Mr. Biddle: First time, but they had been following us for six years.
Mr. Wilcox: I would add only that institutional investors don't typically get
involved with portfolio companies. There are special limited
partners, however, who are typically successful former
entrepreneurs. They have invested in the fund and they sometimes
help generate deal flow. If they've got expertise in a
particular area, they'll contribute it to the general partner on
an as-needed basis.
Ms. Burkett: Otherwise, we only get to meet entrepreneurs at the annual meetings, at
the cocktail hour, or at lunch. For most of us, that's a good
way to keep in touch with how our fund and their portfolio
companies are doing.
Mr. Burke: Given all the advice we give to entrepreneurs about “focus, focus,
focus,” and “target the venture capitalists you want to
approach,” should they also look at the limited partners of a
fund? Do you think that should make a difference to the
entrepreneur, or is all money green, so it doesn't make a
Mr. Biddle: Well, the people who thought all money was green and took the highest
price a couple of years ago are out of business. In the last
three investments we made, there were multiple term sheets on
the table. Ours had the lowest price and the entrepreneurs went
with us. I think the reason is that we've stuck with our
companies when we've had companies in trouble. We fight to the
last dog. For the entrepreneurs, this is their one shot. We do
deals all the time. If we lose a company, it averages out, but
for the entrepreneurs, they get one shot. Today they want to go
with the guys who have a 60% on-base percentage instead of a 20%
Mr. Burke: Do you think the entrepreneurs know who your LPs are?
Mr. Biddle: I don't think so.
Mr. Burke: Do you think it matters?
Mr. Biddle: I think today they don't, but a lot of hot money came into this
business and is leaving the business. They came in at the peak
and they're gone. Accenture just shut down their venture group
-- $500 million, just gone. When we started our fund, we saw the
industry crash in the 1980s. It was predictable. Groups like VRS
are committed to the asset class. They understand the game. You
have to be in it all the time. You don't go crazy, just nice and
steady. Those are the people we wanted in our fund. We have
capital. The majority of the funds in the region are not going
to be able to raise another fund. Some of it is because they
haven't done a good job, but some of it is that they have the
wrong kind of limited partners.
Mr. Burke: What are you limited partners seeing on a macro level now? You see lots
of pitches, you evaluate lots of funds, what are the general
trends that you are seeing?
Mr. Wilcox: First-time funds are having a very difficult time raising money. You
have to have a track record. If you've made money with a fund
before, there's a good chance you'll go back to them.
Mr. Burke: But, as Jack was talking about, it's a 10-year partnership. They'll
make investments for the first four, then they're going to start
raising a fund again. In that case, you're going to be
evaluating funds that may not have any returns yet. How do you
Mr. Wilcox: We typically don't. We generally won't invest with a firm if they're on
their first or second fund, or if they don't have some exits
under their belt that they can show us.
Mr. Burke: So you'll just wait?
Mr. Wilcox: Yes. We typically invest with the firms that have been around for a
number of years. We do make exceptions, especially when the
general partners are from other firms and have transferable
track records, such as a number of exits that they can show. For
people starting a first-time fund who don't have a number of
exits under their belt, however, there isn't anything that we
can look at, so the chances of them getting funded from Bessemer
are very slim.
Ms. Burkett: There are first-time funds in the market right now that are getting
funded mostly by their friends and family. Institutions just
aren't looking at them now because the situation has cooled
I would also
say that the high profile funds, if they can, are staying out of
the market at this time and working their portfolios so when
they must come to market, they will come with some results, or
at least some understanding of the direction in which their
portfolio is going. As a result, you're definitely seeing a lack
of urgency and a calmer market than there was even a year ago.
Mr. Burke: So Catharine, would that affect your judgment at all? If a VC comes to
you that has raised one fund from friends, family, and
individuals, and now they have some track record, would you
think about it? Would it make a difference to you?
Ms. Burkett: It might make a difference. It might not tip me over the balance, but I
might give them more of a hearing than I would have the prior
Mr. Biddle: You also have to understand the psychology of being a business. If an
institution invests money in one of the high-profile VCs, such
as New Enterprise Associates (NEA),
and loses money, it's NEA's fault. If they invest in me and lose
money, it's their fault. There's a strong institutional bias to
back the IBMs and NEAs of the world.
Ms. Burkett: You don't get shot for that.
