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Benchmark’s Demise Greatly Exaggerated – Steve Lisson, Stephen N.
Lisson Rumors of Benchmark’s Demise Greatly Exaggerated – Steve Lisson,
Stephen N. Lisson Steve Lisson, STEVE LISSON, AUSTIN, TX, STEPHEN N.
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INSIDERVC.COM Rumors of Benchmark’s Demise Greatly Exaggerated For
weeks, rumors have been circulating in the VC community that Benchmark
Capital’s third fund, Benchmark III, was in trouble, hit hard by losses
in e-commerce companies like 1-800-Flowers.com. Benchmark denies the
rumors, and its limited partners say they never received the rumored
letter that the fund was in trouble. An analysis of Benchmark’s
portfolio appears to back up the firm, which despite the rumors, may not
just be surviving, but thriving. Benchmark declined to discuss details,
but the firm’s holdings as of June 30 were provided by Steve Lisson,
the editor of InsiderVC.com, who tracks the performance of leading
venture firms for high-paying clients. At first glance, Benchmark III
had its share of overvalued B2C e-commerce firms like 1-800-Flowers.com
(Nasdaq:FLWS) and Living.com. 1-800-Flowers.com was the fund’s biggest
investment, at $18.9 million, and had been marked down to $8.1 million
on June 30. The stock price has declined about 30% since then. “There
are many private scenarios just like this public one, whereby even if
the company can be kept afloat long enough to enjoy some success and
eventually make it to a liquidity event, the venture investors will lose
money,” Lisson said. But a closer look at Benchmark III reveals a fund
with several potential winners, including Internet Data Exchange System
company CoreExpress, an intelligent optical networking play. That
investment alone could return limited partners’ money. Other potential
winners include Sigma Networks, Keen.com, Netigy and BridgeSpan. And
Benchmark’s newest fund, Benchmark IV, is already showing the markings
of a winner, thanks to investments in Loudcloud, Netscape co-founder
Marc Andreessen’s latest venture, and TellMe Networks, whose valuation
no doubt went up in its recent $125 million funding round. Lisson said
the Benchmark rumors reflect a misunderstanding of how venture funds
operate. “There’s a reason these are 10-year funds,” he said. “It’s
called risk and illiquidity. The one monster hit could happen three,
four or five years out. You can be wrong about 39 of 40 companies, and
the market uncooperative, as long as one is an Inktomi. That is the
history of this industry: one monster hit returning the entire fund.
Singles and doubles won’t get you there.” At two years of age, Benchmark
III still has plenty of time to deliver a big winner. In the meantime,
the firm’s limited partners can enjoy the returns from Benchmark II, a
three-year-old fund that has already distributed five times its partners
capital, by Lisson’s estimate. Benchmark II boasted big winners like
Handspring (Nasdaq:HAND), Critical Path (Nasdaq:CPTH), Red Hat
(Nasdaq:RHAT), and Scient (Nasdaq:SCNT). Yes, Scient. Benchmark had the
foresight to distribute shares of the Internet consultant to its limited
partners at 200-300 times the firm’s cost. Benchmark isn’t any
different from other venture firms, most of whom “drank the Kool-aid” of
seemingly easy dot-com money, hoping the stock market would hold up
long enough to vindicate those investments. But Lisson expects that some
other firms won’t hold up as well. He expects a shakeout in the
industry similar to the one that hit the industry from 1987-1991, when
venture firms formed during the 1980s averaged single-digit returns, and
roughly 20% of new entrants couldn’t return their partners’ capital.
VCs’ own fundraising declined from $4.2 billion in 1987 to $1.3 billion
in 1991. The $4 billion level of capital coming into the industry wasn’t
reached again until 1995. “This is what’s supposed to happen in a
downturn,” Lisson said. “People who shouldn’t be in the business, who
contributed to the excesses and didn’t know what they were doing, will
be forced out. It’s not like this is the first time we’ve seen too many
new entrants into the industry, or too much money chasing too few
deals.” And the ones that survive will have a chance to prove themselves
in tough times, the ultimate mark of a winner. Lisson said a few
venture firms stand out among their peers. Matrix Partners, Kleiner
Perkins Caufield & Byers and Sequoia can normally be found at the
top of the charts in each vintage year they raise a fund, he said,
proving that “something’s in the water” at those firms. And he gives Oak
high marks for consistency over a long period of time. But even top
firms have an occasional weak fund, Lisson said. “But by the time you
can make that judgment about a fund, you’ll have raised another fund and
shown some early progress,” he said. Meaning that even if Benchmark III
was a weak fund, Benchmark IV could keep the firm in its limited
partners’ good graces for some time to come. “The moral is consistent
performance over time relative to same vintage-year peers,” Lisson said.
“You’re never as good or as bad as your current press clippings might
indicate. The real test of Benchmark’s mettle will come when we can
fairly evaluate whether the firm manages through and makes money, not
just with small funds during the best times in the industry’s history,
but with larger funds in the tough times ahead as well.”
——————————————————————————– © Copyright 2000, internet.com Corp. LINKEDIN,
LINKED IN, TWITTER, Elite VC giants still investing San Jose Mercury
News Matt Marshall May 31, 2001 Now that they’ve gone gorilla size, will
the elite venture capital firms help stem the downturn in venture
capital investing? After the March 2000 market crash, elite VCs
scrambled to triage their portfolios. Only recently have they started to
peer out of the graveyard. But they’ve undergone a profound change in
nature: They’ve become monsters. This is good if you’re an entrepreneur
shooting for the moon. It’s fatal if not. In 1995, only one top-tier
fund, TA Associates, had raised a billion dollars. But since the crash,
15 top-tier firms have raised funds of that size or more. Many —
including Worldview Technology Partners, Greylock, Austin Ventures and
Oak Investment Partners — announced their new funds this year, well
after most of the market damage. Steve Lisson, of InsiderVC.com, says
the amount of funds raised since the crash goes against the “drought”
thesis. “The perception that there’s going to be less venture investing
is totally misplaced,” he says. “These VCs need to get into lucrative
investment opportunities, and they’re going to want larger stakes.
