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High tech's bloom has faded for Paul Allen | STEVE LISSON

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*High tech's bloom has faded for Paul Allen *
/Friday, March 9, 2001/

*By JOHN COOK <mailto:johncook@seattle-pi.com>*
SEATTLE POST-INTELLIGENCER REPORTER

Is Paul Allen -- who made his fortune in technology -- shying away from
his first love?

Recent moves indicate that he is.

During the past 18 months, the Mercer Island billionaire has liquidated
ownership positions in Priceline.com, Egghead.com, Internap, Viewpoint
Corp., Allegiance Telecom and Zany Brainy. He didn't exercise an option
to buy more of online financial news site TheStreet.com. And he pulled
the plug on Bellevue-based Mercata in January. On top of that, Allen
last year sold $8.5 billion worth of Microsoft Corp. -- the software
company he co-founded with high school buddy Bill Gates in 1975.

During the 1990s, Allen and his team at Vulcan Ventures were some of the
most bullish technology investors pumping billions of dollars into more
than 100 Internet, media and communications companies. The investments
ranged from the high-profile and now-defunct Internet film studio
Pop.com to online postage company Stamps.com. All were to be building
blocks in Allen's so-called wired world strategy.

Although Allen has always touted himself as a long-term investor willing
to ride out choppy markets, beginning in late 1999, the world's
third-richest man started aggressively selling. That trend shows no sign
of abating.

Now Allen's trusted money manager, Bill Savoy, says Vulcan's portfolio
of publicly traded tech companies has dwindled to the point where "I
don't have a whole lot left to sell," and the appetite for new
technology investments "is significantly reduced as we go through this
correction." Allen continues to hold significant stakes in cable
companies such as Charter Communications, but tech investing has
declined in recent months.

"I think that the total restructuring of technology is just beginning as
opposed to nearing an end," Savoy says.

Vulcan is acting like many venture capital firms these days: liquidating
shares, slowing down investments and adjusting to what many are calling
"the new paradigm."

Savoy says he is using the downturn in the market "to get our own fiscal
house in order and really understand where the pockets of opportunity
will be for the future."

And what about the "wired world"? Savoy says the strategy is alive and
well and while investments have slowed to a trickle, that is not to say
Paul Allen is no longer a believer in technology.

"The value contribution of technology has not been taken away," says
Savoy. "The price people are willing to pay for it has changed."

Savoy is making the "hard decision" to shut down or refuse to fund
poorly performing businesses.

"It is not the fun part of the job," he says. "But when you have a good
business model where the path to profitability is not clearly
identifiable, in this environment, the right thing to do is put that
opportunity on a shelf and wait for a different environment."

Yet, the mood at Allen-backed companies remains amazingly upbeat.

Mark Vadon, chief executive of online diamond retailer Blue Nile, said
Vulcan "is doing the right thing" as the venture capital firm cuts its
losses and turns off the funding spigot.

"They are seeing which companies have business models that can make it
to profitability," said Vadon, whose Seattle company raised an
undisclosed amount from Paul Allen last April. "If the answer is yes,
they are funding them. If not, they are shutting them down or backing
out." Of course, Vadon believes his company is one that will make it to
profitability before funding dries up.

So does Greg Drew, chief executive of online consumer electronics
retailer 800.com.

After raising more than nine venture capital rounds over a 26-year
career, the Portland entrepreneur knows that venture capitalists will
not always be there in a time of need. But he feels that Vulcan, which
invested in earlier rounds, has always been supportive of the company.

"We are bullish on our ability to raise the next round," he says.

Imandi.com vice president George Meng says he is confident as well.
"They have not indicated anything but their continued support of the
company in line with their investment last June," Meng said.

It is unlikely that all of Vulcan's Internet companies will be able to
raise more money in the future. Some may be able to turn the corner on
their own and receive even more attention from cash-heavy venture funds
like Vulcan. But others could very well fall by the wayside.

That's not bad for Vulcan, according to Stephen Lisson, who follows
the venture capital business as editor and publisher of InsiderVC.com.

"Slowing the investment pace and shutting down companies can only be a
healthy thing," said Lisson. "I wish a lot more traditional venture
capital firms would show a similar discipline."

Technology start-ups have always worn an investment from Paul Allen as a
seal of approval. But the billionaire's involvement has not always meant
success. Value America, Beyond.com, Reel.com, Pop.com, Mercata and
Priceline.com -- all of which were one-time Allen investments -- have
had their problems as of late.

Lisson said this is common for the venture capital business where most
firms get all of their payout through one or two "home runs."

So when The Wall Street Journal reported in December that the average
return for seven of Allen's investments from July 1998 to August 2000
was a loss of 43 percent it didn't really matter. Savoy says the article
was inaccurate anyway, using an initial public offering price as
Vulcan's investment point rather than the pre-IPO price point that he
paid. He did not disclose the fund's performance.

