Some are asking whether Crescendo should bother even trying to raise a new fund of money to invest. In our assessment, the firm has got two strikes against it. The third pitch is coming straight down the middle…and Crescendo had better connect.
Here is the significance: Investors, known as limited partners, are pumping huge amounts of money into venture firms again, but are finally parsing out the ones who don’t deserve it. We are far enough along since the Internet bubble burst in 2000 for those limited partners (LPs) — many of them universities and pension funds — to decide which firms aren’t doing well enough to justify getting more cash. Initially, LPs forgave poorly performing VC firms, excusing them because of the disastrous post-Bubble times. Apparently, no more. This matters for entrepreneurs because nervous venture firms can make hasty decisions — which may not be in the best interest of the entrepreneur’s start-up. There are several other venture firms in death-watch status right now. So think carefully about who you take money from.
Crescendo doesn’t have a very big name in Silicon Valley; no big brand-name hits. It was focused — tragically in retrospect — on telecommunications during the Internet boom, and got killed when the market turned downward. The firm’s most visible partner is David Spreng, who claims hits in Callidus, Ejasent and Indigo Medical (we’ve corrected the Forbes reference to Indigo Systems, which is wrong; see comments for more).
Crescendo was mentioned in the comments of a piece we did two weeks ago about WorldView, another Silicon Valley venture firm. There, we talked about the three strikes rule, and why we thought Worldview had struck out.
The comments pointed out that Crescendo had only seen one of its companies see a positive, but trivial return on investment since March 2000. Another comment said Crescendo was being sued by a limited partner. We did some tire-kicking a couple of weeks ago, and we confirmed both. David Spreng wouldn’t comment for our piece, other than to say “We are not looking backwards, we’re looking forward,” he said in a phone call. “We have an incredibly great team, and fantastic portfolio results which will speak for themselves over the next several quarters.” The lawsuit, though, is a sideshow: The limited partner who sued end up losing $5.5 million in legal fees, because it was thrown out, we’re told. It is worth noting, though, that Crescendo apparently took the money from that LP without ever meeting the guy. The LP simply wired over the money, after a five minute discussion (update: after he was found by an investment manager helping Crescendo raise the cash). Dan Primack, who wrote a piece about Crescendo yesterday, referred to “dumb” money, and he may have a point in this particular case. Unfortunately, we don’t know who the firm’s other LPs are, and the firm won’t tell us.
We spoke to well-placed source, close to the firm, and can confirm most of what Dan Primack said in his piece (Dan was armed with the firm’s quarterly report!), though with a few minor corrections. Yes, the firm drew a line in the sand in 2001. It sought redemption from its LPs and pledged it would switch to invest in “digital infrastructure” companies, away from the graveyard that was telecom. Mid-way through its $650 million fourth fund, Crescendo made the switch. Since then, Crescendo has divided its performance results into two eras: the terrible one before 2001, and then a much better one after 2002.
Crescendo argues that the second half of Fund IV is performing in the top ten percent of firms (taking industry data from folks like Cambridge, Thomson, and comparing it to other firms that raised funds in 2002). Crescendo has invested in 19 companies since 2002 (Dan said 16), and six of them have been written up (Dan mentioned only 2), and 12 others are being carried on its books at “cost,” or at the original value at which Crescendo invested. This “at cost” means its investments in companies may be healthy, but the companies haven’t raised more money or been sold — and so there has been no objective external event needed mark them up. Dan implies that “cost” is not a very good thing, when in fact it doesn’t say much at all. This practice of carrying investments at cost is industry standard. Finally, there was one sale, of Sastina, but didn’t bring a very big return.
So let’s review the bad stuff: Crescendo’s first part of Fund IV did terribly, and the firm’s Fund III, which the firm began investing in 1998 and 1999 is underwater — which is really difficult to justify because those were supposed to be good years. Those are the two strikes. And we don’t see any balls.
Moving along, here’s why we haven’t seen the third strike: The firm does have a promising company or two, like Pure Digital, which we mentioned here, and Credant, a company that offers security for mobile phones. BroadSoft is apparently considering an IPO and SOISIC has talked with ARM and Soitec about a possible acquisition. Second, the firm’s leader, Spreng, is still at the helm. Third, the firm brought it more experienced partners early on, like Ian Jenks to address a perceived lack of operating experience. If some of its companies get sold for a profit by the end of this year, Crescendo’s hide may well be saved, and will begin fund-raising again in earnest later this year.
More significant to entrepreneurs in Silicon Valley is if Crescendo, desperate to save itself, will be forced to swing wildly for the fences on its last pitch. When the pressure is great, bad decisions can be made. A firm can push one of its companies to sell out, when waiting might be preferable for the company. Crescendo’s is a situation many firms are finding themselves in. They may or may not do the right thing. But if you’re juggling which firm to take cash from, take it from someone who doesn’t have two strikes.