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Crescendo's two strikes, and why it matters

Crescendo Ventures is another struggling Silicon Valley venture firm.

Some are asking whether Crescendo should bother even trying to raise a new fund of money to invest. In our assessment, the firm has got two strikes against it. The third pitch is coming straight down the middle...and Crescendo had better connect.

Here is the significance: Investors, known as limited partners, are pumping huge amounts of money into venture firms again, but are finally parsing out the ones who don't deserve it. We are far enough along since the Internet bubble burst in 2000 for those limited partners (LPs) -- many of them universities and pension funds -- to decide which firms aren't doing well enough to justify getting more cash. Initially, LPs forgave poorly performing VC firms, excusing them because of the disastrous post-Bubble times. Apparently, no more. This matters for entrepreneurs because nervous venture firms can make hasty decisions -- which may not be in the best interest of the entrepreneur's start-up. There are several other venture firms in death-watch status right now. So think carefully about who you take money from.

David Spreng
Crescendo doesn't have a very big name in Silicon Valley; no big brand-name hits. It was focused -- tragically in retrospect -- on telecommunications during the Internet boom, and got killed when the market turned downward. The firm's most visible partner is David Spreng, who claims hits in Callidus, Ejasent and Indigo Medical (we've corrected the Forbes reference to Indigo Systems, which is wrong; see comments for more).

Crescendo was mentioned in the comments of a piece we did two weeks ago about WorldView, another Silicon Valley venture firm. There, we talked about the three strikes rule, and why we thought Worldview had struck out.

The comments pointed out that Crescendo had only seen one of its companies see a positive, but trivial return on investment since March 2000. Another comment said Crescendo was being sued by a limited partner. We did some tire-kicking a couple of weeks ago, and we confirmed both. David Spreng wouldn't comment for our piece, other than to say "We are not looking backwards, we're looking forward," he said in a phone call. "We have an incredibly great team, and fantastic portfolio results which will speak for themselves over the next several quarters." The lawsuit, though, is a sideshow: The limited partner who sued end up losing $5.5 million in legal fees, because it was thrown out, we're told. It is worth noting, though, that Crescendo apparently took the money from that LP without ever meeting the guy. The LP simply wired over the money, after a five minute discussion (update: after he was found by an investment manager helping Crescendo raise the cash). Dan Primack, who wrote a piece about Crescendo yesterday, referred to "dumb" money, and he may have a point in this particular case. Unfortunately, we don't know who the firm's other LPs are, and the firm won't tell us.

We spoke to well-placed source, close to the firm, and can confirm most of what Dan Primack said in his piece (Dan was armed with the firm's quarterly report!), though with a few minor corrections. Yes, the firm drew a line in the sand in 2001. It sought redemption from its LPs and pledged it would switch to invest in "digital infrastructure" companies, away from the graveyard that was telecom. Mid-way through its $650 million fourth fund, Crescendo made the switch. Since then, Crescendo has divided its performance results into two eras: the terrible one before 2001, and then a much better one after 2002.

Crescendo argues that the second half of Fund IV is performing in the top ten percent of firms (taking industry data from folks like Cambridge, Thomson, and comparing it to other firms that raised funds in 2002). Crescendo has invested in 19 companies since 2002 (Dan said 16), and six of them have been written up (Dan mentioned only 2), and 12 others are being carried on its books at "cost," or at the original value at which Crescendo invested. This "at cost" means its investments in companies may be healthy, but the companies haven't raised more money or been sold -- and so there has been no objective external event needed mark them up. Dan implies that "cost" is not a very good thing, when in fact it doesn't say much at all. This practice of carrying investments at cost is industry standard. Finally, there was one sale, of Sastina, but didn't bring a very big return.

So let's review the bad stuff: Crescendo's first part of Fund IV did terribly, and the firm's Fund III, which the firm began investing in 1998 and 1999 is underwater -- which is really difficult to justify because those were supposed to be good years. Those are the two strikes. And we don't see any balls.