Although the financing environment has changed in recent months, Savoy
says he is dealing with the current climate based on past experience --
treating the bursting of the Internet bubble much like the biotechnology
bust of 1994.

Asked how long this shakeout will last, Savoy simply says: "Much longer."

------------------------------------------------------------------------

/P-I reporter John Cook can be reached at 206-448-8075 or
johncook@seattle-pi.com <mailto:johncook@seattle-pi.com>. For more
information on Seattle-area start-ups or venture capital firms, visit
www.seattlep-i.com/venture. <http://www.seattlep-i.com/venture>/

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WALTHAM'S MATRIX LEADING VENTURE PACK ON BOTH COASTS

What's a VC to Do?
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WALTHAM'S MATRIX LEADING VENTURE PACK ON BOTH COASTS

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WALTHAM'S MATRIX LEADING VENTURE PACK ON BOTH COASTS
FIRM CREDITS DISCIPLINE, INSISTENCE ON LEAD ROLE FOR STUNNING '90S RETURNS

    Author: By Beth Healy, Globe Staff Date: 11/12/2000 Page: D1 Section: Business

BUSINESS & MONEY WALTHAM - Paul Ferri keeps two client letters framed on the wall behind his office door in this suburban haven of venture capital.

One letter, dated Sept. 12, 1994, informs the Matrix Partners founder that an overseas investment group would sit out that year's venture portfolio. Results in Fund II had not wowed the group, and it was "premature to make a judgment on Matrix Partners III."

Talk about an expensive decision.

The other letter, sent in April 1995, contains a rave from an elated American investor: "I have never seen a portfolio explode on the upside as has Matrix III in the past year."

Matrix hasn't opened its venture funds to new investors since. The firm has emerged as one of the best performers in the business, according to several investment sources, with a stunning 95 percent average annual return over the past decade. It's a record that rivals even the venture industry's Silicon Valley titans. And the returns on Matrix's latest fund appear to be unrivaled on either coast.

This is fighting talk in venture circles, where egos are huge and investment results are guarded like family secrets. But with the stock market in the doldrums and dot-com flops deflating venture returns after three sizzling years, it's a good time to take a peek and see who has really made money in this field.

Stephen N. Lisson, a writer in Austin, Texas, tracks top venture players on his Web site, InsiderVC.com, much to the chagrin of the venture firms. He has sparked controversy for researching and posting the returns on his site, but his numbers, when checked with independent sources, appear to be correct or in the ballpark.

According to Lisson's numbers, Matrix's Fund V, a $200 million fund launched in 1998, is the best venture fund of all time, with a 725 percent return. Lisson says it's really too soon to judge funds of the 1998 vintage because they're young and many of their portfolio companies haven't been sold or taken public, or left to die yet. Venture funds, after all, have 10-year lives. But in the case of Matrix V, he says, "Even if everything else in the fund tanked, the internal rate of return of 725 percent would stand."

This fund claims several hot deals, including telecom IPO juggernauts Sycamore Networks Inc. and Sonus Networks, which turned early-stage investments of $17 million into holdings worth more than $3 billion. Of the $450 million Matrix invested from funds III, IV, and V, about $220 million went into companies that have gone public or have been sold. That $220 million has returned more than $11.5 billion, the firm says.

Matrix partner Timothy Barrows says a sharp discipline kept the firm away from the dot-com mania that clouded the judgment of many venture firms.

"There are things we could have made money on," Barrows says. "We turned down Geo Cities," a company that helps people launch Web sites.

But Barrows and his six Matrix partners can only feel good about getting into telecom and optical firms early, focusing on infrastructure and, more recently, storage. The firm is famous for putting entrepreneurs from its past successes, like Cascade Communications and Apollo, to work at the new firms. And it simply won't do deals unless it's the lead investor, in first, with board seats.

The recipe has paid off handsomely for entrepreneurs, too. Matrix has helped create more than 2,500 millionaires at its portfolio companies. More than 40 of those people can claim a net worth exceeding $100 million, the firm estimates.

Ferri says the firm wasn't always this good.

To some extent, he understands why that overseas investor fired the firm in 1994. Matrix's first two funds posted above-average returns, he said, but they were nothing special.

"We looked like everyone else," Ferri says. "There was no reason anyone would come to see Matrix specifically."

But the firm was in the process of a makeover it had started in 1990. It decided to turn more attention to New England, instead of investing two-thirds of its assets in Silicon Valley. It stopped investing in medical devices and retail and focused only on high-tech start-ups. And it decided to do only hands-on deals.

"If we're not the largest investors in a deal, we're not in a deal," Ferri says.

