SRF eats crow with XenSource sale

Sevin Rosen Funds appears to have proven itself wrong.

Ten months after General Partner Steve Dow declared that “the traditional venture model seems to us to be broken,” SRF found that the model is working just fine: Portfolio company XenSource was sold to Citrix Systems (Nasdaq: CTXS) for $500 million in cash and stock on Aug. 15.

XenSource, a provider of open source virtualization software, was incubated in SRF offices in 2005 and later raised more than $38 million in VC funding from SRF, Accel Partners, Kleiner Perkins Caufield & Byers and New Enterprise Associates.

No firm is probably happier about the XenSource sale than SRF, which last fall pulled the plug on its efforts to raise $250 million for its 10th fund. It sent a letter to limited partners on Oct. 6, 2006, that read in part:

“The venture environment has changed so that overall returns for the entire industry are way too low and even the upper quartile returns have dropped to insufficient levels. Our plan is to take the time to see if there is a new model that can better address the troubled exit environment than the traditional venture model has over the last decade. We look forward to coming back to and asking again for you to renew the commitments that we have reluctantly chosen to return to you.”

General Partner Nick Sturiale declined to discuss the effects that the sale will have on SRF. But he said in mid-August that the firm may have some official announcement in the coming weeks, though he would not specify its nature.

“We’re feeling good about the portfolio and working very hard to make money for the LPs,” Sturiale says.

Indeed, there are signs of life at the firm, despite having ceased its fund-raising. SRF has invested in 26 deals so far this year, mostly follow on rounds for its existing portfolio, according to Thomson Financial (publisher of VCJ). And Sturiale remains with the firm, even after he shopped his resume around Silicon Valley in the spring.

When SRF pulled the plug on its new fund-raising efforts last fall, the firm had good reason to be skeptical of its ability to invest in future deals. Over the last three years it had only seen five of its companies sold for a profit and not one of the six companies it had taken public since 2000 had a market capitalization in excess of the venture capital it had raised, according to Thomson.

Of the firm’s biggest exits in recent years was also the result of a sale to Citrix. SRF had seeded WAN optimization company Orbital Data Corp. in late 2003 with $2.1 million and invested again with Redpoint Ventures in a $12 million round six months later. Citrix bought Orbital Data in April 2006 for $50 million.

Citrix has close ties to SRF. SRF partnered with Kleiner Perkins 18 years ago to seed Citrix. The two firms, along with Mayfield Fund, invested $16.25 million in Citrix through 1993. The company filed for a $37.5 million IPO in 1995 and SRF’s Dow has remained on the board of directors since then. He also served as chairman of Citrix between 2002 and 2005.

Dow did not attend the Citrix board meeting that approved the XenSource deal and he recused himself from the vote, according to a regulatory filing. Dow can personally expect to gain $1.9 million from the deal, according to Citrix.

Virtualization software, which helps companies cut costs by allowing them to run multiple operating systems on a single server, is a hot sector. XenSource rival VMware Inc. (NYSE: VMW) went public on Aug. 14 at $29 per share and its stock shot up 76% by the end of the day.

Just one day after the VMware IPO, XenSource agreed to be acquired by Citrix.

“The Citrix deal is going to propel XenSource into a new category,” says Sturiale. “You’re putting its software into Citrix’s 5,000-strong channel. It’s rare to see such a hand-in-glove relationship.” —Alexander Haislip