VC Adventures in Enron-land –

It started with a simple question: “What’s going to happen to Enron’s venture capital investments?” I should have known the answer would be anything but straight.

When I called, Enron greeted me with the recorded voice of a man who sounded like he did infomercials for a living.

“Thank you for calling Enron. On December 2, Enron filed under Chapter 11 of the bankruptcy code, thus commencing proceedings to stabilize our financial situation and define an orderly process by which we can try to restructure our business…”

Never mind Andrew Fastow and all those angry senators on Capitol Hill.

“While we are confident that we will emerge from this process as a stronger company, we know this filing will raise questions for our customers and vendors…”

Here’s one: Are you kidding?

“We have established this information hotline to address those questions as best we can. We will be updating this information as we move forward…”

Vendors, suppliers and customers are asked to dial 1 through 6. “Concerned neighbors” from the Enron “community” are directed to dial 7. All other callers are told to press 9.

So, I press 9.

A live operator answers. Six transfers and a dozen voice mails later, the closest I’ve come to Enron is a bag of Lay’s potato chips.

Five days pass, and I give it another try. This time, the operator transfers me to “Ed” at Enron Broadband Services. He’s the wrong guy, but I leave my name and number on his voice mail anyway.

A few hours later, he actually calls back. I almost fall off my seat when he says he knows the person I should talk to: Mark Gandy, the last man standing at Enron Principal Investments (EPI).

I call Gandy. “Well, it’s just me now,” he says.

EPI, Enron’s legitimate strategic venture arm – not one of those shady off-balance sheet partnerships with names out of “Star Wars” – is closing up shop.

“Post-bankruptcy, we’re managing the portfolio and preparing them for eventual liquidation,” Gandy says. “However the company emerges, venture capital won’t be an immediate or desired business unit. To return to those businesses is probably unlikely.”

EPI is looking for a buyer for its entire portfolio of 25 start-ups, including Artesia Technologies, FastForward Net- works, Pathfire, Telseon and V-Span (see chart, page 8).

Optimally, Gandy would like to sell the whole portfolio in one fell swoop, but it “depends on the creditors and the bankruptcy judge and the courts and the investors,” he says.

The task is far from simple. For starters, nine of the portfolio companies appear on Enron’s balance sheet. That means that their fate lies at the mercy of a bankruptcy judge, and it has been estimated that it could be years before the case is resolved.

Another sticky issue: Co-investors have rights of first refusal to buy Enron’s equity share of certain companies, but they have not yet made any moves to do so.

To top it off, some companies in the portfolio may have relationships with some of “those nefarious [offshore] vehicles,” Gandy says. If that’s the case, EPI’s position can only be sold when and if those relationships are sorted out.

The first trouble signs emerged from EPI at least two months before Enron filed for Chapter 11 protection. By the time Enron announced it would restate its earnings and the Dynegy merger fell through, EPI realized it would not be making any new investments.

“When Enron’s death spiral began last fall, we said we would not continue looking externally [for investments], if ever,” Gandy says. “The team took on much more of a management focus rather than an investment focus.

In mid-summer, before the bankruptcy filing, EPI still was trying to figure out how to proceed as the successor to four separate Enron-backed venture groups: itself, Enron Broadband Ventures, Enron Net Works Ventures and the Houston Economic Opportunity Fund. When the groups merged in June 2001, the renamed EPI began evaluating its portfolio and rethinking its investment strategy.

Even then, however, the synergies between the groups were not altogether clear. Each of the corporate venture groups was to invest in companies that could be easily aligned with Enron’s core strategy, which was becoming increasingly murky.

For Enron Broadband Ventures, that had meant creating broadband markets through investments in communications hardware or software companies. It was a passive investor, often investing late in a company’s growth cycle and rarely taking board seats.

Power Grab

Enron Principal Investments invested in technologies that could make power markets ubiquitous or address power delivery or quality. It was an active, early-stage investor often taking board seats.

Enron Net Works Ventures made investments in platform software, mostly business-to-business plays like ChemConnect. Meanwhile, the Houston Economic Opportunity Fund invested in local minority-owned businesses.

Finding common ground, Gandy says, was not easy. None of the individual groups could preserve its unique investment strategy without clear direction from the corporation. And Enron never set a clear vision for EPI. Although the group completed two follow-on financings for portfolio companies, EPI made no new investments after June.

EPI then started letting go of investment professionals. At least a dozen people once formed the core of EPI. Most were in Houston, but some were in London and Portland.

Board seats were handed over to members of Enron’s special assets, or workout group, as personnel left or were let go. Some of Enron’s principals have turned up at other venture firms. Former Enron Managing Director Kevin Garland, who once sat on the boards of Enron portfolio companies Utiliquest, FirstWorld Communications and Hanover Measurement Services, is now a principal with The Sterling Group in Houston. Paul Rodseth, once a partner with Enron in London, is now an investment director with Add Partners in London.

And Gandy? He says he really likes what he’s doing, but he wishes that he could be doing it in another situation. Meanwhile, he’s putting together the pitch book to sell the portfolio. Want a piece of the action? Call (713) 853-6161, listen to the well-enunciated and surprisingly chipper message, and press 9.

