News @ peHUB

The WSJ recently reported that Microsoft is sniffing around Facebook, less than seven months after investing $240 million in the social network at a $15 billion valuation. It was largely discounted as the hopeful fumblings of Steve Ballmer, in his search for a rebound acquisition after being dumped by Yahoo. But it got me to thinking: Microsoft’s initial investment may be one of the worst venture capital deals of all time.

Longtime readers know that the current title-holder is Hummer Winblad, for its Napster investment in the midst of that company’s legal morass. And it will remain that way, as Microsoft’s Facebook deal presents neither the legal difficulties nor the likelihood of a total write-down. In fact, it’s probably been a good strategic deal for Microsoft, which doesn’t need to sweat the small stuff (i.e., cash). The only caveat to that last part is that Microsoft is now expected to overpay for all its other acquisitions, which has led to a trickle-down throughout the Web 2.0 market. For example, macro valuation inflation helped scuttle the Internet roll-up envisioned by Ross Levensohn and Jon Miller — as their targets upped their respective asking prices.

Anyway, back to my thesis. The reason this might be one of the worst VC deals is that all of its negatives fall on its supposed beneficiary: Facebook.

This isn’t a dilution argument, but rather one of public perception. Social networks partially work because of functionality, and partially because of bandwagon popularity. You don’t necessarily join and use Facebook because it works well, but perhaps because your friends have joined and use it. And, as has been proven with MySpace-Facebook-Beebo, that usage can be fickle and prone to migration.

Public perception is very important, and I think the Microsoft investment has set Facebook up for a giant egg pie in the face. For example, imagine the endgame is to go public. If so, there is no way a company with such low revenue could possibly get near a $15 billion valuation (this isn’t 1999, and Facebook isn’t Google circa 2004).

So let’s generously imagine it could get $5 billion. Know what the headline will be? How about: “Facebook Files for IPO.” Looks good, but check the subhead: “Social networking company worth just one-third of 2007 valuation.”

Ditto for an acquisition, as no company in its right mind would pay close to $15 billion for Facebook. Yes, that includes Microsoft.

What this means is that Facebook is going to lose heat upon liquidity, and a loss of heat can lead to a loss of cachet. Remember all the buzz when Facebook got the $15 billion? Now imagine it again, but with a negative spin (particularly outside the TechMeme bubble, where most of Facebook’s users actually live).

All of this is exacerbated by the fact that Facebook never really needed to take the Microsoft money (could have gotten it elsewhere), and certainly didn’t need to confirm the valuation in a press release.

The only out I see for Facebook is to take another big strategic investment at the $15 billion figure. It could provide liquidity for Facebook’s early VCs like Accel (whose LPs would really like some payoff) and other employees looking to turn their paper green. And, yes, that probably means Microsoft again. If not, that original investment will hurt Facebook far more than it will help it.

Note: Much of the above argument was first made (to my ears) by venture capitalist Stewart Alsop, at this year’s VC in the Rockies conference. It took my a while to come around, but I’m now there. Hope he doesn’t mind the pilfering.

Major update after jump Earlier this week I chatted with Venrock partner David Siminoff, who led the firm’s $3 million investment in SlideShare (the YouTube of Powerpoint presentations).

Part of our conversation was about the deal, including: (A) How it plans to make money, (B) If it can be sticky or just an embeddable application and (C) Why the site is often real slow when I try to upload items for peHUB. The answers were: (A) Contextual advertising, (B) He thinks yes, and challenges us all to browse the site without staying on it for a while, and (B) Growth out-pacing active servers, but they’re working on it.

The subtext for our conversation, however, was that Siminoff has been rumored to be pressing for Venrock to increase its investments in public tech companies (probably small-cap). Not quite as extensive as what Sequoia is doing, but still something non-ventury.

His initial response was that Venrock already has made a few PIPE investments via Funds IV and V. But then he acknowledged that the firm does plan to hire “a dedicated group who lean toward larger companies, including public ones.” Siminoff said that such a practice could conceivably have its own dedicated fund, but that such decisions are a long way off.

