Sent to you by Sean McBride via Google Reader: The Cash Panic Sweeping
The VC Industry via Silicon Alley Insider by Henry Blodget on 11/7/08
Why have VC firms clamped down on investments so fast? Why are they
shouting from the rooftops that portfolio companies had better start
cutting costs immediately?

Well, for one thing, because they're not boneheads. This economy has
the potential to become the worst economy since the Great Depression
(it isn't yet, thankfully). VCs see this and understand that:

- Profitable exits are going to be a lot rarer in the next couple of
years, and
- Potential investments--including current portfolio companies--are
going to get a lot cheaper in the next few years (and, therefore,
future returns are going to get a lot higher) .

That logic alone explains why money has gotten so tight so fast. But VC
sources say there's also another important dynamic going on: The folks
who supply the money that VCs invest--Limited Partners such as pension
funds and endowments--are now so strapped that some are beginning to
default on commitments. In VC-land, in other words, as elsewhere, the
oxygen is being sucked out of the room.

Here are some notes from SAI conversations with two VC sources this
There are now unbelievable difficulties in the LP world. Many of the
best names are having liquidity problems. They are having trouble
meeting capital calls from Private Equity and VC firms and need to sell
stocks to get cash. Much of their stock portfolios are tied up in hedge
funds with lockups, however, so they can't liquidate those positions.

Some Limited Partners are starting to default on their commitments to
VC firms. In some cases this can mean they lose their investment to
date, but since the LPs think the the VC funds are going to be losers
anyway it does not matter. Some second-tier VC funds are looking at the
fine print to see if they can sue the LPs who don't follow through on
their commitments.

[In case you don't know how VC funding works: When a VC "raises" a $100
million fund, what the firm really has done is gotten commitments from
LPs that they will deliver $100 million over the life of the fund. The
firm then issues "capital calls" over the next few years and gradually
draws the money down. It is these calls that some LPs are reportedly
starting to default on.]
The most agressive LPs have been hurt the most. For example, a rumor is
circulating that Columbia's endowment fund is illiquid [can't raise the
cash it needs to fund current commitments]. Harvard is reportedly
trying to sell 1/3 of its private equity portfolio at a steep discount
in a secondary offering. You would only do this today if you are really
in deep doo doo.
The market price for LP positions in VC funds on average is 75 cents on
the dollar. Limited partnership positions in PE funds are selling for
50-60 cents on the dollar. This suggests that $50-$100 billion in value
has gone in the past few months from PE funds alone.
One VC thinks that all of the major university endowments are down
25-30% [this sounds extreme to us]. Big universities are heavily in
commodities, PE, VC hedge funds, and very little in bonds. They are
getting killed across the board
Pension funds are a little bit less aggressive but they also may be
more exposed soon.

We have only spoken to a couple of VCs about this, and we assume many
firms are not affected. We have heard the endowment scuttlebutt before,
though (Princeton was a name that came up a few weeks ago), and it
makes sense: University endowments need to fund massive cash spending
every year, but they also don't like to compromise annual returns by
keeping much of the portfolio in cash. So now that the value of ALL
assets has plummeted and so many endowment investments are subject to
lock-ups, it certainly sounds plausible that the funds are having
trouble raising necessary cash.

Any VCs or LPs care to weigh in? We'd love to hear from you. All
sources obviously kept confidential. [EMAIL PROTECTED]

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