The transformation of a VC firm, Bay Partners

Bay Partners is the latest Silicon Valley venture firm to go through a major generational change — witnessing an influx of new faces, even as an older generation of partners exits for reasons apparently related to poor performance.

Chamath Palihapitiya, a partner at another well-known Mayfield Fund, recently said he was taken out of context when quoted complaining about an exclusive white circle of insiders. While that may be true for the world in general, it isn’t in Silicon Valley, he said in clarifying remarks. If his views are still in doubt, take a look at Bay Partners, a venture firm that embodies the consistent, radical change occurring in Silicon Valley.

Bay was founded by former lawyer, John Freidenrich, in 1976 (second to left in photo below). Over the past 18 or so months, the firm has rid itself of several partners, after hundreds of millions were invested and lost after the bubble burst. Some left voluntarily, some didn’t. That the change is largely along ethnic lines may be coincidental, but it does highlight how a younger generation of immigrants is grabbing a greater share of influence.

It also continues a long tradition of metamorphoses and spin-outs at valley venture firms — from Redpoint, to Highland, Benchmark, August and True Ventures — in many instances, driven by younger partners eager for change, even as older partners seek, unsuccessfully, to maintain their grip on a firm’s profits. We recently wrote about the changes at Battery Ventures.

baypartnersdown.bmpThe changes at Bay began with the departure of partner Loring Knoblauch about a year and a half ago, and accelerated last year to include Dino Vendetti, Chris Noble and Bob Williams. VentureBeat has tried contacting these partners. Dino Vendetti, asked about his departure last year to Formative Ventures, said it was related to differences with the firm about it structure, and not to performance — though he apparently did not see any of his investments exit while at Bay. Bay had raised a lot of money, and it was hard to invest so much money in early stage ventures, he said. Noble and Williams are still on the company’s Web site, but are no longer actively investing for the firm, according to sources. Williams declined comment. Knoblauch could not be reached, though one profile shows an affiliation with Bay Creek Resort & Club.

baypartnersup.bmpFreidenrich has retired. Neal Dempsey, one of the two founding members of the firm, is still at Bay. Pressured by limited partners concerned about the firm’s performance, he helped promote new partners with the help of Atul Kapadia, who joined in 2003 and has taken a leadership role.

They found that younger investors were more attuned to new technologies, after a decade of swift change driven by the Internet. Enterprise software and networking companies were out of favor, and the older partners were having a tough time. Analysis based on available data shows Vendetti, for example, invested large amounts of money networking and wireless companies like Telesym, Magis, Steridian, now all out of business, and into Capella and Cswitch, both start-ups with uncertain futures. Noble invested in companies like Airflow, Ispheres, Jarna and Transat, all out of business. One source indicated that Noble has one private company still in business that looks promising. Williams saw one company, Sonicwall, go public, but that was in 1999. Most others he sourced, including Ammocore, Littlefeet, Netpost, Peakstone and Pluris, had nothing to show. Knoblauch, saw a similar story, with six out of seven companies going out of business, and one acquired, but for an insignificant amount.

Meanwhile, new, younger hires showed more energy. Of 17 deals done in 2005 and 2006, 14 were led by the younger group promoted by Atul, with blessing from Dempsey

Despite the poor performance of the older partners, Bay was able to raise a $290 million fund in 2005, which it is now investing. Technically, investors in the fund could have pulled their money back, because the departing partners triggered a “key man” clause. This clause protects investors by giving them the right to withdraw their money when key partners leave.

Private Equity Week reported on the departures late last year.

However, Kapadia (far left, in picture), hit the road, along with Dempsey, to see if the limited partners would back the new team he brought in. He promoted (from left to right), Eric Chin, Sandesh Patnam, Neil Sadaranganey and Salil Deshpande. Without exception, the investors decided to keep their money in the fund. They have a newer lilt. They still invest in hard-core chips and semiconductor equipment, but Chin, who had co-founded an Internet company (Webspective, acquired by Inktomi), invests in new Internet companies, Sadaranganey invests in Web-based software, and Deshpande likes open source, and even social networking companies.

VentureBeat talked with Kapadia, Dempsey and Chin, who said they couldn’t talk about the records of the outgoing partners. However, they did say they’ve instituted a new team-oriented strategy of investing. For example, one partner recently wanted to fund a search engine called Powerset. However Eric Chin argued against the decision, saying it was overvalued — and the firm decided not to do it. The firm has formalized this process: If one partner argues a company should get funding, the firm makes the most critical partner of the deal co-lead the diligence process, letting the two debate whether or not to fund the company. They come to an agreement, or the firm doesn’t do the deal. In another deal, Chin was at first critical of Eventful, a company supported by Sadaranganey, questioning whether the team had the chops to pull off its vision. The two got exercised, and argued loudly in the office; Atul said he called a meeting among the partners, to debate it more. After doing a series of reference checks, and finding that some bigger Internet companies may be interested in doing business with it, Chin agreed to the investment.

Despite all this change, however, some things stay the same. In this case, the power of Sand Hill Road, where the valley’s venture companies are located: After 29 years, Bay is leaving its Cupertino headquarters and moving there — to stay in the thick of things.

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  1. [...] years ago, Bay Partners, a firm that launched in 1976, knew it was in trouble. At the time, we reported how the firm’s leaders orchestrated a clean-up, forcing several partners out, and …, more promising partners to replace [...]