Keeping Limited Partners Happy

It can be tricky when venture returns and exits are way down.

Limited partners who bet on Scale Venture Partners are no doubt happier than some because they’re going to get a distribution check from Adobe’s $1.8 billion acquisition of Omniture — a Scale portfolio company — which is expected to close this quarter.

But the firm isn’t taking LP happiness for granted, according to Scale’s Kate Mitchell, and its annual meeting for LPs, held last week in Silicon Valley, was tweaked again.

Last year, after the federal government let Lehman Brothers go bankrupt, Scale polled its LPs to see how they were feeling and decided to have the CEOs of its portfolio companies speak frankly at the annual meeting — “more than just the typical song-and-dance, marketing oriented, where people are sitting in the back checking their blackberries,” Mitchell said.

This year, the firm went a step further and took the CEOs off the podium and into the audience, where they were immediately available for questions after their speeches.

Also, CEOs are told to minimize talk about their latest widgets in favor of straight talk about the economy and how their companies are performing — what’s it like to be a CEO, to sell in this environment, to hire? What are their worries, how much visibility do they have into the future, how’s the competition, what do they think about exits?

“The LPs said what I expected — our thesis and what I think LPs are looking for, is that it’s a show-me environment and we should make this data driven,” Mitchell said. “Where’s the beef?”

One reason LPs are concerned is that venture is a larger part of their portfolio — even if they didn’t invest any more money in the category — just because the value of their other assets has fallen.

On the other hand, some LPs also fear the venture industry will return to its old ways of raising and investing too much money in too many low-quality companies once the economy improves, she said. “We have a couple of LPs saying their fear is that vintage 09 is a great one to invest in, but will the money come sloshing back?”

Scale was able to accurately predict to its LPs that although last year’s 50%-plus growth of the portfolio would fall, it would still grow this year by about 30%. The NASDAQ, meanwhile, has declined by around 20%. “I have cautious optimism,” Mitchell said. “We’re holding our own.”