Moving along, here's why we haven't seen the third strike: The firm does have a promising company or two, like Pure Digital, which we mentioned here, and Credant, a company that offers security for mobile phones. BroadSoft is apparently considering an IPO and SOISIC has talked with ARM and Soitec about a possible acquisition. Second, the firm's leader, Spreng, is still at the helm. Third, the firm brought it more experienced partners early on, like Ian Jenks to address a perceived lack of operating experience. If some of its companies get sold for a profit by the end of this year, Crescendo's hide may well be saved, and will begin fund-raising again in earnest later this year.

More significant to entrepreneurs in Silicon Valley is if Crescendo, desperate to save itself, will be forced to swing wildly for the fences on its last pitch. When the pressure is great, bad decisions can be made. A firm can push one of its companies to sell out, when waiting might be preferable for the company. Crescendo's is a situation many firms are finding themselves in. They may or may not do the right thing. But if you're juggling which firm to take cash from, take it from someone who doesn't have two strikes.

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Uh oh, someone's double-checking my work. It's about damn time:)

Anyway: Matt, you are right that some of my numbers are off. Indeed, its active Fund IV portfolio includes 19 companies invested in since the early 2002 "line in the sand" (including Compellent Technologies, which first got Crescendo $$ in July 2002). Of these, six are being carried above-value (none of its pre-2002 ones are above-value), with two under-value and the rest at-value. For context, the post-2002 portfolio is being carried 18.8% higher than its initial value.

Also, it's worth noting that not all Crescendo IV companies are valued based on a financing round or exit. Credent and Tropic Networks -- the former is up, the latter is down -- are valued on "General Partners' assessment of fair market value."

I do take issue, however, with the suggestion that I'm implying anything negative about holding companies at cost. No such thing. All I'm saying is it is a meaningless number, and that the post-2002 portfolio is mostly comprised of such meaninglessness. Yup, some of the companies might be good. Some might not be. Either way, at-cost only represents what Crescendo was willing to pay, and its track record so far is no ringing endorsement of its valuation judgment. As I wrote, it's all about positive realizations. They will need a lot of those (more than just Pure Digital) before smart LPs will take a serious look at Fund V. As for the dumb ones, all bets are off.

Dan Primack on August 16, 2006 2:34 PM
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Please check the facts before you publish claims made by Spreng. David Spreng can not take credit for Indigo Systems, Ejasent or Callidus. Indigo Systems was never a Crescendo portfolio company. Spreng was no where near that company. He was on the Boards of Ejasent and Callidus when both companies experienced their liquidity event. However, only at the very end since both investments were made by other GPs who left Crescendo prior to those exits. Therefore, how can he claim those investments?


You should also check your facts. Spreng claims an upgrade of investment team by end of 2002, a team with stronger operational history. However, lets look at the facts. The team members that left Crescendo around 2002 and 2003 were:

1)Doug Robertson, founding exec at successful startup Entera and exec at Level 3 and Motorola.
2)Lorraine Fox, experienced exec at Oracle and Sun
3)Richard Grogan-Crane, exec at Oracle and founder of startups
4)Subra Narayan, exec at Nortel and startup Interwave
5)Chris Chu, engineer at VLSI, IBM, National Semi
6)Roeland Boonstoppel, mostly VC experience

Now lets look at the GPs that stayed on after 2002:

1)Tony Daffer, worked for NAI, Crescendo predecessor since college in 1993. Left firm in 2005
2)Jeff Hinck, prior to Crescendo was at McKinsey for couple of years. Left firm in 2004.
3)John Borchers, worked 3 years after college at a software company and joined Crescendo in 1997
4)David Spreng, only has banking and VC experience
5)Jeff Tollefson, only has banking and VC experience
6)Ian Jenks, exec at JDS

Lets tally the results. Of the 6 that left, 5 have deep operational background. Of the 6 that stayed, only 1 has credible operational background. Does this look like an upgrade towards a stronger operational team?

David Spreng is a prolific revisionist. He will twist history to fit his agenda. If Crescendo does experience the exits claimed by him, the LPs should look deeply into who sourced and are responsible for those investments. David has a tendency to take credit for the good ones and assign the bad apples to ex-GPs, chalk them up as done by individuals without strong operational background. Please, get real!

