Sevin Rosen to extend Funds VII and VIII, waive management fees

The US venture firm has asked LPs to extend partnership terms, citing an abysmal IPO environment and slowdowns in M&A and the broader economy. Those factors are ‘red flags’ for the VC market, but a fund extension is business as usual, according to the NVCA’s president.

Sevin Rosen Funds, a 27-year old venture capital firm whose partners recently split ahead of their 10th fundraise, has asked investors to extend by three years the life of its eighth fund, and by two years the life of its seventh fund, both of which were raised in 2000.

The challenging exit environment over the last eight years has delayed liquidity.

Sevin Rosen

Fund VIII's limited partners are being asked to extend the partnership terms through the end of 2013, due to “the current economic climate, a weak IPO market, and a slowing of large M&A opportunities to venture-backed companies”, according to a letter to investors obtained by PEO.

In return, the general partners are waiving any additional management fees, and will disperse over a longer time period the remaining management fees.

“We believe we were successful in aggressively managing the portfolio and husbanding the partnership’s capital after the downturn began in late 2000, but the challenging exit environment over the last eight years has delayed liquidity for several of our promising companies,” the firm told investors.

Fund VIII, as of 31 December 2007, had an internal rate of return of -17.6 percent, according to documents on the California Public Employees’ Retirement System’s website.

Here it is, almost the end of June, and we have not seen any IPOs this quarter at all and we’ve only seen five venture-backed companies go public this year.

Mark Heesen

Rescheduling fees will help to fund current portfolio company needs, allowing additional time for liquidity events, but more capital will be required “to support them through their maximum value creation point”, the firm said. It said it is considering “several financing options”, about which it will contact LPs in the third quarter.

Alan Buehler, the firm's chief financial officer, confirmed that Sevin Rosen had asked LPs to extend the life of both Fund VIII and Fund VII, the latter of which closed on $480 million in early 2000. He declined to provide further information on communication with LPs the firm deems confidential.

The extension is just the latest fund adjustment the firm has made in accordance with its views on the venture market.

Fund VIII’s size was reduced by nearly one-third, to $600 million, in 2003, which was in line at the time with actions by many of its peers post-bubble. Accel Partners, Kleiner Perkins Caufield & Byers, Mohr Davidow Ventures and Austin Ventures were among those that returned capital to investors, citing a changed venture capital environment.

Sevin Rosen also returned roughly $300 million to LPs in late 2006, which would have been the start to its 10th fund, saying it had opted to cancel the fundraise in light of a weak exit environment and too many VC dollars saturating the market.

Roughly one year later, the firm announced its partners would split over differences in Fund X’s investment strategy. The firm’s Dallas, Texas-based partners will raise Fund X, “while the four California partners have chosen to purse other investing paths”, the firm said in a letter to investors.

The extension of a venture fund by a year or two, and waiving resulting management fees, is in keeping with industry standards, Mark Heesen, president of the National Venture Capital Association, told PEO.

“That, in and of itself, is not a red flag,” Heesen said. “What is a red flag is here it is, almost the end of June, and we have not seen any IPOs this quarter at all and we’ve only seen five venture-backed companies go public this year. That is highly, highly unusual, [and] problematic.”

That said, and taking into account there are fewer venture firms each year – a dotcom effect Heesen said is only being felt now due to the long-term nature of venture funds – he added the asset class is still an attractive one for investors.

“I certainly don’t see LPs walking away and I think that LPs are also content in seeing fewer, leaner, meaner VC firms.”