Thirty years in the business has paid off, the 61-year-old veteran says. He's not at all surprised by the carnage and losses overwhelming the new entrants to the business, from fly-by-night incubators to start-up venture firms.

"It looks like an easy business to be good at," Ferri says. As a result, over the past few years, pension funds and other big investors have flooded venture funds with cash. "They've been giving money to a lot of people who don't have a clue as to what they're doing."

All the best firms do have a clue, of course. Other top funds of venture capital's record decade include Sequoia Capital's Fund VIII, with a return of nearly 402 percent, and Kleiner, Perkins, Caufield & Byers' Fund VIII, with a return of 350 percent. These two firms are considered the most successful and most experienced of Silicon Valley.

Lisson's long view, assessing all the top firms over the past decade, is this: "Vintage year after vintage year, fund after fund, there is no question that Sequoia and Matrix will be at the top."

People who run university endowments and foundations corroborate Matrix's reputation. In the same company, venture experts put Boston's venerable Greylock Management Corp.; North Bridge Venture Partners of Waltham; Kleiner, Perkins; Benchmark Capital Partners - the Silicon Valley firm of eBay fame - and Redpoint Ventures, also of the Valley.

In the next breath come Battery Ventures of Wellesley, Charles River Ventures of Waltham, and Oak Investment Partners of Westport, Conn.

There are dozens of other fine firms with great returns. But only one can be the best. One Boston endowment investor who has money in many top venture funds - speaking on condition of anonymity, so he wouldn't anger several successful and hyper-competitive venture players - says of Matrix, "The last three funds have been extraordinary."

"Matrix," he adds, "is in a league of their own."

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Steve Lisson Austin Texas Stephen Lisson Austin Texas Stephen N. Lisson Austin Texas InsiderVC.com InsiderVC Insider VC

Transparency. Let’s have a round of applause for CalPers, the giant state pension fund, for transparency. Beth Healy of the Boston Globe (8/17/2001) reports Money managers aghast that pension investor shows returns, rankings. It’s a report card that has rocked the secretive venture capital world, and one that even the `A’ students didn’t care to see displayed on the refrigerator. Calpers, the giant California pension fund that sets trends for many large investors, has posted on its Web site the performance of every venture or buyout fund in which it’s invested for the past decade. Firms typically guard these numbers carefully, but the Calpers chart even says which funds are meeting expectations, and which are disappointments. … The industry buzz around the report stems from the secrecy with which venture firms and buyout artists guard the specifics of their returns. Virtually every firm claims ”top quartile” performance, and the numbers they give out are suspect, venture analysts say. Steve Lisson of Austin, Texas, on his controversial Web site, InsiderVC.com, tracks venture returns by doing his own calculations on venture portfolios. He is the only independent source on such numbers and has drawn fire from some venture capitalists for breaking the code of silence. … over the long term, Calpers has been doing something right. As of March 31, its average annual return for 10 years of private equity investing was 17.5%. The Wilshire 2500 Index, a broad stock market benchmark, was up 13.9% in that period. Would that the federal government would do the same with alleged investment programs like SBIR. Carl Nelson Consulting http://www.carl-nelson.com/government2001.htm Published by Carl Nelson Consulting, Inc, 1325 18th St NW, Washington DC 20036

Steve Lisson

Stephen N. Lisson, Austin, Texas

What’s a VC to Do?

        Forbes.com
        What’s a VC to Do?
        Shelley Pannill, Forbes ASAP, 09.10.01
        Someone’s always looking for a bargain.
        As thousands of new economy startups crashed and burned this past year, speculation mounted that the venture capitalists they once enriched were now cautiously sitting on pots of gold and playing golf. But the VCs we talked to say it’s only the limited partners, the investors behind the venture funds, who get to perfect their putts.
        So what are these high-powered moneylenders up to now?
        Damage control. VCs, like the rest of us, have lost a lot of money lately. Some 25% are expected to go out of business over the next several years. “Sometimes your widget doesn’t widge,” says Alan Salzman, founding partner at VantagePoint Venture Partners. He should know. His firm recently faced the grim task of writing severance checks after one bankrupt portfolio company’s management team had squandered its money. Then there’s the job of smoothing things out at companies that survived but were merged, downsized, or acquired. Says Philip Gianos of InterWest Partners: “I’m acting like a marriage counselor, which is a full-time job right now.”
        Scouring the ocean floor. Last year, says one observer, “You felt lucky to be able to invest in a new technology startup.” This year, VCs get to play God, waiting to invest until impoverished companies are desperate for cash. “I’ve been out bargain shopping,” says Heidi Roizen of Softbank Venture Partners, sipping chardonnay on a rolling lawn at the Atherton, California, home of a fellow VC. “I can’t believe these valuations!”
        Revisiting old friendships. Last year’s “shootouts” for deals have subsided. VCs are again finding synergies with competitors. “The tourists are gone,” says Accel Partners über investor Jim Breyer, alluding to the rush of cash-happy hobbyists–both individuals and companies–combing the landscape for gold in recent years.
        Business as usual. Sort of. VCs are doing what they do best: investing in startups, although the pace has slowed. According to research firm Venture Economics, VC investments have fallen by nearly two-thirds, from $27.2 billion in Q2 last year to $10.6 billion in Q2 this year. Still, they’re actually spending more this year in some sectors, such as wireless, biotechnology, fiber optics, and data storage. E-commerce, of course, was the big loser, with VC investing sinking from $210 million in the first quarter of last year to $3.3 million by the fourth quarter.
        But venture capitalists had better keep investing, warns Steve Lisson, who runs the popular InsiderVC.com. According to data tracker VentureOne, 27 venture capital firms have completed raising funds of more than $1 billion each since the start of the dot-com doldrums in spring 2000. Says Lisson: “They’ve got to use it or lose it.”

