The WSJ has a story today about how investors at Insight Venture Partners made a killing last year when Photobucket was sold to News Corp. for $300 million — even as the firm’s own limited partner’s didn’t make a dime.

Scandal, right?

I just got off the phone with Jeff Horing (below left), one of Insight’s partners, to confirm the story, and it’s  more benign than it may seem.

It’s true, Horing said, that several IVP employees invested $3 million for 20 percent of the photosharing site Photobucket, in 2005, a time when social networking “was by no means an understood sector.” A 25-year-old analyst for the firm, David Horig, had found the company, and partner Jeff Lieberman took a seat on the board. But it was too unconventional of a deal for the firm itself to approve, because the firm is a late-stage, private equity buyout firm, and a $3 million investment was way lower than the firm’s minimum requirement. So Liebermann and his colleagues, along with some acquaintances, decided to make the investment with their own money. That way, when Photobucket was sold, the firm’s limited partners, who basically employ Insight to make investments for them, ended up with nothing. Meantime, Lieberman and other individuals at IVP took home $60 million.

IVP’s co-founders, Horing and Jerry Murdock (right in the image above), for example, invested $300,000 apiece, and each took home nearly $5 million.

Apparently, a tipster has been going around trying to make a big deal out of this, and the WSJ decided to write it up.

Here’s the first question I asked Horing. Why, if you are working on behalf of your limited partners, with a nice salary (in the form of a fee) would you be spending time investing in companies outside of the firm’s jurisdiction? And second question: Why, specifically, would your firm’s partners be joining boards of these investments (a drain on a partner’s time, when he should really be spending it all on the firm’s clock instead)?

Horing said the time spent on Photobucket was negligible (see the WSJ for his full account, which provides the context), and in fact led to many other promising investments on behalf of the firm. The firm’s analyst, Horig, who found Photobucket, gained credibility because of the investment, and thus helped the firm find and invest in companies such as Threadlist, Karmaloop and another undisclosed photo site. None of these deals would have been possible without the investment in Photobucket, said Horing, which he called a “silly, lucky bet” at the time.

All investors have real or perceived conflicts when they invest their own money and their firm’s money, Horing said. He said Insight’s early investment in Photobucket is no worse than the “gray zones” that respected Silicon Valley firms face all the time when they invest. Take Sequoia Capital. That firm, he said, has early-stage funds, as well as growth stage funds, and has different limited partner investors in each — meaning that it faces conflicts when it classifies an investment as early stage or growth, and when it spends time on one funds’ investments versus another fund’s.

So with that, read the context provided by folks like PaidContent and PEWeek, which suggest Insight actually did not try to hide the Photobucket investment from its LPs (something implied by the WSJ) and decide for yourselves whether this that big of a deal.

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