The face of venture capital is changing as an unprecedented number of general partners leave the firms where they made their marks. Some – like Todd Brooks of Mayfield – are leaving voluntarily, while others – like Todd Dagres and Ravi Mohan of Battery Ventures – are being forced out due to fund size reductions or investment strategy shifts. Either way, this emerging game of GP musical chairs could edge out disclosure as the year’s most significant market story.
“I think that a lot of this dislocation is coincidence, but there also are some other factors at work,” says Ed Kane, a senior managing director at HarbourVest Partners. “A lot of people made lots of money, and when you’ve made that much it’s difficult for some people to keep wanting to work hard.”
While Kane is undoubtedly correct, few departing GPs are interested in pleading burnout or lethargy. Instead, the most common explanation is that downsized funds are leading to downsized investment teams. This is certainly true in the case of Battery Ventures, which told limited partners about Dagres and Mohan at the same time that it asked for permission to reduce its $1 billion sixth fund by 15 percent. When the Wellesley, Mass.-based firm – which also laid off an unnamed non-GP investor on the West Coast – goes back into the fund-raising market early next year, it will seek only $450 million.
Other GPs affected by their firms’ fund reductions include Bill Burnham of Palo Alto, Calif.-based Mobius Venture Capital and Paul Vabakos of Menlo Park, Calif.-based Trinity Ventures. Burnham, with Mobius since 1999, soon will leave due to “reductions in the current and planned size of Mobius VC’s funds under management,” says Heidi Roizen, a Mobius managing director. Larry Orr of Trinity Ventures – which has reduced the size of its seventh fund twice in the past 12 months – offers the same explanation for Vabakos’ departure. “We simply had too many partners going forward,” he says. “This was an amicable decision made earlier this year when we cut the fund again, and [Vabakos] officially left in October.”
Not all departures from downsized funds are related to the downsizing itself. Take the case of Charles Phipps, who joined Dallas-based Sevin Rosen Funds in 1987 after a 30-year career with Texas Instruments. In late 2002, Sevin Rosen cut its $875 million eighth fund down to $600 million. It is now in the market with a $250 million target capitalization for its ninth fund. Phipps will not be listed on that new vehicle due to his pending retirement, but he will be replaced in the general partner ranks by a promotion from within.
“Even though we’re raising less money than before, we still need the same number of partners because less money is invested in each deal than it was when we raised Fund VIII,” a Sevin Rosen spokeswoman says. “Charles still will work on his Fund VIII companies, but he won’t be investing from Fund IX.”
Complicating matters is the fact that in some cases downsizing isn’t the primary driver of GP shake-ups. Instead, some moves are being made because the IT focus of years past is giving way to a greater emphasis on life sciences. The most obvious example is Sprout Group, which historically has invested in both life sciences and information technology. Going forward, the firm will spin out its health care group and let its IT members go their separate ways (see story, page 10). This includes Keith Geeslin, a managing partner with Sprout who already has announced his imminent retirement.
New Enterprise Associates isn’t proposing anything nearly as dramatic as Sprout, but it is preparing to say goodbye to IT-focused general partners Tom McConnell, Ron Kase and Rob Coneybeer. The move is seen by some as a byproduct of the fact that NEA’s new fund will be far smaller than its last, but sources say that the Baltimore-based firm will eventually replace the departing trio with life sciences investors.
“The quality of deals in the life sciences sector clearly has increased, and I’ve certainly noticed the trend of firms paying more attention to it [through partnership changes],” says Joe Lacob, a partner with Kleiner, Perkins, Caufield & Byers (KP).
KP recently hired a new life sciences investor in former JPMorgan Partners principal Risa Stack, but Lacob declined to say whether or not the firm was planning to decrease its number of IT-focused partners. Numerous sources say KP has been floating various target sizes for its next fund.
A single explanation may yet emerge for all of these changes, but for now it’s just a mishmashed collision of circumstances. The only thing that most of the firms going through staff changes have in common is an acute lack of formal succession planning. Few firms have formal five-, 10- or 15-year personnel plans in place, while those that do seem swayed by passing investment fancies. Part of this is caused by a reluctance on the part of older partners to confer future powers to younger partners who may, or may not, show firm loyalty in the face of another offer.