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ITU Ventures.jpgThis story about ITU is a tragic one, and a lesson for us taxpayers in California to be vigilant about how the state deals with venture capital firms.

A few weeks back, we reported on the failure by the Southern California-based venture firm ITU to raise a new fund. The failure, we reported, was sparked in part by Harvard’s decision to pull its money from the firm.

Now a story in the LA Times tells us why Harvard took that step. ITU had suggested its portfolio companies, including three in California (the start-ups aren’t mentioned by name), give donations to political candidates the firm was friendly with, including California Controller Steve Westly. This is tragic, because by all appearances, it was an effort to manipulate Westly to be friendly to ITU, which was dependent on large pension funds where Westly was influential as a board member, and even more influential had he won the election (i.e., as governor, you have a role in picking board members for the funds). More importantly, it is state money that would be supporting ITU.

The guys at ITU, defending themselves, say they merely made suggestions that the portfolio companies make donations, and no pressure was intended. This is silly, because there was enough pressure on the companies for them to start griping about it. They even approached us about it.

The LA Times should be commended for reporting this story. The tipster who gave us the original story about ITU’s problems stayed on the phone long enough to suggest we look into “political donations” made by its portfolio companies. We sniffed around a bit, but without any further leads, we couldn’t get very far and let it drop.

But the LA Times did not make explicit, except for a brief mention at the bottom of the story, the real reason this story looks like a scandal. ITU was dependent on investors such as the huge California state pension funds (CalPERS, CalSTRs) for its money. This is significant because we, the Mercury News and others fought hard, and successfully, in 2003 for appropriate disclosure rules — including a demand that the financial performance of companies like ITU be disclosed. This helps ensure that only good-performing firms receive state money, and not mediocre ones dependent on political contacts for their money.

Disclosure of performance results may not be enough. The LA Times references to political relationships at the bottom of the story are concerning, and makes you wonder:

TU’s principals and associates have given $19,500 to Westly and $20,000 to state Treasurer Phil Angelides, who defeated Westly in the June gubernatorial primary. These donations are not in dispute.

Westly spokesman Russ Lopez said the controller has met with Brownstein privately — including meetings in New York, where Brownstein introduced the controller to other potential donors…

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