Palto Alto, Calif. – With the surprising dissolution of the Barksdale Group, a shakeout of funds formed in the go-go days of 1999 may have only just begun.
Such funds came into being at the height of dotcom mania, when capital was virtually free to venture capitalists. Like rock stars, the fame and fortune of the VCs who managed these funds rose to dizzying heights as tech stocks soared and start-ups sprouted like dandelions.
As the legendary former chief executive officer of Netscape, Jim Barksdale was just the sort of person who could raise a brand new fund with little effort.
However, as the economy soured and began to slip into a recession in mid-2000, funds like his focused almost solely on Internet-related investments began to post negative returns. Preliminary estimates indicate that funds formed in 1999 may be among the worst performers in history. The average 1999 fund had a negative 3.6% internal rate of return (IRR) as of Sept. 30, 2001, according to Venture Economics, publisher of Venture Capital Journal (VCJ).
To put that in historical perspective, the vintage year with the worst performance two years into its life was in 1987. The average fund of that vintage year had a negative 0.9% IRR as of 1989, but ultimately posted an 8.1% IRR, Venture Economics reports.
Funds from 1999 look ghastly when contrasted with those raised in the previous three years. As of September 2001, 1998 funds had an average IRR of 40.7%, 1997 funds had an average IRR of 66.3%, and 1996 funds had an average IRR of 90.8%, according to Venture Economics.
Two years into their lives, the funds that preceded those raised in 1999 showed remarkable promise. The average 1998 fund had an IRR of 77% after two years, while the average 1997 fund posted a 74% IRR and the average 1996 fund had a 42% IRR after two years, says Jesse Reyes, vice president at Venture Economics.
Reyes says that 1999 funds have a “big uphill climb” if they attempt to raise second funds. “The conventional wisdom is that you can raise two funds without really trying, because the time between funds is so short,” he says. “But in this case, unless they have some spectacular return, 1999 funds will have a hard time raising a second fund.”
Most VCs agree that the so-called dotcom funds face an uncertain future. “That money was raised at the time from individuals when the stock market was at an all-time high, at the middle of the Internet bubble,” says Promod Haque, a managing partner with Norwest Venture Partners. “Trying to go and raise money from individuals again is very tough. It doesn’t matter how good your track record is. That source of funding is very volatile, and it has shrunk.”
No Joy in ’99 Funds
A San Francisco VC who asked not to be named says that vintage 1999 funds by themselves are a very difficult sell to limited partners. “With established firms, where they have 10 funds, and you invested in their ’95, ’96 and ’97 funds as well as a ’99 fund, you’re still going to be happy,” the source says. “If you just invested in the ’99 fund, you’re not going to be so happy.”
A Boston VC cautions that the jury is still out on 1999 venture funds. He likens them to value-investor hedge funds that invested from 1995 to 1998. “Value hedge funds got the tar beat out of them by the momentum technology investors,” he says. “But in two years, the value investors made up for the opportunity costs. In 2000 and 2001, the value investor did fabulously well. It may be the same way with some venture firms that may have gotten their clocks cleaned because they made bad investments in one part of the market, but may have a prudent, viable investment strategy now.”
Barksdale Group never even got that far, announcing in January that it would cease all new investments and its four partners would go their own way.
Barksdale Group will continue to manage its portfolio. It invested about 66% of the $180 million it raised in its first and only fund, and it has plenty of money left for follow-on financing, says Peter Currie, one of the firm’s four partners.
Some industry watchers speculate that the Silicon Valley-based venture firm broke up because it found it too difficult to raise a second fund. “It’s a sign of the times,” says a Silicon Valley VC. “Initially, it was all riding on Barksdale’s reputation. That’s the way business was done then [in the late 90s]. It was all about pedigree and reputation, not business. Now it’s all about business, so it doesn’t surprise me that they can’t raise a new fund.”
Barksdale Group partners say they could have raised a second fund if they chose to. “We tested the waters, and we talked to one LP who said it would take nine months and 200-plus meetings,” says Danny Rimer, who joined Barksdale Group from Chase H&Q’s Internet Group, one of the investment banks that underwrote Netscape’s blockbuster IPO in 1995. “We thought it would make more sense to spend our time elsewhere.”
But it begs the question: Why did Barksdale raise the fund to begin with? VCs don’t start funds lightly, and they often talk about their partnerships as marriages, because they expect to be with their partners for a very long time.
Could it be that tech superstar Barksdale wanted to avoid tarnishing his reputation by getting out before the final results are in on his two-year-old fund?
Yet another factor to consider is that he has stretched himself pretty thin. He sits on the boards of several large public companies, including Federal Express Corp., Sun Microsystems Inc. and AOL Time Warner Inc. He is also a member of President Bush’s foreign intelligence advisory committee. All of these extracurricular activities precluded him from doing anything full-time, Currie says.
Barksdale could not be reached for comment.
Currie insists that he and his colleagues made a deliberate decision not to raise a second fund. “We were fully invested, so to the extent that we couldn’t do any additional projects, we all decided to invest differently,” he says. “I’ve spent my career looking for money, and it would be a real project to raise [another fund]. And once we got the money, would that have been the right environment to invest out of? I’d much rather invest out of a large fund than a small boutique firm because of the resources a large firm has to invest.”
That explains why Barksdale and Currie, a former Netscape executive, made the leap to General Atlantic Partners LLC, a $4 billion private equity outfit based in Greenwich, Conn. Currie, who will work out of GA’s Palo Alto, office, will be a partner at the firm. Barksdale will serve as a special advisor to GA portfolio companies, giving him time to pursue his other activities.
As for Rimer, he’s off to set up a London office for Geneva-based Index Ventures, a venture capital firm co-founded by his brother, Neil Rimer.
The fourth Barksdale Group partner, Quincy Smith, had not announced where he was headed before VCJ went to press. Smith also hails from Netscape, where he was director of corporate development and investor relations before joining Barksdale Group.
Breaking up the firm was a bit easier than it may be for most, since half of the fund’s capital was fronted by the four partners. Currie says that the fund is still in the black, and he anticipates the partners will all reap a return on their investments in a few years.
However, of the 17 original Barksdale portfolio companies, 14 are still privately held, and none has announced any realized gains or losses.
On the upside, the firm has backed some potential winners, like Neoteris Inc., which specializes in Web security and networking technology, a sector that has gained momentum since the Sept. 11 terrorist attacks.
-Additional reporting: Lawrence Aragon.
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