CAUTIOUS CAPITAL

Dan Burstein and Sam Schwerin aren't interested in dice rolling, dart throwing venture capitalism.

The boutique New York firm that the Blackstone Group alumni co-founded in 2004, Millennium Technology Value Partners, specialises in complex secondary transactions that create liquidity for venture capital investors, as well as company founders and management teams.

The firm is affiliated with the seven year-old Millennium Technology Ventures, founded by Burstein after having run some traditional, early-stage venture funds from within Blackstone in the late 90s. Though not Blackstonebranded funds, they were backed by the private equity giant's senior management (Blackstone co-founder and senior chairman Pete Peterson remains one of the firm's special limited advisory partners).

“When we decided to raise a substantial fund we determined the best thing to do was to go out on our own,” Burstein says. The spinout raised $150 million for its debut fund, but “we had the support, friendship and partnership of all our colleagues from Blackstone all along the way”.

Schwerin left Blackstone to join Burstein in 2002, and the two concluded that a new model was needed for venture capital investing in the post-dotcom crash era.

We tried to invest in Tellme in a way that allowed us to get that same upside return that Benchmark and Kleiner [Perkins Caufield & Byers], Barksdale and others got, but without the same equivalent risk

Sam Schwerin

The approach they settled on – and the thesis behind Millennium Technology Value Partners – involves a desire to remove as much risk as possible from venture investments without diminishing VC-type returns, coupled with what Schwerin calls a “systemic approach to offering liquidity” to individual investors and institutions.

The concept appears to be working. Only two of 200-plus investments have resulted in a loss, Schwerin says.

“No two of our deals look alike,” Burstein says, noting that whether the firm opts to take a public company private via bankruptcy, or provide investors with liquidity within an existing capital structure, the deals are “very labour-intensive, they require enormous amounts of creativity to structure”.

An example of the firm's involvement in specialised secondary investing is voice-activated mobile directory Tellme, which was sold in March to Microsoft for an undisclosed price understood to be between $800 million and $1 billion.

“Tellme, we felt, was far and away the leader in the sector, [but] it wasn't raising capital,” Schwerin says. So the firm met with Tellme management in an effort to understand its capital structure, who could benefit from liquidity and how to build the best risk-return profile for Millennium's limited partners.

Between 2005 and early 2007, Millennium made 12 investments in Tellme, worth more than $12 million and involving a mix of debt, senior preferred stock, junior preferred stock and common stock.

“And then we also wanted additional exposure that we couldn't get because it didn't exist in Tellme's capital structure, so we actually wrote a multi-million dollar derivative effectively on that capital structure as well,” Schwerin says. “We tried to invest in Tellme in a way that allowed us to get that same upside return that Benchmark and Kleiner [Perkins Caufield & Byers], Barksdale and others got, but without the same equivalent risk.”

The investors Millennium worked with ranged from founders and “near-founders” to hedge and mutual funds that, seven to eight years into Tellme's lifespan, were “past their investment horizon” and in need of liquidity, Schwerin says.

Millennium brings “a sophisticated, financially driven view to what I would describe as the Wild, Wild West of Silicon Valley venture capital investing,” Burstein says.

“Don't get us wrong,” he adds quickly. “We appreciate and love the kinds of returns that the great venture capitalists have been able to get over the years and the great companies that they've built, but our whole approach has been to take … the lessons we learned at Blackstone … and apply those principles to venture capital investing.”