Friday, July 10, 2009

Turbulent times cause turnover among venture capital firms

By Galen Moore

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Since the beginning of 2007, more than 30 investors have left seemingly lucrative spots at New England venture capital firms, a trend that appears to be picking up, a review of Mass High Tech’s venture industry database has found.

The game of musical chairs at the senior level — mostly general partners, but a few senior principals and venture partners — has seen venture capitalists switch allegiances to competing firms, revert back to operational roles, and strike out to raise their own VC funds or start their own companies.

Just halfway through the 2009 calendar year, New England is on pace to double the average VC turnover rate for 2007 and 2008. Mass High Tech counted 10 VCs who had left their firms so far this year — nearly twice as many as the six who moved around in 2008, and on track to easily top the 15 who made a switch in 2007.

“It’s tough out there. It’s an industry that’s going through a lot of change, a lot of consolidation,” said Mark Carthy, who quietly left his position as partner at Oxford Bioscience Partners in late 2007. “Some funds have run into trouble raising money.”

Oxford was reported to be raising a $325 million fifth fund in 2006, which closed at just $147.7 million, according to Dow Jones VentureSource. The firm did not return calls for comment. Earlier this year, Carthy founded his own venture firm, Orion Healthcare Equity Partners. He declined to discuss the new firm’s strategy, citing regulatory restrictions while the firm is raising its first fund.

VC turnover at the partner level is certainly rarer than in other industries, such as corporate law firms — but it does happen, and its rate is on the increase over the past decade, said Josh Lerner, a Harvard Business School professor of finance and entrepreneurial management.

“It’s fair to say that the most recent period has been extraordinary,” Lerner said. “And I think it’s reflecting the changing dynamics in the venture industry.”

In the days of venture that preceded the 1990s technology bubble, it was rare for investors to leave the VC firm where they had made partner, Lerner said. With a liquidity crisis in the VC business now, it’s less surprising to see turnover increase, he said.

This week alone, Sigma Partners venture partner Roger Krakoff announced he is leaving to start his own fund, and clean tech-focused principal Rob Day said he has left @Ventures, the venture capital arm of what used to be CMGi Inc. and is now ModusLink Global Solutions Inc. (Nasdaq: MLNK). Day is taking a partner-level position at Black Coral Capital, a family-office fund that is new to venture investing.

So far, this year has seen the departure of partners from Alta Communications, Atlas Venture, Brook Venture Fund, HLM Management Co., Oxford and Polaris Venture Partners.

“I think you’re going to see more of it,” Day predicted, referring to the year’s VC turnover figures. He said specialist VCs are looking to break out of their roles at broadly focused, so-called “generalist” firms. In emerging areas, a growing cadre of mature investors may be champing at the bit.

“We are starting to see the clean tech VC specialists starting to reach a level of maturity where they’re sort of midlevel staff and have been looking for opportunities to take that next step,” Day said.

But specialists may also see their usefulness wane if their specific industry segments cool, Lerner said. On the other hand, generalist VCs who have made a great deal of money may lose their drive to push hard on new investments. In that situation, a partner would most likely be given the opportunity to make a smooth transition, he said, because rancorous separation can lead to lawsuits that air the firm’s dirty laundry, at great reputational cost.

However, if a firm needs to scale back its number of investors, an underperforming partner might find it harder to stay, Lerner said. “Being a partner at a venture firm is not equivalent to being a tenured professor,” he said. “If you’re not delivering for whatever reason, there’s likely to be pressure to leave the partnership.”

VCs on the move
A sample of the comings and goings of New England-based venture capitalists since 2007.
 

Moves we’ve missed? Let us know at: newsroom@masshightech.com