Crosspoint Shocks Industry With Voluntary Fund Withdrawal –

WOODSIDE, Calif. – Let’s call the whole thing off.

Despite having secured approximately $1 billion in existing limited partner commitments for its latest venture capital vehicle, 28-year Silicon Valley stalwart Crosspoint Venture Partners told investors in late November that it was abandoning its fund-raising efforts due to unsteady public and private market conditions. The firm had originally planned to hold a final close on Crosspoint Venture Partners 2001 on Dec. 1.

“When we began the [fund-raising] process, we told our limited partners that there were uncertain waters out there and that there were a number of challenges to face,” said John Mumford, founding partner of Crosspoint. “That was only six weeks ago, and in that time things in the public markets just continued to worsen. We also continued to have a number of concerns about valuations in the [early-stage] venture business and over the tremendous amount of capital being put in.”

Such concerns became deafeningly articulated over a series of general partner discussions during the weekend of November 18. By that Monday, the entire organization was convened in order to draw up plans for informing investors that Crosspoint would take the virtually unprecedented step of killing off a mega-fund which had never exhibited any serious fund-raising difficulties.

And, on Nov. 28, the hammer officially dropped.

“At first [the LPs] were speechless,” Mumford said. “But the general response has been that they’ve known it was bad and that they knew we’d be the first ones to tell them about it because we’ve always been very up front with our limiteds.”

Institutional investors involved with previous Crosspoint funds who are believed to have also been prepared to invest in the discarded vehicle include: California Institute of Technology (CalTech), Duke Endowment, HarbourVest Partners, Ford Foundation, the Massachusetts Institute of Technology, Princeton University, Stanford Management Co., University of Chicago, Verizon Investment Management (formerly Bell Atlantic) and Yale University.

“It was a bold move, but also somewhat risky,” said Eric Doppstadt, director of private equity with the Ford Foundation. “What we wanted to know first was what they thought the implications would be for their business and deal flow. In the end, though, we respect their judgement and are willing to let them make the call.”

Reverberation

Crosspoint’s decision to voluntarily discontinue fund-raising efforts is believed to be the first of its kind in the entire private equity industry. And, like with any first, it has confounded jaded market professionals who thought they had seen it all.

“I find the whole thing with Crosspoint just incredible,” said one venture capitalist. “What John [Mumford] said was a reasonable explanation I guess, but we all raise money in tough environments. He could have just taken the money and sat on it until things improve… the investment cycle did used to be more than just one year.”

Even investors used to competing with Crosspoint in the ever-treacherous early-stage venture market seem dumfounded by the move.

“We think that there continues to be many early-stage companies worth investing in, even though valuations are still a bit inflated,” said one such buyer. “I think it will be very interesting to see how the market reacts to [Crosspoint] pulling the fund.”

The most immediate reverberations will most likely come from the LP community, which is already said to be beginning to pull away from venture capital by diversifying their alternative investment allocations. At the very least, LPs will certainly begin taking a keener interest in the organizational structure of venture firms, such as the number of board seats partners are willing to sit on.

“We think the issues Crosspoint has raised regarding the public and private markets are issues that any serious investor has to be wrestling with, no matter how they come out on them,” said the Ford Foundation’s Doppstadt.

And it seems that Crosspoint is almost reveling in its newfound role as industry whistle blower.

“I think [our decision] will send a chill through the industry and will cause people to pause and reflect,” Mumford predicted. “Marginal groups will have new challenges in raising money and you’ll probably see a number of firms tell limiteds that they’re not getting they’re money back.”

Such questions will mostly have to wait until next year, though, as market rumors have a number of major private equity players suspending fund raising efforts until the market calms down and institutional investors have a fresh bounty of allocations to spend.

What Next?

As for the immediate future over at Crosspoint, Mumford said that the firm will turn its attentions toward supporting existing portfolio companies. Capital for such endeavors will come out of the $900 million Crosspoint Venture Partners 2000, which still has approximately $450 million worth of dry powder left. Additional funding will be derived from a $250 million later-stage fund previously dedicated to existing portfolio plays, as well as from existing reserves in the firm’s $200 million 1999 vehicle.

The firm has not completely ruled out new investments, but it is not actively pursuing any such opportunities.

“The market is simply overvalued right now,” Mumford said. “We’re all former operating guys who have been around for a while and enjoyed the party over the past few years, but right now we’re content to sit on the sidelines. We’ll be back when we feel the time is right.”

Whether or not the firm will be able to re-sign its current LP roster, however, remains to be seen.

“Crosspoint has certainly taken a business risk here,” said Sandra Ell, treasurer and chief investment officer at CalTech. “Institutional investors like us are in this for the long run – and we expect to reinvest with them eventually – but I would imagine that some of us could conceivably not be quite as interested in a Crosspoint-type of fund sometime in the future.

One More Thing

At the same time Crosspoint was privately making the decision to pull the 2001 fund, the firm was publicly announcing a new partnership with public relations agency Applied Communications. Applied will be responsible for getting the word out about Crosspoint’s Vertical Service Provider (VSP) initiative, said Richard Shapero, a managing partner at Crosspoint. “Applied is a world class agency who will be working with the VSP companies we have invested in to establish the positioning and messaging of this industry,” he explained.

VSP companies provide Internet-based services tailored to vertical markets, he explained. Over the past two years Crosspoint has begun investing in VSPs and after committing $350 million to 14 VSP companies, the firm believes that now is the time to begin publicizing the VSP industry to the wider business world, Shapero noted.

Shapero declined to reveal the terms of the partnership between the firm and Applied. He described the relationship as a “close, broad” one that extended beyond a simple fee for service agreement. He said that while Applied is currently focusing on Crosspoint’s VSP companies, the PR agency will work on other initiatives for Crosspoint in the future.

As part of the agreement between the two firms, Applied was to have become an LP in the Crosspoint’s 2001 fund. The public relations agency will still eventually become one of Crosspoint’s LPs when Crosspoint decides to raise another fund, said Kelli Tejada, Crosspoint’s communications partner. “The arrangement between us and Applied does not change; the timing simply does,” she noted. Tejada negotiated Crosspoint’s agreement with Applied.

Daniel Primack and Alistair Christopher can be contacted at