Wringing Money from a Flagging Venture Fund — for a Price

Aging, poor-performing venture funds seldom have attractive options, but a new “innovation” by Shareholder Representative Services can quickly shift some money onto the balance sheets of their LPs, assuming a number of things come together first.

First, some background: SRS manages the final steps of M&A transactions for dozens of clients, including Kleiner Perkins, Sequoia Capital, and Oak Investment Partners. Why hire them? Because after all the handshakes and high-fives, a full 56 percent of buyers decide that all is not hunky-dory with a deal, and they typically keep between 10 and 20 percent of a deal in escrow until they do. That can take time – 8 months on average, says SRS, though some deals take up to 24 months. Worse, just 86 percent of the escrow is released to shareholders on average, says SRS.

All the while, says SRS, it has the investors’ back. When disagreements arise over how much working capital the acquired company really has, SRS deals with it. That shareholder who claims he was left out? That’s SRS’s problem now.

Of course, it’s always been in SRS’s interest to paint a grim picture in which the process of sealing a deal is onerous and awful. But that’s never been truer than now, and here’s why: the company has just introduced EscrowExchange, a pool of capital it will use to buy shareholder interests that are being held in escrow —  for a 30 to 50 percent discount.

Why would a shareholder agree to such a deal, when all they need be is patient? SRS co-founder Mark Vogel tells me angel investors are often eager to get as much money out of a deal as quickly as they can, even if it means leaving some money on the table. But he concedes that the bigger customer here is VC firms that have “end-of-life funds and that either want to improve their IRR or shed their indemnification risk by taking a discount today.” Vogel suggests that such firms may want to “possibly redeploy the funds into a new investment with what they believe will be a bigger outcome.” But presumably, most of EscrowExchange’s customers will be firms with LPs breathing down their necks for some capital back tout de suite.

Not just anyone can take advantage of EscrowExchange. First, you’d better be a customer of SRS. Additionally, Vogel says that SRS will only be “offering this product on selected deals.” (No surprise here. After helping close more than 200 deals in the company’s four-year history, SRS probably has a good idea about which transactions are more likely than others to prove aggravating and expensive.)

For the rare venture firm that doesn’t already have an account with the secondary trading platform SecondMarket, it will also be necessary to sign up. It’s through SecondMarket that shareholders will be asked to name a price for their still-illiquid shares. Afterward, SRS will either accept the proposed offer or decline it — sort of like a reverse Dutch auction. All shareholders will be told about the opportunity, says Vogel; none of them will be obligated to sell if they’d rather hang on to their holdings until the close of escrow. All who choose to sell will be charged a 2 percent commission by SecondMarket.

SRS isn’t talking about how big a pool of money it has raised for EscrowExchange, but Vogel says it will invest just $200,000 to $1 million in each deal. He adds that he doesn’t expect it to compete with SRS’s primary business of being a shareholder representative.

“We created this product to meet the needs of shareholders,” he tells me. “In today’s venture world, [investors] are looking for new avenues.”