Venture shocker: Sevin Rosen returns cash, cites "terrible" environment

Updated

Sevin Rosen Funds, an established venture capital firm with offices in Silicon Valley and Dallas, has taken the extraordinary step of returning the cash it had raised, saying the investing environment is “terribly weak.”

Over the past few months, the respected firm had won commitments of between $200 and $300 million from its investors, and next week was going to seal its fund-raising process, and begin investing it into new companies.

But in a letter sent to its investors Friday, a copy of which was obtained by VentureBeat, the firm made a surprising about-face. It told the investors it had decided there is “too much money,” “too many deals funded in almost every conceivable space,” and a “terribly weak exit environment.” Moreover, it sees no changes in the foreseeable future.

The move is significant because it comes at a time when billions of new dollars are cascading into the venture capital industry. Global investors have been looking for a place to put their money, and venture has become a favorite. Most venture firms have shrugged off concerns this could lower profits by creating too many competitors. Sevin Rosen’s step is a frankness rarely seen in an industry known for its bravado, where firms often raise as much cash as they can, and worry about it later — driven by the incentive to enjoy the millions of dollars of income they get from the management fees.

In some ways, it is eerily similar to move made by Crosspoint Venture Partners back during Internet bubble, when that firm returned cash to its investors, saying it could not in good conscience invest the money. The move sparked a wave of similar actions by other venture firms — leading to a major downsizing of the industry.

News of the Sevin Rosen move was first reported by the New York Times today (sub required).However, when asked whether this could be compared to the move by Crosspoint during the last Internet bubble, Sevin Rosen general partner Steve Dow (pictured here) said his firm’s move is different. Crosspoint’s action was also precipitated by internal differences, he said. “It was more about interpersonal issues at the firm, partners wanted to go in different direction, there were generational concerns,” he said. Sevin Rosen’s partners, by contrast, are united in their views, he said. (Update: We’ve since heard this isn’t exactly true, that there were indeed differences within the parntership, but have yet to confirm anything. Does anyone have feedback on this?)

Sevin Rosen is not shutting down, and will continue to invest the funds it has raised previously, including managing the portfolio of companies it has already backed. It is also leaving open the option of going back to investors at a later date, Dow said.

The firm had been talking about deteriorating market conditions for two years, it pointed out in its letter. The IPO market, Dow said, demands a level of revenue that few companies can achieve, or which takes much longer to achieve. He cites the example of Citrix Systems, a company where he is a board member and which went public in 1995. It had annual revenues of $14.7 million at the time, far below the threshold needed to go public today, he said.

Moreover, the average value of an acquired company is $74 million, Dow said, which is lower than the $100 million plus price tags venture firms look for. Investments in companies like YouTube, MySpace or Skype may yield profits, but they are exceptions, he said.

Many investors disagree with Sevin Rosen’s view. They say complaints about excess capital have always circulated, but that great companies will always handily beat competitors and yield profits, no matter how many players are funded. Google is an example. Scores of search start-ups have been backed, but this hasn’t dented Google’s success — and perhaps has even helped it, as users cling to a company they trust in part because there is so much noise elsewhere. Investors Tim Draper of DFJ, Peter Fenton of Benchmark and Fred Wilson of Union Square, for instance, have all dismissed the idea there is too much money.

Dow agrees there are lots of attractive areas to invest, from clean technology, to biotech, nanotech and personal health — more places than there were two decades ago. But that doesn’t mean you can make good profits from the investments, he said. In the letter, the firm wrote that the last year of fund-raising that the entire industry saw positive results was 1997. (Those funds were invested in 1998 and 1999, and saw great profits during the last part of the boom).

Seven Rosen has seen a few partners move on to other partnerships, including Dave Shrigley and Jennifer Gill Roberts, but they left before this latest decision, which was made only last week, Dow said.

Sevin Rosen’s fund VIII, raised in 2000, has seen a negative 12.3 percent internal rate of return, according to results published by the California Public Employees’ Retirement System dated March 31.

The firm’s mood probably wasn’t helped either by the public market’s rejection of RFID company Alien’s effort to go public. The company was forced to withdraw its offering recently. Sevin Rosen is one of Alien’s major shareholders.