Fact-driven on August 16, 2006 6:28 PM
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Thanks for the feedback, factdriven.

Where would we be without readers. I mean that seriously. This blogging is kept to a higher standard, in my belief, because it is open for criticism from outsiders. Please keep it coming!

On to the substance: Check out my post again. It says "Indigo Medical," not Indigo Systems. The Forbes piece was wrong. I corrected this about an hour after I posted, and before you commented, so maybe you just missed it. You are right that Indigo *Systems* was not a Crescendo investment. Spreng invested Indigo *Medical* before the Crescendo days. The company was bought by J&J in 1996. In fact, I double checked this again when I saw your comment, and found a VC Journal mentioning this, back when Spreng was with IAI Ventures. (Article: "IAI Markets Fourth VC Partnership," June 1, 1996)

As for Ejasent and Callidus, your point is valid. I'm told Lorraine Fox brought those deals to the Crescendo, but that Spreng took the board seats and saw the companies through the exits. Partnerships are teams (at least they are supposed to be!), but you're right that Lorraine should get bulk of credit in actually sourcing the deal.

Matt Marshall on August 16, 2006 7:03 PM
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I can vouch that David Spreng was at Cosine in the early days, and he should get full credit for that investment. However, I wish he had not been there. His lack of operational experience drove us into the ground. He knew nothing about networking. He did not know when to pull out the founding CEO; and when he did, he had no idea how to equip the team to be successful. As a member of the Cosine management, I was very frustrated with his overall ignorance about our operational needs. He was clearly dumb money. Funny that his LPs are dumb money. Like LP, like GP.

Cosine on August 16, 2006 8:00 PM
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To be clear: We're told that Lorraine was on the board of Ejasent and Callidus during early days (1999-2002 and 1998-2002, respectively) before David took them over.

Matt Marshall on August 16, 2006 8:26 PM
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Since none of the deals attributed to Spreng are his deals, Forbes should eliminate him from the Midas List. Is his track record even in positive territory?

Take Spreng off Forbes' Midas List on August 16, 2006 10:12 PM
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Folks, I'm giving more thought to creating a login system for comments, so that I can help distinguish between people who are willing to stand by their identity and those who aren't. I haven't decided whether I want to require full disclose of true names on comments, or whether to require them to simply disclose their names to us so that at least *we* are assured. That latter might be difficult to execute though, because it would require us to do heavy verification.

We'll think about it more. Let us know if you have thoughts.

Matt Marshall on August 17, 2006 5:04 AM
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Matt: I can see why you might be considering a login process for posting comments in SiliconBeat.

It has its advantages, no doubt, and will weed out noise. The costs seem disproportionate to the benefits. Consider that speaking out about VC practices is unheard of in Silicon Valley and for a reason: the VCs wield a lot of influence and can, and have, put an end to the careers of many promising entrepreneurs and executives. What's worse, it is usually the poor quality and poor performing VCs that resort to such conduct.

SiliconBeat is the first and only forumfor public discourse on practices that affect the tech business in the Valley. The signal/noise ratio is very high (for both the articles and the comments) and barring the occasional slip in articles or comments, it is at no risk of being swamped with trash. Requiring identification before commenting will further inhibit those wanting to say something but already apprehensive for good reasons. Requiring ID without complete verification isn't worth the effect, and if you push for verification or full identify disclosures, the sources for articles and comments will wither away.

You are a professional journalist and know well how important confidentiality, anonymity, etc. are in the exchange of information. The Valley squares that because of the peculiar power VCs wield over entrepreneurs, employees and shareholders. If your concern is that some of the comments are unfounded or extreme, why the VCs or their PR agencies are always free to respond. SiliconBeat provides a forum for them too, as far as I can tell.

Pragma on August 17, 2006 8:06 AM
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That's why I'm weighing this carefully. Thanks for feedback.

Matt Marshall on August 17, 2006 8:28 AM
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SiliconBeat is a nice, welcome contrast to Forbes, as far as tech is concerned. A year from now comments here (and perhaps polls) will seem more grounded and valuable (to entrepreneurs and LPs) than PR stunts like the Forbes Midas List which is a joke.