Update: A Venrock LP just wrote in to say the following, regarding the lack of definitive fund plans: “That’s not what they told LP at their annual meeting three weeks ago.  Want to raise $200mm with a 2% and 25% fee structure and expect to begin raising it soon.”

* Citi may sell $400 billion in assets.

* Are private equity firms buying rent-controlled apartment properties in New York, and then pressuring tenants to move out? That’s the accusation in today’s New York Times. As an aside, I like the term “predatory equity” more than “vulture capitalists.”

* Josh Kopelman on how to ask for the order.

* Foot-in-Mouth Flu: Yesterday it was Steve Schwarzman. Today it’s activist shareholder Evelyn Davis.

* India chases China into Africa.

* Q&A with ClearWire CEO Ben Wolff.

* The House of Reps passes the Pro-IP act, which is intended to strengthen copyright protection.

* Be it resolved: U.S. is a third-world nation.

* Wallstrip on Google:

Being an entrepreneur means figuring out how to survive and thrive when you often find yourself in way over your head.  An ambitious entrepreneur is always pushing and stretching beyond their comfort zone — creating a company from scratch, evangelizing a new category, taking risks way out of any rational person’s comfort zone.  They rarely want to admit vulnerability, particularly to their management team or board, and so sometimes cover up their anxiety with bravado.  This is the exact wrong way to approach this common situation.

Believe me, I know the feeling.  In my late 20s, I was promoted to the executive team at Open Market — a billion-dollar market capitalization, publicly traded company — and found myself in way over my head.  I would come home at night, shake my head as I recounted to my wife the decisions I was responsible for making, and reflect that I really had no idea what I was doing.

But after a few years, I started to get the hang of it, gaining comfort and confidence in my position.  What happens to a passionate, ambitious entrepreneur who gets the hang of something?  They get bored.  They seek out the next big challenge.  I was fortunate to find it at Upromise, where I was asked to help start the company and serve as president and chief operating officer.  In our first 18 months, we raised $90 million in venture capital, hired over 100 employees, signed up partners and launched the service into the market.  During that period, I again often felt way over my head.  But that’s what made the experience so thrilling.  Whether it was pitching Citigroup’s chairman Bob Rubin to join our service (we were still operating the business out of my partner’s house at the time – talk about “punching above your weight”!) or negotiating a board compensation package with former presidential candidate Senator Bill Bradley, being in over my head was one of the scariest and most fun parts of being an entrepreneur.

How do you know if you’re in over your head in a healthy way as compared to an unhealthy one?  One entrepreneur gave me a good rule of thumb for this just yesterday.  He suggested that entrepreneurs follow an 80/20 rule - they should always feel in command of 80% of the business, but feel way over their head 20% of the time.  It’s that 20% stretch that makes it fun and challenging.  But if an entrepreneur is on the wrong side of the 80/20 rule (i.e., are stretching 80% of the time and in command only 20%), then there is a deeper issue.

Here are a few recommendations for those who find themselves in that situation:

1) Be self-aware.  It’s ok to feel as if you are in over your head as an entrepreneur.  In fact, it’s natural.  Don’t be afraid to recognize it, admit it, and talk openly about it with your board and management team.  Figure out which side of the 80/20 rule you find yourself.

2) Learn your way out…with help.  Seek the advice of the wise men and women around you to learn how to step up and grow into the situation you find yourself in.  Don’t close yourself off to outside advice for fear of appearing weak.  Instead, embrace smart, diverse opinions to help shape your own.

3) Accept life preservers.  Many entrepereneurs are terrible at accepting help.  After all, the reason they’re entrepreneurs is that they enjoy being their own boss and are passionate and often stubborn about following their vision.  It’s hard for them to admit they need help and, sometimes, need a life preserver to pull them out of the situation.  It may mean hiring a COO, hiring a CEO and moving into a chairman role, or other big moves that risk giving up control.

When entrepreneurs are in over their head, it can be awkward.  But it doesn’t need to be.  Be honest and open with those around you and keep an eye out to make sure you’re not on the wrong end of the 80/20 rule!

