Friday, September 8, 2006

Mobius Venture Capital Getting Hammered in the News

Lots of negative press swirling about Mobius Venture Capital's demise:

Yeah, so... what's the big deal?

VCs shut down under-performing startups all the time.

LPs should be shutting down under-performing VCs more often.

Frankly, I was surprised that I didn't see more VC shutdowns in 2005 and 2006. I really thought that the Limited Partners would band together and hand out a clear, collective, slap on the wrist of the VC asset class. Once again, I was wrong. It didn't really happen - certainly not to the degree I expected. There simply seems to be a lot of money that wants in to this asset class. Supply and demand. Econ 101.

When the VCs shut down a startup, does that mean that the executive staff were all losers? Nope.

When the LPs shut down a VC, does that mean that the general partners were all losers? Nope.

Timing applies equally well to VCs as it does to entrepreneurs. The only difference is that a VC has Limited Partners that are making a 5-year to 10-year commitment to the VC, while the entrepreneur typically only gets 6-18 months runway. That's a pretty big time difference and, I wonder, if a VC firm could find a way to make much shorter-term commitments to their LPs (like 2-years) if that would be something that the LPs would appreciate and select for when deciding where to put their money? Hmmm... Got me thinking about Business Models as applied to the VC industry now... Ahem. That's my NADD. Back to Mobius.

Without question, Mobius closed a pair of funds, back-to-back, that were too big. Niall Kennedy notes that "Mobius raised a $630 million fund in 1999 and a $1.25 billion fund in 2000." With $1.25B in their later fund, if they were getting the usual 2% management fees, they would have a $25M annual fee-based budget to run the firm, find the investments, and grow the businesses. That's a lot of fee money, to be sure - certainly a larger budget than most startups would typically expect to receive. But, that is the usual and customary Business Model for a VC firm, and the LPs all agreed, right? I don't know...

What gets me is that, by mid-2002 the writing was clearly on the wall that the investment frenzy that we expected in 2000 was in fact quite dead. I.e., the investment thesis for the fund (not just Mobius's, but everyone's) was shown to be wrong. So, why didn't the VCs that took too much money on an incorrect investment thesis just lay the cards on the table with their LPs at the 2002 LP Annual Meeting and put forth a vote to scale the fund size back (and the fees proportionately) to something that works for the remainder of the fund investment term? The WSJ article does point out that Mobius lowered the fund size - from $1.5B to $1.25B, but doesn't say when that happened. That, clearly, was not a big enough cut.

A startup company has monthly checkpoints with their investors.

A VC firm has annual checkpoints with their investors.

Another order-of-magnitude time difference for us to ponder...

So, what does all this mean for the Portfolio Companies of Mobius? I think it's actually good news. Mobius most likely still has a butt-load of capital to call for follow-on investments. I see that Technorati and FeedBurner recently upped. Other Portfolio Companies should definitely take the time to talk to Mobius about accelerating their next round (if it makes sense to the business, of course). Naturally, Mobius can't just drain that money in follow-on investments ASAP - it has to maintain the proper fiduciary decision-making.

So, what does all this mean for new companies seeking a first-time investment from Mobius? I doubt that Mobius is doing any new investments. I would stay very far away. There's plenty of other money out there.

And, when do the fees run out for Mobius? Anyone?

How does Mobius plan to sell their interest in their ongoing Portfolio Companies after the fees expire? Something that can happen is that there is a bit of cherry-picking that goes on and a GP will take some of his Portfolio Companies with her/him to their next VC firm, whether she/he starts it from scratch or joins some other one. Sometimes the VC syndicate for a portfolio company will buy it out. I would expect Brad to take Technorati, FeedBurner, Rally, Postini, and NewsGator to his next gig (whoever he's been writing about). Comments?

Brad Feld is the most vocal and well-written of the Mobius GPs. We all read his stuff. He has been Talking About Failure of late, which prompted me to write about it as well. I look forward to Brad's retelling of the story.

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1 comment:

  1. I have no idea why the firm is not raising another round.

    My article perhaps wrongly assumed that it was because they were under-performing.

    Perhaps it was because the GPs didn’t like working with each other?
    Perhaps it was because Gary left?
    Perhaps it was all of the above?

    No matter. We will never know.

    Also, I did intend to add that Matt and Dan were a bit harsh in their headlines and remarks, but that VCs are a tough bunch, so it likely did not bother them in the least.

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