Mr. Wade: The majority of our general partners, specifically our venture
managers, came back to market in 2000 or the beginning of 2001
and significantly decreased their investment pace. Most of them
seem to be concentrating their efforts on their existing
portfolios. As a result, most of the GPs we have exposure to
aren't coming back, or we don't foresee them coming back, in the
near term. Those we do see, as Catharine and George said, are
the first-time funds, those with maybe some small, discernible
track record working into their second fund. While we may take a
meeting with them, it would be very difficult for us to get to
Mr. Burke: So, the environment for funding these venture funds has changed. Lots
of entrepreneurs think that the process is broken, for lack of a
better word. It's very difficult, particularly for early stage
companies, to get funded. How is this pressure that we've been
talking about affecting that?
Mr. Biddle: There are two sets of issues. One is just raw economics. It's going to
take twice as long and twice as much money for half the return
to make an investment successful. As a result, the wealth that
the company has to create to justify the investment is much
higher than it was a couple of years ago. The economics have
issue, from my standpoint, is that these people on our panel are
very high quality investors, and I'm going to go to all three of
them in a year or two and ask them to invest in my next fund.
Our numbers for the last few years aren't going to be terrific.
I think they're going to be better than the vast majority of
people that we compete against, but, as I said earlier, LPs have
alternatives. They own bonds and real estate and office
buildings. I would rather outperform their alternatives, and I
think it's going to be very tough to do that in venture because
there's still too much money in the business. I need to make
investments that not only return, but are sensible, logical, and
make sense to my limited partners. I'm not going to take any
companies public in the next year or two, and you're crazy to
sell a good company today, so the companies we sell are our bad
companies. I'm not going to have a lot to point to in terms of
results, so I need to do deals that make the economic hurdle. I
also have to do deals that are sensible to limited partners so
they can see that I'm a better investment than buying an office
building. That's what they'll do with the money if I don't
Mr. Burke: You've got investments that are illiquid, they're tied up for years,
and they've been tanking for the last couple of years. What are
LPs doing investing in venture capital these days? What
percentage of your total investments is private equity as an
asset class? Is it going down? Going up?
Ms. Burkett: It's declining in value, that's for sure.
Mr. Wade: We got as high as 10% of the value of the fund in very early 2000, and
we're fortunate enough, through some of our stronger general
partners, to take a significant amount of money off the table.
Now we're down to a little over 6% of the fund.
Mr. Burke: What has it been historically?
Mr. Wade: It's been somewhere between 5% and 10%. We typically don't like to get
above 10%, but we did, essentially because of valuations. As
Catharine said, our percentage has decreased because the value
of our portfolio has dropped, but we're not going to change our
direction as far as dropping out. We'd never make it trying to
time the market and we don't expect to do it now. In some
respects, now is a decent time, from our perspective, to ensure
that you stay active.
Mr. Burke: So you're committed?
Mr. Wade: Yes.
Mr. Burke: George?
Mr. Wilcox: We're at about 10%. We manage about $35 billion, and about $3.5 billion
of it is in private equity.
upon something in terms of vintage risk that's changed for us in
the last 24 months. When we deploy capital in private equity, we
look at diversification by sector. We invest in some firms that
are generalists, some with an optical networking focus, some
software. We want diversification across sectors, and we want
diversification by geography, especially with regard to early
stage funds which tend to have a very narrow geographic focus.
We want diversification by stage. We don't want to just invest
with early stage investors, so we place money with expansion and
later stage funds also.
most investors hadn't really looked at was vintage risk.
Typically, we would raise a fund every three or four years, a
$600-$700 million dollar fund, then we'd be out of the market
for three or four years, then we'll raise another one. There's
inherent risk there. When you look at the numbers historically,
the returns that you'll get out of a fund depend heavily upon
its vintage year, so we've moved to a vintage model. We raise a
fund every year, a smaller fund, and we're putting money out in
the market every year. This way we get the vintage
diversification that we think is critical.
equity valuations have come down, and funds have been marking
down their portfolio companies. That will probably continue for
another 12-18 months. The worst of it is probably behind us. The
past 24 months have brought out a couple of phrases that we
haven't heard around our shop in a long time. The first is,
"Recessions catch what the auditors miss." The second
is "Investing money is easy, getting it back isn't."
Mr. Biddle: A key point, though, is that venture, as an asset class, has beaten the
public markets by 400 basis points. That's a lot over a decade,
but it's not a huge difference.
two-thirds of all the venture capital invested since Columbus
has been invested in the last 36 months. In the venture
business, what we're going to do as an industry is assume that
you've invested in all of our funds since 1970 and we're going
to show great numbers. That's really not the way it's worked. If
you gave me $100 million in 1990 and I gave you back $300
million, then you gave me $1 billion and I gave you back $500
million, I can report a great IRR, but you lost your shirt.