Once per month I do a “Six Degrees of Separation” item for Buyouts Magazine, linking a private equity pro with a similar-sounding celebrity. This morning I received a press release that just screamed for the 6 Degrees treatment (actually 5 Degrees, because that’s the way it goes sometimes), so here goes:

O.G. Greene today was named an operating partner with Navigation Capital Partners. The mid-market firm’s other operating partner is…

1. Craig Kirsch, who was CFO of Kinko’s when it was owned by Clayton Dubilier & Rice. During that time he got to know CD&R president and chief executive…

2. Donald Gogel, who also served on the Kinko’s board of directors. Gogel sometimes works with…

3. Jack Welch, the former GE honcho who currently serves as a special partner to CD&R. While still at GE, Welch tapped GE’s finance chief…

4. Bob Wright to run NBC Universal. Wright has since moved onto a private equity gig with Tom Lee, but while at GE was required to negotiate with…

5. Dick Wolf, the Law & Order czar whose programming has dominated NBC for years. Among his programs is Law & Order SVU, which co-stars…

Ice-T: Actor, rapper and original gangster.

* Winning by losing? That’s how Blackstone feels about not ending up with Clear Channel. Kind of ironic, because that’s how Clear Channel buyer THL Capital feels about a whole host of overpriced deals it lost out on in 2007 (U.S. Foodservice, etc.).

* Avista Capital Partners has written down its investment in the Star-Tribune by 75% — just fifteen months after taking it private for $530 million (including $100m of equity from Avista). Just further evidence that PE firms should focus on local weeklies rather than big-city dailies. After all, Norm Pearlstein may still like newspapers, but he sure hasn’t invested in any through Carlyle.

* The future of credit crunch-related lawsuits.

* Will May be a merry month for IPOs?

* SEC officials defend their agency.

* ExpressJet is the next airline in trouble.

* Clear Channel trial is on in New York. The judge issues a summary ruling: ClearChannel.pdf

The VC trading deadline must be near, given the number of partners switching firms today. Some have been publicly disclosed, some not. Maybe it has something to do with the NVCA Annual Meeting taking place in San Francisco… Here’s a brief recap:

- Cynthia Ringo has joined DBL Investors as a managing director. She previously was a managing director with VantagePoint Venture Partners, and before that served as CEO of CopperCom (Pluris too, but we’ll forget that for now). DBL recently spun out of JPMorgan, and is out raising a new fund. More on this tomorrow.

- Sameer Gandhi has joined Accel Partners as a partner in the firm’s Palo Alto office. He previously was a partner with Sequoia Capital, where his deals included Barracuda Networks, eHarmony, Gracenote (acquired by Sony), Marketlive and Sourcefire

- Jeff Hinck has joined El Dorado Ventures as a partner. He previously had been a senior managing director with Vesbridge Partners. Not a huge surprise, as Vesbridge was flailing and Hinck and EDV partner Charles Beeler have been close friends for a long time. Here’s a post on Vesbridge, originally written before I’d learned that Hinck had left.

- Christopher “Woody” Marshall has joined Technology Crossover Ventures as a general partner. He previously was a managing director with Trident Capital, where his deals included Advanced Payment Solutions, AccountNow, Bytemobile, Merchant eSolutions, MapQuest, SideStep and Xata.

- Rob Theis has joined Scale Venture Partners as a managing director. He had spent the past eight years with DCM Doll Capital, but formally left in February. Here’s my post on the move, from earlier today.

Call it a pitfall of being too glib. Or a very misguided attempt at waking up a morning crowd with vivid imagery. Either way, Blackstone boss Steve Schwarzman sure made an insensitive comment last week, during a speech at the firm’s annual investor meeting in Boca Raton.

According to Private Equity Insider, Schwarzman used the following analogy to describe the recent plight of subprime lenders: “[It’s like] being a noodle salesman in Nagasaki when they dropped the A-bomb – not a lot of noodles left, and not a lot of people either.”

Yeesh, foot meet mouth. PE Insider suggests that the crack could damage Blackstone’s business in Tokyo, where it opened an office last fall. Not so sure it will really hurt — this is a personal relationship biz, and Schwarzman isn’t on the ground in Japan — but it certainly won’t help.

A Blackstone spokesman had no comment.

