From the Editor: Do the Right Thing –

Country singer Lucinda Williams sings a song called “Get Right With God.” In other words, listen to your conscience and make amends. It’s time that venture capitalists heed her call.

We find ourselves at a time when confidence in the public markets has been shaken by the lying and scheming of Kenneth Lay and his cronies at Enron. The so-called Enron-effect has driven down the Nasdaq because investors are worried that other seemingly sound corporations are going to come out and say their numbers are inflated. As a shareholder in several public companies, I have a personal stake in this – as do my wife and two small children.

What I don’t get is how someone can lie and think he’s going to get away with it. Did the stooges at Enron really believe that no one was going to catch on to their shell game just because they paid their auditors to turn a blind eye?

By the same token, too many venture capitalists know that they should reduce their management fees, yet they steadfastly refuse to do so. Do they really think they’re going to get away with it, that their limited partners are stupid?

It’s understandable that so many VCs got caught up in the hype and raised too much money. But now, for reasons we’re all painfully aware of, they simply can’t put the money to work as planned. And yet they continue to draw down fat fees.

Some VCs are stepping up and doing the right thing like ComVentures (see story, page 12). On a similar note, Mohr, Davidow Ventures went through the painful process of scaling back its latest fund because it was the right thing to do.

More will follow. It’s just a matter of time. One VC I spoke to says that 95% of all investment mangers are over-distributed, and “they’re not being real with themselves or their LPs” if they continue to carry funds at unrealistic values.

What’s exasperating is that so many firms haven’t already adjusted their fees or, in the privacy of their partners meetings, say they have no plans to do so. I’m told of one high-profile Silicon Valley VC who told his partners: “No –ing way.”

This guy – whose current fund is underwater and hasn’t had a single exit – thinks that the rules don’t apply to him. Just like the Enron executives, he thinks he’s going to get away with it. Is it chutzpah, delusional thinking or just plain stupidity?

Whatever the answer, this VC is going to have to get right with God at some point – whether he wants to or not. LPs are going to put up with this sort of childish behavior for only so long before they play hardball.

For those of you who are struggling with this issue, don’t overthink it. It’s simple. You know in your gut what you’re supposed to do. You’ve known it for a long time. There is no shame in valor. And years from now, your LPs are going to remember that you were among the first to adjust your fees. Why put it off? Get right with God.

Lawrence J. Aragon

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