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Financial Times; Mar 6, 2002

 

GLOBAL INVESTING: Venture capitalists look for outside help in a harsh climate

Funds are increasingly calling on consulting companies as they find themselves in unfamiliar territory, writes Alison Beard

Two years ago, at the height of the internet boom, venture capitalists called Dick Strayer to sort out their fast-growing portfolio companies. Mr Strayer, a management consultant, was charged with turning a group of technology geeks into a team.

Now, the venture capitalists are calling with a different job: they need help themselves.

"The requirements for success are different now," said Mr Strayer, chief executive of California-based Strayer Consulting.

"You have people that feel really confident and almost arrogant about their ability and they're moving to a world that they haven't been successful in yet. There are partners who were good at giving money out but who aren't so good at rolling up their sleeves."

Venture funds have generated annualised returns of 54 per cent over the last three years, according to the latest figures from Venture Economics. But in the 12 months that ended last September, they lost more than 30 per cent.

Some portfolio companies have gone bankrupt, others have seen their stock prices plunge and most are struggling to survive. The venture capitalists, their leading investors, are shell-shocked.

"There were some really painful tragedies," Mr Strayer said, and his first role is to be a counsellor. The formal consulting process begins when he collects evaluations on each venture capitalist from fellow partners, board members, executives in the firm's portfolio companies and secretaries.

"The funds are pretty unique in how they're structured... because there's no hierarchy, so it's hard to get feedback," Mr Strayer said. "You have four or eight or ten partners and they're all presumably equal."

So far this year, more than a dozen firms have asked Mr Strayer for this 360-degree feedback consultation. Fees vary, and Strayer Larcen often accepts a limited partnership in the fund for its services. The company's day rate is between Dollars 3,500 and Dollars 4,000.

After being evaluated, the venture capitalists are made to acknowledge their weaknesses, from sloppy financial modelling to having too much confidence in one industry, and ask for help. "How do you work together and give away your ego and some of your turf?" Mr Strayer said. "That's where I come in."

Some firms realise that all the partners are not created equal and reorganise accordingly. "Some partners just don't have the skill sets to jump in and help downsize . . . and make sales calls," Mr Strayer said. "The question is should we be paying them as much as we do to the people who are up to their elbows 24 hours a day."

Mr Strayer would not give specific details on any of his clients, which include Kleiner Perkins, Olympic Venture Partners and Alpine Ventures. But he said that many had reduced bonuses or the percentage of fees earned for partners who had an investing background but no operating expertise.

"The stronger firms have really faced up to this (in part because) their investors have forced them to," Mr Strayer said. "Most of our business is in venture groups now because they're saying 'We're the focus, not our start-ups.'"

Copyright: The Financial Times Limited 1995-2002

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