This morning’s PE Week Wire email included an item about how Forbes reporter Erika Brown is leaving to become director of marketing and communications for Matrix Partners. Nice little scooplet that I hadn’t seen elsewhere.

But then I messed the whole thing up by listing www.matrix.com as the firm’s URL, instead of the correct www.matrixpartners.com. Seems what I listed actually led to a haircare company, whose homepage looks like the above photo.

The results amused some readers, including one who wrote: “I’ve talked to Erika countless times, but she never mentioned her modeling. Must have wanted to keep it on the down-low. Wonder how Matrix will react?”

Then there were those who take typos way too seriously: “Was this meant to be a joke? A woman gets a financial job and you make light of it by linking to this sexually-charged photo? I’m extremely disappointed in you.”

At least most readers fell into the former category, which means they know I’m far more prone to mistakes than to misogyny.

Major update after jump Split Rock Partners this morning announced that it has raised $300 million for its second fund, which will continue to focus on early-stage IR and medical device opportunities in the Midwest and on the West Coast. It was by all accounts a successful fundraise, with all of its first fund LPs returning. That includes insurer St. Paul Cos., which used to hold Split Rock as a captive fund named St. Paul Venture Capital.

Actually, that’s not the complete story. St. Paul VC was actually spun out into a pair of independent firms in 2004. Split Rock was one, and the other was called Vesbridge Partners. The new firms were differentiated in two ways.

The first was geographical. Both firms had offices in Minneapolis, but Split Rock’s satellite was in Menlo Park, while Vesbridge’s was in (my hometown of) Westborough, Mass. That basically meant that Split Rock would invest middle-west, while Vesbridge would invest nationwide with a ground presence on the East Coast. The other difference was in terms of investment sectors. Split Rock wanted to focus on both IT and healthcare, while Vesbridge was dedicated to tech opportunities like early-stage networking and Internet infrastructure.

It was — and is — amicable, with Vesbridge even sending its former colleagues a previously-commissioned portrait of the Split Rock Lighthouse on Lake Superior. All well and good, except for one big problem: Vesbridge couldn’t raise its fund.

While Split Rock breezed to $275 million for its debut vehicle, Vesbridge struggled. It had received a $50 million cornerstone commitment from St. Paul Cos., but gained little traction toward its $250 million target. One early problem was that managing director Bill Cadogan (former CEO of ADC Telecom) soon agreed to become chairman and interim CEO of Mahi Networks. That company would fail, but he didn’t end up returning fulltime to Vesbridge. Moreover, fellow managing director Rick Boswell announced his plans to scale back his activities in preparation for retirement. LPs began balking, and it can sometimes be very hard to get them back.

Vesbridge eventually closed the fund out with just around $60 million, including the St. Paul money and a bit of endowment capital. It’s done a bunch of deals (and even has three sales), but still seems to be struggling.

The latest problem is the pending departure of principal Danny Klein, who will join Hunt Ventures in Dallas next month. That leaves Vesbridge without any full-timers investors on the East Coast (office now in Wakefield, MA), and only two full-timers in general (senior MDs Zenas Hutchinson and Jeff Hinck). Whole thing is kind of sad, as I like both Hutchinson and Hinck (even though I’ve been unable to reach them for this story).

Never say never about resuscitation of a VC firm, and that goes double for a firm like Vesbridge without any portfolio blow-up baggage. It might even have some brand new LP commitments lined up. But, until I hear otherwise, Vesbridge sadly lands on my unofficial list of the walking dead…

Update: peHUB has learned that Jeff Hinck recently joined El Dorado Ventures as a partner. His first day was Monday.
That basically sticks a total fork in Vesbridge. Still awaiting a call from Jeff or Zenas to explain plans for existing Vesbridge portfolio companies.

Update II: El Dorado Vesbridge has sent over the following statement, on behalf of Jeff Hinck: “Vesbridge I is almost fully invested and will continue to invest and make follow-on investments with Jeff continuing in his role as a Vesbridge Senior Managing Director and serving on his current boards. Meanwhile, Jeff is transitioning to El Dorado Ventures and is helping to invest EDV’s current fund, EDV VII and will be part of EDV going forward. No decision has been made about Vesbridge’s longer term future.”