and Lip-Bu Tan of Walden International.

What those VCs and others have contributed directly to Kerry and Bush doesn’t tell the whole story, however. Those figures are colored by the $2,000 cap for donations to individual candidates. If you factor in so-called soft money (such as donations to the Republican National Committee), the number would be significantly larger.

Let’s take a look at just one example of two partners at one firm, Kleiner Perkins. Partner Floyd Kvamme’s $2,000 contribution to re-elect Bush was overshadowed by the $67,500 in soft money he contributed during this election cycle (including $47,500 he gave to the RNC). On the left side of Kleiner’s office, Partner John Doerr chipped in $2,000 to Sen. Joe Lieberman’s failed presidential bid, but that was a pittance compared to the soft money he contributed: $72,500. That figure includes $25,000 that Doerr gave to the DNC and another $25,000 he gave to the Democratic Congressional Campaign Committee.

Troll through the FEC database and you’ll find that the size of the contributions from Doerr and Kvamme are more the rule than the exception. VCs are collectively investing millions of dollars to influence not just the presidential race, but also Senate and House races.

While most individual VCs are contributing less than $100,000 in hard and soft money in this election, some are putting up millions. Andy Rappaport, a general partner with August Capital, and his wife (Deborah) have coughed up more than $2.6 million to “527 organizations” in this election cycle, including $1.1 million to the New Democrat Network, according to PoliticalMoneyLine, a website that tracks money in politics.

“There are a lot of new mega-donors [from the VC industry], and I think this is going to continue,” says Kent Cooper, co-founder of PoliticalMoneyLine. “I think you will see it become a fast-growing class, because they’re going to be pulled into this circle of fund-raisers for both parties, and they’re going to enjoy making new business connections and new friends who have substantial wealth. All of a sudden they’re meeting people they’ve read about or heard about and they’re part of the crowd. It’s very intoxicating.”

The Soft Side

The most popular soft-money outlet for venture capitalists is VenturePAC, a political action committee organized by the National Venture Capital Association. It receives most of its money from general partners, and had disbursed $660,000 to various federal candidates and committees between the first quarter of 2003 and the second quarter of this year (see pages 30 to 33). VenturePAC does not formally endorse or contribute to presidential candidates due to the “personal” nature of national campaigns, but it has an uncanny ability to pick winners in congressional or senatorial races. Over the past two election cycles, for example, 85% of candidates supported by VenturePAC have been elected, including 142 of 150 congressional candidates in the 2002 mid-term elections.

Most of the VenturePAC strategy is to focus on industry-friendly incumbents, but it also sides squarely with the Republican Party. During the current election cycle, VenturePAC disbursed approximately 60% of its dollars to Republican candidates and causes. This includes approximately 72% of all political committee contributions and approximately 60% of $484,000 given to Senate and House campaigns. The only area where VenturePAC favored Democrats was among senatorial candidates (55% to 45%), although $22,000 of the $29,000 given to senators who are not up for reelection went to GOP candidates.

Mark Heesen oversees VenturePAC through his role as NVCA president. He says that the partisan donation discrepancy is based on his belief that Republicans will maintain federal legislative control. “I think that they certainly will hold onto the House, and probably will hold onto the Senate, even though you’re going to see a lot of changes there,” Heesen says. “The GOP will lose its Senate seat in Illinois, but pick up South Carolina and, possibly, Louisiana.” He adds that, outside of stock option expensing, no single issue precludes a candidate from receiving VenturePAC funding.

We’ve tried to be as comprehensive as possible in this special report. In addition to contribution data-so you can see whom your colleagues are supporting-we examined four key issues to determine which candidate is most aligned with VC thinking (see pages 34 to 41). And we solicited input from VCs around the nation about whom they’re voting for and why. Mark Gorenberg of Hummer Winblad Venture Partners weighs in for the Kerry campaign, while Bob Grady of Carlyle Venture Partners gives his pitch for Bush. Finally, we asked as many VCs as we could think of to complete the sentence, “I’m voting for (insert candidate’s name) because…” You might be surprised by some of the responses we received (see pages 46 to 48).

If you’re still on the fence, we hope this special report will help you in your quest to choose a candidate.