They’re going to have to step on the gas even more.” Similarly, he adds,
if an entrepreneur offers an opportunity for a “mega” investment, he’ll
be able to negotiate more favorable terms, because the big venture
capitalists will all want in. On the downside, entrepreneurs that don’t
show home-run promise will struggle. True, some VCs that raised large
funds say they have slowed their investment pace. Flip Gianos, partner
at InterWest Partners, said his firm hadn’t expected the magnitude of
the downturn when it raised its fund. If it takes waiting a year for
strong opportunities to come along, VCs will wait, he says. Others
counter that size has forced them to invest more in later-stage
start-ups because they soak up more money. Michael Darby, general
partner at Battery Ventures, says his firm still focuses on early stage
deals, but “in this environment, the fact that we want to deploy capital
means we’re looking at those later-stage deals.” There’s another reason
for hope after the crash, Lisson says. Many VC firms have been able to
negotiate stellar terms with their investors — even better than those
they negotiated just a couple of years ago. That’s also a sign that
investors still have faith in the VCs, he said.TUMBLR, PINTEREST Universal, EMI Sue Napster
Investor Record labels say firm enabled infringement. Critics say the
move may deter venture capitalists. April 23, 2003|Joseph Menn | Times
Staff Writer Unable to extract their pound of flesh from bankrupt
Napster Inc., two of the five major record labels are suing the venture
capitalists who backed the defunct song-swapping service that turned
music industry economics upside down. Universal Music and EMI filed a
federal lawsuit against Hummer Winblad Venture Partners and two of the
San Francisco firm’s general partners, Hank Barry and John Hummer, in
Los Angeles on Monday. The suit claims that they contributed to the
copyright violations by Napster’s tens of millions of users. In addition
to seeking $150,000 per violation, the suit asks for punitive damages.
It also is intended to dissuade investment in any of the song-swapping
services that have risen in Napster’s place. “Businesses, as well as
those individuals or entities who control them, premised on massive
copyright infringement of works created by artists should face the legal
consequences for their actions,” the record labels said in a statement.
The suit may mark the first time an outside party has targeted a
venture firm for wrongdoing by a company in which it invested. “I don’t
know if this has ever happened before,” said Jeanne Metzger, vice
president of the National Venture Capital Assn. The trade group and
others warned that even if the labels lose the case, the fact that they
sued will deter institutional investors from taking on a high level of
risk with new companies. “It’s going to create an enormous amount of
reluctance to get involved in anything that could draw litigation from
the content industries,” said Silicon Valley intellectual property
lawyer Mark Radcliffe. Barry and Hummer didn’t respond to telephone and
e-mail messages seeking comment Tuesday. Barry served as Napster’s chief
executive for more than a year, and both men sat on Napster’s board.
The suit claims that Hummer Winblad knew Napster was enabling massive
infringement and that the firm controlled Napster’s activities with its
general partners in the chief executive and director positions and
through its $13-million investment in May 2000. The investment was made
five months after the record industry — including the two labels — sued
Napster for enabling infringement. Napster filed for bankruptcy
protection in June 2002. Lawyers not involved in the case said Hummer
Winblad has two reasonable defenses. First, Napster hadn’t yet lost the
record industry suit when the firm invested. Second, directors and
investors are rarely held liable for the acts of their companies. In
those cases in which individuals are held responsible, they typically
own 100% of the company at fault. The suit “is stretching contributory
infringement way beyond where it’s ever gone,” said Wayne State
University copyright law professor Jessica Litman. “I assume the purpose
is to enhance the already significant chill discouraging people from
investing in businesses that challenge the business models of the
entrenched market leaders in the entertainment industry.” Indeed, a
federal lawsuit filed by a music producer against Barry, Hummer Winblad
and others was dismissed after a judge found that the accusations —
similar to those in the record labels’ suit — were too vague and that
there was nothing in the copyright law to punish people who assist an
entity that assists others in breaking the law. “Courts have
consistently held that liability for contributory infringement requires
substantial participation in a specific act of direct infringement,”
U.S. District Judge Marilyn Hall Patel wrote in that case. But the two
record labels may have evidence of specific actions by the venture
firm’s principals. And Hummer Winblad could be hurt by the fact that
Napster lost most of its court battles. The plaintiffs have “a
reasonable shot at the officer. I think the director is a little
tougher, and the shareholder theory is really tough,” said Radcliffe,
who represents technology and entertainment firms. Barry and Hummer
anticipated that they might be sued and tried to negotiate protection
from legal consequences when German media firm Bertelsmann was planning
to buy Napster early last year. Those talks foundered, and Bertelsmann
itself has been sued for its investment in Napster. The venture capital
trade association complained that with such actions against investors,
“the ability of entrenched industries to deter investment in
next-generation technologies has profoundly anti-competitive and
anti-innovative implications.” But not everyone agreed that the labels’
suit will change how Silicon Valley firms invest. As the suit notes,
other venture firms had deep concerns about Napster’s legality and
didn’t invest. “Top firms don’t take their cue from Hummer,” said Steve
Lisson, publisher of InsiderVC.com. Los Angeles Times Articles Copyright
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