The VCs pay their PR agencies to get on the list, and use that as PR to wow unsuspecting entrepreneurs and LPs. Consider that Forbes recently listed Crescendo/Spreng and Worldview/Wei, Orsak as having the Midas Touch. That PR stunt didn't wash over LPS as those firms/partners had their oxygen cut off by the LPS who saw IRRs in black and white and votede with their dollars.

I speak with intimate familiarity, having worked at a firm that paid through its nose to have two partners on the Midas List and is now closing down. And one of those partners was in constant screaming battles with everyone else, drove away other GPs, and legion are the startups suffering from his "Midas Touch."

Jeb on August 17, 2006 8:34 AM
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To see the performance of a number of venture funds, see the public Calpers disclosure on their VC investments at:

Of particular interest is how they list the current value of the fund as a percentage of the investment in column 9.

Some notable current fund values:

0.50x - BlueStream Ventures, L.P.
0.30x - Convergence Ventures II, L.P.
0.50x - New Enterprise Associates 9, LP
0.30x - Prism Venture Partners III, L.P.

With these funds, you put in $100 and 7-10 years later you get back $30 to $50.

It's a wonder that any of them can ever raise additional funds.

Concerned Observer on August 17, 2006 9:03 AM
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Thank you for the pointer to the Calpers table, Concerned Observer.

It is precisely this exchange of information, in a blog focused on Silicon Valley business and associated with the Valley's premier daily, that makes SiliconBeat so relevant to entrepreneurs, employees, VCs and LPs.

Imagine the value to an entrepreneur about to evaluate different VCs bidding to invest in his company. Some VCs may not like this kind of disclosure but the genie is of the bottle and I hope Matt keeps it that way in SiliconBeat.

Pragma on August 17, 2006 9:15 AM
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Spreng taking over Ejasent and Callidus from Fox and "saw the company through the exits" is wishful thinking on his part and his PR firm. A true measure of a VC's contribution to his portfolio companies is how many entrepreneurs re-up with the VC on his/her next startups. I can't think of any entrepreneurs who have resigned with Spreng. However, there is at least 1 startup, Palo Alto Networks, founded by an entrepreneur who was previously funded by Spreng at OneSecure but did not resign with Spreng second time around.

Fact-driven on August 17, 2006 9:52 AM
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Amazing that Spreng can blame other GP's for Crescendo's dismal record. Isn't he the sole keyman? Everyone knows that the buck stops at his desk. Any investment at Crescendo needs to clear through him, and he has the final veto to block deals. If the LPs need proof, they should ask for partnership agreements and carried interest docs.

CB on August 17, 2006 10:40 AM
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It'd be nice to hear Dave's side of the story.

Elan Nov on August 17, 2006 9:09 PM
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>be nice to hear Dave's side of the story.

As I said in an earlier post, SiliconBeat is and provides a forum for the VCs too. They are free to respond if they feel the comments are not factual, and extreme or critical in an unsupported manner.

Expecting them to engage in a dialog is an exercise in foolishness. If you've worked with them you'll know they consider themselves above questions even to LPs. Witness how LPs who questioned Mayfield or Sequoia or Accel, to name just three, were kicked out of the funds. If I remember right Matt attempted to dialog with Worldview/Crescendo/Bay and found them largely unresponsive.

SiliconBeat is playing a constructive role in leveling the field and exposing dictatorships, and that promises to usher in a better tomorrow for all: LPs, entrepreneurs, employees nad other shareholders/investors, and in turn the VCs.

Pragma on August 18, 2006 2:16 AM
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Yes, I'm ready to talk with Worldvew, Bay or Crescendo and to have a sensible conversation with them. It is difficult when you don't have their cooperation.

Side note: Regarding the latest peace on NEA, which I posted yesterday, that firm's Mark Perry got back to me, and talked on the record. I'm still in correspondence with him about a few things, but it really helped clear things up -- and I'd like to update the post as a result, to reflect his views on the matter. That it makes a huge difference.