Stephen N. Lisson, Austin, Travis County, Texas, Steve Lisson, Austin, Travis County, Texas

Stephen Lisson, StephenNLisson, Stephen N. Lisson, Austin Texas, Austin TX
Financial Investors? Us?
InsiderVC.com pierces the VC industry’s verbal fog.
1 April 01 12:14, Tsafrir Bashan Stephen N. Lisson, Austin, Travis County, Texas, Steve Lisson, Austin, Travis County, Texas
Anyone carefully following the venture capital industry in Israel and overseas recognizes the routine. Managing partners talk at length and with great passion, but with very little substance. They gossip endlessly about the industry. What about the industry’s numbers? “We don’t disclose private data,” is the stock reply from industry players.
Today, for example, everyone knows that the situation is bad, but it is hard to say who exactly is in a bad position. You won’t find a fund partner talking animatedly about a company shutting down or about a down round. The most you can expect is an admission that not everything is perfect.
The absence of data is both odd and entertaining, particularly for an industry in which capital, finances, and yield are the key words. Without figures on the amount of a company’s holdings or valuations, the pompous phrase, “added value,” is all the venture capital industry has left to talk about. It is difficult to find a financial industry at any point in history that has provided so few figures. (Venture capital is a professional investment industry, regardless of how many partners talk about opening doors and assistance in recruiting executives).
Against this rather frustrating background, it is worth consulting the US web site insiderVC.com. The site provides data for companies in the industry, such as profit and loss allocations between the general partner and the investors (the carry), the exact rate of management fees, and exact investments and valuations for portfolio companies at the various financing rounds. Of course, the site also includes derivative data, such as the internal rate of return (IRR) and the realization ratio. In other words, it provides the tools needed to compare various organizations and even different funds within the same organization, information you will not get from your local venture capital management partner.
In order to gain access to all this data, you have to pay a considerable fee, but you can get a preview of the statistics and a sample of site editor Stephen Lisson’s sharp tongue free of charge. You won’t find better material on the web.
Published by Israel’s Business Arena on March 29, 2001 Stephen Lisson, StephenNLisson, Stephen N. Lisson, Austin Texas, Austin TX

Stephen N. Lisson, Austin, Travis County, Texas, Steve Lisson, Austin, Travis County, Texas

Transparency. Let’s have a round of applause for CalPers, the giant state pension fund, for transparency. Beth Healy of the Boston Globe (8/17/2001) reports Money managers aghast that pension investor shows returns, rankings. It’s a report card that has rocked the secretive venture capital world, and one that even the `A’ students didn’t care to see displayed on the refrigerator. Calpers, the giant California pension fund that sets trends for many large investors, has posted on its Web site the performance of every venture or buyout fund in which it’s invested for the past decade. Firms typically guard these numbers carefully, but the Calpers chart even says which funds are meeting expectations, and which are disappointments. … The industry buzz around the report stems from the secrecy with which venture firms and buyout artists guard the specifics of their returns. Virtually every firm claims ”top quartile” performance, and the numbers they give out are suspect, venture analysts say. Steve Lisson of Austin, Texas, on his controversial Web site, InsiderVC.com, tracks venture returns by doing his own calculations on venture portfolios. He is the only independent source on such numbers and has drawn fire from some venture capitalists for breaking the code of silence. … over the long term, Calpers has been doing something right. As of March 31, its average annual return for 10 years of private equity investing was 17.5%. The Wilshire 2500 Index, a broad stock market benchmark, was up 13.9% in that period. Would that the federal government would do the same with alleged investment programs like SBIR.
Carl Nelson Consulting
http://www.carl-nelson.com/government2001.htm
Published by Carl Nelson Consulting, Inc, 1325 18th St NW, Washington DC 20036