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A year ago, we published an exposé on Oak Investment Partners, which has become one of largest venture-capital firms by attracting large sums from investors despite a mediocre track record. Of particular concern was the continued support of the Washington State Investment Board (WSIB), which manages public money. Neither Oak nor the WSIB were willing to comment at the time, but insiders suggested it was a case of smug relationships in the investment community.

Well, it turns out Oak is raising money again, and once again Washington State has committed money to the new fund, but a representative of the board also says it has decided to end all funding of venture capital going forward.

On Monday, VentureWire reported that Oak has rounded up about $700 million to $750 million for its 13th venture fund, which is gunning for $1.5 billion by the summer.

Among the money already committed is a hefty chunk of Washington State’s public funds. The WSIB’s public affairs director, Liz Mendizabal, told us that the WSIB had committed $30 million to Oak XIII, but also said that as of last fall, the board will no longer direct any funds to venture capital. She also addressed the board’s past investment decisions and relationship with Oak:

“Our investments in Oak for [Funds] VIII, IX, X and XI were done directly by us. But then we moved to a fund of funds to do these kinds of investments and that was Pathway.”

Pathway Capital Management is a portfolio management company that makes investment decisions on behalf of institutional investors. Pathway said its team would not able to comment for this article before we went to press.

Mendizabal’s account paints the WSIB’s board in a favorable light because Fund IX, raised in 1998, ended up returning a solid 55 percent internal rate of return thanks to the dotcom bubble.  Oak’s performance at the time was enough to explain the board’s decision to invest in the next two funds in 1999 and 2001. But by the time WSIB committed to Fund XII and XIII, the return on investments in Oak were looking down (as was the case for most venture firms). Mendizabal points the finger to Pathway for those later decisions, though she indicated that Pathway may have continued to invest in Oak partly because of the pre-existing relationship. Oak did not return a phone call for comment by the time this went to press.

Asked why the board agreed to continue funding Oak despite a questionable track record, Mendizabal said that the capital commitments are “drawn down” over time, and that they don’t assess past investment decisions until the entire commitment is delivered. It may take five to seven years for a venture firm to request all of the funds that a limited partner has committed, since they are distributed over time to startups. For example, only 2/3 of the WSIB’s 2006 commitment to Fund XII has been drawn down.

“It’s not our policy to second guess our performance,” Mendizabal said. “As the money’s being drawn down, numbers may not look that good. We look at performance after the fund has been fully drawn down.”

That means that the WSIB routinely gives chunks of $30 million to $100 million worth of public money to a firm every other year without due diligence on the last 2 to 3 investments. Yikes.

Or, more precisely, they were giving such sums.  Last fall, sometime after its last commitment to Oak, “the board decided that we would not actively seek to invest in venture anymore,” Mendizabal says. The decision was made simply because “we would rather commit to other kinds of large funds.” Oak XIII was one of the last funds that Pathway managed for WSIB before entirely pulling out of venture capital, she said.

It’s no secret that the venture capital industry is shrinking. The credit crunch, coupled with poor returns from the venture-capital asset class, has led many big institutions like pension funds and university endowments to reduce the amount of money they dedicate to venture capital. In some cases, this cutback is long overdue.


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