By Lizette Wilson
As the market tightens, the cliquishness on Sand Hill Road intensifies. Who certain VCs will and will not do deals with has always created a strict demarcation line separating the A players from the rest. Now, with portfolio companies needing more funding for longer periods of time and a wider variety of exit strategies (the IPO market is still shut), VC firms are choosing their friends even more carefully. “Now it’s about liquidity. Who has it and who wants to spend it going forward,” says John McClave, CEO of PE Source, a private equity research firm based in McLean, Va. “When things are good, you prefer to work with your friends. As things get tougher you have to look at ‘Hey, can they add value?'” So who are buddies in the bust after the boom? For most firms, their oldest friends are still their best ones.
Who hangs with whom
Take Integral Capital Partners, the Menlo Park-based expansion and growth-stage firm that was incubated within Kleiner Perkins Caufield Byers. Although the firm, which also operates buyout fund Silver Lake Partners, invests independently from KPCB, it has still done more than 30 percent of its total investment deals with KPCB as a co-investor. Other deal doers topping Integral’s list include Amerindo Investment Advisors, Accel Partners, Oak Investment Partners, Benchmark Capital, Mohr Davidow Ventures, and New Enterprise Associates. And Kleiner’s best buddies? Mostly the same crowd. The firm has done 17 percent of its investments with Integral and 10 percent with Amerindo, according to PE Source. Integral Capital co-founder and General Partner Roger McNamee said although his firm, like others, is always looking to expand its network, he relies most heavily on existing relationships and expects to continue to do so in the future. He said he is focused on feeding and fostering the friendships he currently has and relies on other partners at Integral to strike up new relationships. Those relationships are crucial because VC firms act as a filter for one another, weeding weak companies from the pool of promising ones and presenting the best as candidates for group funding. “People’s time is limited,” said McNamee. Quoting a favorite saying in the VC biz, he added: “When you have a choice, always do business with your friends. When you don’t have a choice, your friends are the only ones who will do business with you.”
Viability
Promod Haque, managing partner at Norwest Venture Partners, said another crucial factor is at play: the firm’s viability. With a closed IPO market, startups are no longer able to do one or two funding rounds and then go public. Companies are now doing Series E and even F rounds and have been in a wait-and-see mode since the markets slammed shut three years ago. That means the venture companies backing them, particularly in the early rounds, have to be prepared to dole out more cash over a longer period of time and often participate more heavily in the company’s management. “My belief is over the next 10 years, more than half the VC firms will go away. Over the next three or four years, many of these firms will go out of business because it’ll be hard for them to raise new rounds,” said Haque during an April interview. “We don’t want to do a deal and then find out the original investors are out of money when it’s time for a follow-on.” Norwest’s favorites – besides Norwest Equity Partners, which is related – include JP Morgan Partners, Greylock and KPCB. Industry players also point to a firm’s ability to execute alternative exit strategies, like buyouts, and devote time and resources on a company board as strong traits they look for in a funding partner. Ron Lissak, managing partner for Catapult Advisors, acts as a go-between for technology companies seeking funding and VCs. He said while the expected washout in the VC industry has pushed some firms to eyeball potential partners more carefully, certain firms have always had a more insular culture. “Top tier firms.. started this trend early on,” said Lissak. “That’s not to say they won’t play nice with the other kids in the sandbox, but they don’t have problems making a decision on their own. ” Lissak said Sequoia and New Enterprise Associates are on the other end of the spectrum. “They both have a lot of friends on all their deals. They have the most co-investors – it’s a different style and it translates into how they work as board members. They are very collaborative and congenial.”