NEW YORK – Know which company included the following line in its most recent earnings report: “We experienced continued growth and strong revenue during the first quarter, but took unexpected losses from our venture capital portfolio?”
Well, take your pick. Almost every major bank has done it, and it’s a common whine of high-tech firms that plugged millions of dollars into strategic investments in the pursuit of generating returns and cutting down on internal R&D expenditures.
“Venture capital can be a tough business for corporations, because they have to be willing to tolerate the mark-to-market requirements,” said Kenneth Rind, a founder and general partner of over 10 funds and a founding director of the National Venture Capital Association (NVCA). “Having a loser on your books can be very embarrassing.”
In fact, those difficulties have become so severe that Rind was expected to unveil a new fund last month dedicated to investing in the direct private equity portfolios of corporations who can no longer stomach the VC business. It is being launched in association with Private Equity Investors Inc. (PEI), and will be named PEI Corporate Ventures LLC.
The joint venture is believed to be the first dedicated fund of its kind, although a handful of online exchanges and traditional secondary firms – including PEI – have conducted one-off transactions for individual portfolio companies. So far, Rind reports that a handful of corporations have already publicly expressed an interest in selling off some, or all, of their assets.
One such firm is IXL Enterprises Inc., an Atlanta-based Web developer whose stock price has suffered through a sustained drubbing on the Nasdaq. The company launched IXL Ventures in 1999 to make strategic investments, but has now reconsidered and is looking to unload the entire investment arm on a group like PEI Corporate Ventures.
“As these companies mature, our ownership stake will become smaller and smaller, since IXL currently wants to focus all of its efforts on its core business,” said Mike Dowdle, a managing partner with IXL Ventures, who plans on leaving the firm this summer. “Selling it all off in one bucket is easier than selling it off piece-by-piece, because you don’t have all of the shareholder drags and tags associated with it.”
Other corporations also said to be considering such a sell-off include Comdisco Inc., which operates Comdisco Ventures, and MarchFirst Inc., which was recently acquired by Divine Inc. and is still debating the future of its BlueVector venture arm.
While the PEI proposal sounds decent from a corporation’s perspective, it might not be sitting terribly well with the portfolio companies themselves.
“This is in the corporation’s best interests, not the portfolio company’s best interests,” Rind said. “Still, if they get bought by us they should be pleased that the stake is being purchased by someone who knows a lot about VC.”
Indeed, Rind and PEI’s VC pedigrees will become vital, as many of the more traditional secondary players (i.e., firms that invest in secondary partnership interests) contacted for this story said they would not participate in such transactions because a different skill set is required.
“It comes down to a cost calculation, and you need to know how to do it effectively,” said Nick Harris, general partner with Lexington Partners, which has done some scattered one-off buying of corporate portfolio interests. “Buying interests in a company requires a certain set of resources that most secondary investors don’t focus on.”
He added that the market should be strong for a group like PEI Corporate Ventures, considering the amount of capital that’s flowed into corporate venture arms over the past several years.
“The secondary business is driven by the primary business, and the primary business has really exploded,” he explained.
Most of PEI Corporate Ventures’ buying will be aimed at entire portfolios, but the fund is open to participating in some one-off or partnership transactions.