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Redpoint Ventures raises $400 million, despite mediocre results

Corrected figures on Redpoint's second fund.

Redpoint Ventures, the Silicon Valley venture firm that launched with great hype in 1999, saying it wanted to be among the top three performing VC firms, and whose partner Geoff Yang flew a personal jet, has raised another $400 million for its third fund.

This is a great primer on how venture capital works.

A group of guys come together from venerable firms, and with quite good reputations themselves, and are able to raise large amounts of money in back-to-back funds in 1999 and 2000. And for icing on the cake, they negotiate a 30 percent "carry," the portion of the returns that the partners keep for themselves -- putting them in the league of about 10 elite VC companies at the time.

And yet the team produced no results.

At least until they had a modest hit in late 2004. As of Sept 30 of last year, Redpoint's $600 million first fund, raised in Oct. 1999, was showing a negative 18.5 percent internal rate of return, according to the University of California endowment, which is an investor.

As of June of last year, Redpoint's $750 million second fund, which was raised in August 2000 (it was initially $1.25 billion, but Redpoint later returned money to investors, saying it couldn't invest it all) had an internal rate of return of negative 13.9 percent. Redpoint poured over half the money of this second fund into private companies, but the investments were all valued at less than half 70 percent of what they started at, according to CalPERS, the large public pension fund that invested in Redpoint. That is worse than the average of -4.5 IRR for funds in which CalPERS invested in that year. (If you care, CalPERS' average for 1999 was -0.2 percent.)

And yet because of long-term relationships, Redpoint is still able to raise another large fund, we find out today in today's VentureWire (sub required)

For example, David Hale, treasurer at Colgate University, an investor (called a "limited partner") in Redpoint Ventures III, tells VentureWire that Colgate's relationship with Redpoint goes back twenty years. That's because Colgate had invested in Brentwood Capital, which is where Redpoint partners John Walecka, Jeff Brody and Brad Jones worked before they joined with a few others to form Redpoint.

We're not saying these relationships are bad. And these universities are making decisions, we presume, based on more than just relationships. They're taking into account past performance. But because public money is invested into Redpoint, at least in the cases of CalPERS and the University of California, we think it's worth pointing these things out. Investors continue to invest in a firm that got caught up more than most in the hype of the bubble, raising enormous amounts of capital way faster than it could ever invest.

This how venture capital works here in Silicon Valley. Everyone's sins for the past six years are forgiven, but only if their performance ten years ago was great. Seems kind of quirky, no?

Now, to be fair, we should point to recent investments made by Redpoint Ventures, and the fruit Redpoint might be able to show on its profit books soon. Redpoint invested in the first round of funding for Intermix Media, the parent of popular social networking site MySpace, which was sold to News Corp. for roughly $580 million in fall 2005. That transaction was made too late for the results to show up in the figures we cite above. Redpoint made a rough $36 million, but it's probably not enough to bring its second fund into positive territory. (In fact, we have just located Sept 30 results for this fund, and it still shows a -7.9 percent IRR)

But beyond this, Redpoint's Yang has long been focused on marrying Silicon Valley and Hollywood by investing in digital media companies. With the emergence of this sector as a favorable one over the past few years (MySpace is just one example), Redpoint should be well placed to start reaping profits. Or at least that's what Redpoint's investors are banking on. And if Redpoint pulls it off, maybe there's a very sound logic to this VC system this afterall. We'll be watching...

Related link: Peter Rip on the broken VC model.

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"Redpoint poured over half the money of this second fund into private companies, but the investments were all valued at LESS THAN HALF of what they started at, according to CalPERS, the large public pension fund that invested in Redpoint".

This less than half calculation makes no sense. According to the CalPERS data, only $5.7M out of the $9.0M in committed capital was called as of 6/30/05, and currently it has a value of $4.0M (0.70x per the linked page).

Further, if one assumes 2.5% in annual fees, 5 years of fees would equal 12.5% of committed capital, or $1.125M of CalPERS called amount, meaning that only $4.6M was actually invested in companies and these investments were worth $4.0M. This is a far cry from investments losing half of their value.

In short, CalPERS investment may have lost 30% of its value thusfar, but the value of the investments made by Redpoint from that fund is only down 13% or so.

Anon on February 22, 2006 10:21 PM
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Anon, nice catch!

Very bad mistake on my part. I have corrected the post. In short, the fund has lost only 30 percent of its value, not more than half. Apologies, I was moving too quickly, and read the wrong line.


Matt Marshall on February 23, 2006 5:55 AM
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You've referred only to Redpoint's exits in it's internet investments. But they've had a couple in network systems too. Topspin and Timetra both made them money. (Tahoe and Procket crashed.) They've also got money in BigBand, Calix and Fortinet which all have significant revenue, growth and seem well positioned for some exit. When you look at the portfolio, you can see how they could raise another fund

anon on February 23, 2006 7:50 AM
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I don't think I would be so high on the marriage between Silicon Valley and Hollywood. Look around, and you see only established firms reaping the benefits of such relationships (aka Apple). MySpace is not about hollywood - its about everyone else. Hollywood shows up as soon as you already have a crowd... doing deals before that point is a bad idea.

David Touve on February 24, 2006 8:20 AM
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Dan Primack follows with similar analysis, comparing Redpoint to Boston Red Sox. (http://hosting.mansellgroup.net/enablemail/ThomsonNewLetter/HostedWires/NewsLetters/Feb24-06.htm)

Matt Marshall on February 25, 2006 8:11 AM
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I disagree with the tone of the article, enough that I blogged about it, and I am but a rookie blooger:

Redpoint remains an upper crust firm on the short list of the top Interenet entrepreneurs. I am seeing this in the trenches as a fellow venture investor.

I do like Matt Marshall's stuff in general though.

Charles Curran on June 28, 2006 4:12 PM
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