Selby Marches On, Sans SBIC –

Listen up, all you GPs of small funds that are supported with government-backed dollars. The SBA’s Small Business Investment Company (SBIC) program-which invests in small venture capital funds-is going to need some major restructuring one day to stay afloat.

But for reassurance, take notice of Bob Marshall. The venture capitalist is not staying awake at night worried about how he’s going to raise his next fund. As founder and managing partner of Menlo Park, Calif.-based Selby Venture Partners, Marshall’s first two funds were a combined $135 million. Of that, $90 million, or two-thirds, came from the SBIC. In exchange for providing its matching dollars to venture funds, the SBA gets its money back with interest and 10% of the fund’s returns, typically after a fund’s private LPs have gotten their share of the returns. However, among the proposed changes, the SBA wants its profit share increased to 50 percent.

How this and other potential changes affect budding VC firms is not known. Marshall, however, plans to hit the fund-raising trail in early 2005 to raise commitments for a $150 million fund. None of it, he says, will come from the SBA.

VCJ: How come you’re not accepting funds from the SBIC to raise your third fund?

Marshall: There are some administrative issues taking place with the SBIC and there are issues with how the program will be structured and whether it will stay solvent. That’s part of it.

And what else?

Well, this is a natural evolution. This is a common path for VCs. Our first fund [in 1998] was $30 million. Our second fund [in 2000] was $105 million. If we were going to continue to grow in size, it would be only natural for us to break ties with the SBIC program and raise a new fund entirely from private and institutional investors. And the more institutional investors we solicit, the less likely will leverage a fund with the SBA.

Why is that?

Private investors look at the chemistry of the partnership and they want to know who else has invested. It’s not attractive to a lot of the larger investors to partner up with the SBIC, because of the concern over returns and other administrative issues.

Under proposed changes, the SBIC wants to increase its profit share from 10% to 50%, which can’t be too attractive for many venture firms. What are some other downsides with the program?

There is a limit to how much you can invest. If you had a particularly hot company, and you wanted to invest more, you’re prevented from doing that. That’s frustrating

But certainly there are good things about the SBIC program, too?

Oh, yes, absolutely. The SBIC can help leverage a firm’s private capital to create a bigger fund to invest and that helps bring in plenty of deals to look at. Plus, it’s relatively easy money to get from the government.

I have no problem with the SBIC program. But our next fund won’t include it; that’s just part of our natural evolution of a growing firm in the valley.

Will not having the government backing affect your timetable? In other words, how long will your fund-raising take with your third fund?

That all depends on the economy and the general market for venture capital fund-raising. We’re going to begin raising a $150 million fund in Q1, and hopefully it won’t take long.

Rather than taking a look at whether we’re SBIC-backed or not, I believe investors will be looking at how successful we’ve been in our first two funds. That’s the key.

Fund-raising has been active this year. VC firms have raised more capital through the first three quarters of 2004 than in all of 2003 combined. If all the competition makes it tough to raise a new fund, will the SBIC then become an option?

There is a lot of competition and activity, and there’s bound to be some retrenchment, But, again, it goes back to the economy and what kind of story we have to tell investors. Hopefully, our record as venture investors will speak volumes.

(Editor’s note: On its website, Selby lists five acquisitions of its portfolio investments, including 3Ware Inc., which received $95 million in funding from Selby and other investors. Applied Micro Circuits Corp. acquired 3Ware for $150 million in cash earlier this year. Among its investment busts was Silicon Planet, which raised about $1.5 million before filing Chapter 7.)

You’re no stranger to the venture industry. You ran the investment arm of Tandem and you’ve been an angel investor. But why did you create Selby Venture Partners?

In 1998, I saw the industry moving toward larger funds and away from what venture capital was all about, which is providing $1 million or $2 million for early stage investments. The funds are getting smaller, but I believe there’s still a need for what we offer.