Right now we're
in the situation where the absolute dollars are so big during
these terrible vintage years, they'll be the worst ever. That's
going to create a lot of pressure from the boards that oversee
these institutional investors. Maybe they’ll say, “We want
to do less private equity and buy Guatemala.” There's going to
be pressure, I think, to shrink the pool. My competition is
getting a lot tougher because we're going to be fighting for
Ms. Burkett: We are looking at ways to diversify our private equity, including in
the venture stage. One of the things we have in our early stage
portfolio -- which I'm not really sure belongs, but has
certainly helped us a lot in terms of our performance -- is
venture lending and leasing kinds of opportunities. There are
other ways to participate in the category and balance your
returns in the process.
Mr. Burke: As LPs you have a unique view into venture funds. Most of these funds
are private. They don't have to report results publicly, so you
see what's behind the curtain in terms of the blood-letting
that's been going on. When you look out over the next 18 months,
is the blood-letting over? Have we seen the worst of these
Mr. Wade: I think we've seen the worst, but it's definitely not over. I think
there's another round, say, in the next two to three quarters.
Companies that were over the hurdle in the last go-around aren't
going to make it.
Ms. Burkett: We've seen some bad news. Some of the funds I've been looking at
lately, in terms of their annual meetings, have one or two
really good companies that are coming along. If those don't make
it, the fund is not going to make it. We're at a critical
juncture. We may not see the drastic number of write-offs, but
some of the write-offs going forward could be key.
Mr. Wilcox: I think we'll still have write-downs in the next 18-24 months. There
will still be companies that get shut down, but the worst is
definitely behind us. It's not all doom and gloom for the
entrepreneurs. There's a tremendous amount of money on the
sidelines. We raised a $600 million dollar fund in 1999, 100% of
it is committed, and only about 30% of it has been called, so
it's probably time to start putting some money to work.
the audience: q&a
Q: I'm Walter
Ludwig with a new company called Difference Engines. The sort of
dramatic errors of the last three years on the part of VCs and
entrepreneurs have created a reduced set of expectations for
entrepreneurs as they seek venture capital. I'm wondering
whether or not you have reduced your internal expectations for
IRR in a similar fashion.
Mr. Biddle: A couple of years ago, everybody was saying that if you're not
generating 100% IRR, you're not doing your job. You could do it
on the back of an envelope. $100 billion was the commitment
amount to a VC two years ago. With 100% IRR, the 1999 vintage
startups would have to produce the entire gross national product
in seven years. It's not likely to happen. You knew the numbers
were going to come down.
something like 1986, not one single institutional venture fund
ever lost money. It might take eight years to get hold, but
nobody ever lost money in this business. This is the first time
that people are losing money. I'm an investor in venture funds
personally, so I see the numbers. There are big franchise
venture funds, big household names, that may return 20 or 30
cents on the dollar for some of these periods. It's that order
of reduced returns.
think that the asset class has a competitive advantage -- the
barriers to entry, the difficulty of raising the first fund, the
fact that good funds tend to get the good deals -- it feeds on
itself. I think that venture capital will continue to outperform
the public markets forever, but that may not be saying a lot for
a couple of years.
Ms. Burkett: A lot of venture funds are doing what we do to our boards, they are
managing our expectations. They were telling us two, three years
ago that these 100% returns weren't going to continue.
Certainly, if they were rational people, they were telling us
that. We, in turn, having been managed by them, are trying to
manage our constituencies, too, “Be realistic about returns
Mr. Biddle: I know one university that took the numbers the GPs provided and
discounted them another 35%. What they're doing now is lowering
their discount as the portfolio value drops. They're telling
their board that it's flat, because they set the right
Q: My name is Cy
Weinstock, I'm in the uncrackable encryption area. I find that
when I talk to investors, their technical expertise seems to be
limited, which affects their knowledge of the investment
activity. While I've had people wanting to give me money, I
didn't feel it would work out if they didn't understand the
market and the expected return. I find that losing the money is
tied in some part to the lack of technical expertise, which is
tied to the business decisions.
Mr. Biddle: We have a very good relationship with some of the top experts in the
field. Your stuff is going to go straight to them, and, if they
tells us it's awesome, we're going to take a serious look at it.
At our shop, our people are pretty technical and we have very
good relationships with people who are extremely
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