Enron’s Venture Holdings
Name Total Amount Raised Most Recent Round Investors Description
Artesia Technologies Inc. $51M Sep-00 Vignette Inc., Warburg Pincus Digital Asset Mangement
ChemConnect Inc. $128M Mar-00 Accenture Technology Ventures, Amoco Venture Capital Co., CMEA Ventures, Eastman Chemical, Goldman, Sachs & Co., Highland Capital Partners, Institutional Venture Partners, Lightspeed Venture Partners, Misubishi Corp., Mitsui & Co., Morgan Stanley Venture Partners, Rohm & Haas Co., SAP America Stanford University, Sterling Commercial Capital, Tamir Fishman Ventures Online Chemicals Exchange
Cinta Networks $51M Oct-00 ADC Telecommunications, Battery Ventures, Comdisco Ventures, Corning Innovation Ventures, M/C Venture Partners, Sequoia Partners Optical Switching
ECOutlook.com $25.3M Dec-00 FS Private Investments, Savoy/Socios Fondos de Financiacon Management Latin Rim, iHatch Ventures, Venrock Associates B-to-B Integration Software
eMotion Inc. $62.5M Jun-00 Chartwell Capital Management, Constellation Ventures, EastWest Venture Group, EMC Ventures, GE Equity, J.P. Morgan Partners, Psilos Group Managers, Sun Microsystems, Wasserstein Ventures Digital Media Management
Ennovate Networks Inc. $85.8M May-01 DLJ Merchant Banking Partners, General Atom/Toshiba Corp., Kohlberg, Kravis, Roberts & Co., Lehman Brothers, Marquette Venture Partners, Mitsui & Co., PSINet Ventures, Pequot Capital Management, Spectrum Equity Investors, Sprout Group, Tudor Ventures IP Provisioning
FastForward Netwoks Inc. $33.9M Mar-00 AOL Time Warner, Accel, Bowman Capital, Inktomi, Sun Microsystems Interactive Broadband
Hyperchip Inc. $189.8M Jan-02 Advent International, Amerindo Investment Advisors, JT Venture Partners, Morgan Stanley Private Equity, Optical Capital Group, Pilgrim Baxter & Assoc., Putnam Management, Siemens Venture Capital, TechnoCap Inc., Telesystem-Argo Global Capital, Van Wagoner Capital Management, Vertex Management Optical Routers
InterXion $173M Oct-01 Akin Gump Investment Partners, Baker Capital Corp., Bear Stearns Merchant Banking, CSFB Private Equity, Continuum Group Ltd., DLJ Merchant Banking Partners, Goldman, Sachs & Co., Morgan Stanley Private Equity, Navis Partners, Paribas Deelnemingen, Residentie Investments, WH Advisors Telecom Equipment Housing
MSHOW.com $56.3M Oct-00 Blue Chip Venture Co., Citizens Ventures, Sequel Venture Partners Interactive Broadcasting
Pathfire $97.7M Nov-00 Alliance Technology Ventures, AT&T Ventures, Banc of America Securities, BancAmerica Capital Investors, Comdisco Ventures, Halpern Denny & Co., Institutional Venture Partners, Kinetic Ventures, Monarch Capital Partners, Noro-Moseley Partners, Quadrangle Group, Reuters Group, Riggs Capital Partners, Sand Hill Capital, U.S. Venture Partners, UPS Strategic Enterprise Fund Digital Media Management
PentaSafe $45M Jul-01 Austin Ventures, Dell Ventures, J.P. Morgan Partners, Lehman Brothers, Pyramid Technology Ventures, Quest Software Enterprise Secuity
Surgient Networks Inc. $80.5M Nov-01 Agave Capital, Austin Ventures, Cisco Systems, Comdisco Ventures, Jafco America Ventures, RockMountain Ventures, Sternhill Partners Interactive Broadcasting
Telseon $186.5M Feb-01 Bear Ventures, Bruckmann, Rosser, Sherrill & Co., Cabletron Systems Inc., Crosspoint Venture Partners, DLJ Merchant Banking Partners, Foundry Networks, Goldman, Sachs & Co., Hunt Private Equity Group, Level 3 Communications, Lexent Technologies, Morgan Stanley Private Equity, Nextlink Communications, Ovation Capital Partners, Pivotal Asset Management, Sevin Rosen Funds, U.S. Bancorp Piper Jaffray Securities Ventures Metropolitan Network Provider
Trellis Photonics Ltd. $33.1M Oct-00 Agilent Ventures, Anschutz Investment, The Carlyle Group, Crescendo Venture Mgmt, Pitango Venture Capital, Tamir Fishman Ventures, Yozma Venture Capital Optical Switches
Tropic Networks Inc. $70M May-01 Anschutz Investment, Celtic House International, Crescendo Venture Management, Goldman, Sachs & Co., Kodia Venture Partners, Raza Foundries Optical Packet Networking
V-Span Inc. $45.9M Oct-00 Boston Millenia Partners, Comcast Interactive Capital, Edison Venture Fund, Goldman, Sachs, Harron Capital, Ironside Ventures, J.W. Seligman, Motorola Virtual Conferencing
Vivace Networks $119M Sep-00 Brentwood Venture Capital, Foundation Capital, Institutional Venture Partners, J.P. Morgan Investment Management, Meritech Capital Partners, Putnam Management, Redpoint Ventures, Sutter Hill Ventures IP Switching
Sources: Venture Economics, VCJ research. Compiled by Carolina Braunschweig.

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