Matt Marshall on August 18, 2006 4:55 AM
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Is it common for VCs to write-off bad investments in the portfolio and only count the good ones? Are there other VC firms aside from Crescendo doing this? This type of gerrymandering seems unfair.

Thomas on August 18, 2006 7:56 AM
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Yes, that's the way it works. And it is legitimate. By writing them off, it simply means the investment doesn't help their results any. It's like if you had three chickens hatch, out of six eggs. Be definition, those three bad eggs are thown out, and you've only produced three chickens ;)

But the analogy isn't perfect, because it still takes VCs money to produce those bad eggs, and so the money is lost. It counts toward their performance results. Now, by "drawing a line in the sand", and telling your investors that you'd like to treat the results of the first half of the fund differently because of exceptional post-bubble circumstances, why that's to the investors to decide whether they will go for or not.

That's why Spreng is having a little trouble, since he initially tried to raise another fund several years ago, and didn't have much luck. I think we'll be hearing more from Primack on Monday, and I'll post a link.

Matt Marshall on August 18, 2006 8:07 AM
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Matt, good to hear Mark Perry at NEA is in dialog with you. I'm sure it will help impove the signal/noise ratio, especially with comments from readers.

A couple data points:

1) Calpers, per the chart you refer to, committed a small and a large amount to two NEA funds. The small amount saw a negative return; what's more important is the larger commitment is seeing (so far) a neutral to positive return. Which is good for NEA and the LPs, and explains their success in raising the new mega fund (when Worldview or Crescendo failed at much smaller amounts.)

2) Crescendo, per your update, faced a lawsuit from an LP after accepting an investment from the LP sight unseen. This was arranged by an "investment manager helping Crescendo raise the cash." In the earlier discussion on Worldview Jane Morris from Veritage Group piped up to speak for Crescendo and Spreng. Funny, the Veritage Group's business is investment management in helping VCs raise cash. Won't anyone be surprised if Jane/Veritage was the "investment manager" in the above Crescendo saga? Talk of self-serving interests and integrity!
3) We also saw a few self-serving postings in the earlier discussion on Worldview/Orsak wherein some executives piped up to support him. They shut up when their hidden agenda--their independence is very questionable as they need more financing from Orsak--was exposed.

Can't wait to see Worldview, Crescendo, Bay and their likes engage in this forum. What a treat it'd be to check out their Midas Touch credentials, hear from their (ex)colleagues, LPs, entrepreneurs and employees of portfolio companies, and discuss publicly their predatory, rapacious acts of commission and omission that led to the death of many companies!

Pragma on August 18, 2006 8:41 AM
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I question the legitimacy and accountability of Crescendo's accounting practice. Changing rules mid-fund is absolutely irresponsible. If every firm is allowed to gerrymander its portfolio, all funds will be in the top decile. Every firm has the right to market themselves to potential LPs; however, going to this egregious extreme is only a disservice to the LP and GP community and only invites federal regulation involvement.

DSW on August 20, 2006 3:38 PM
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Would it be possible to solicit an explanation from Forbes on the inaccuracies of their "Midas List"? From the sounds of it, it's more inaccurate than not.

aVC on August 21, 2006 5:45 PM
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Have contacted Forbes for a response.

Matt Marshall on August 21, 2006 10:04 PM
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Matt: if Forbes gets back to you here are a couple queries that might be handy for you:
a) what explains their listing Crescendo/Spreng as one with a Midas Touch (to quote from Spreng's blurb in his bio) "since 2003 (8th among VCs in 2005)" when it is so transparently clear his record for that same period was just dismal, which his LPs can confirm if the public records aren't enough?
b) what explains their listing Worldview/Orsak as having the Midas Touch when he had one IPO that bombed (Cosine), numerous closures, a few sales (for less than money raised), and disaster wherever he glanced or whatever he touched (Cemaphore, Accelerant, Mirapoint)? Public shouting matches with fellow GPs (forcing them out of the firm) and fights with entrepreneurs, management and LPS. LPs voted against him, he has stepped down as a GP at Worldview and wasn't part of raising the new fund (which the firm couldn't, as we know now), and he has ZERO successes to show. Quite a Midas Touch there!

JB on August 22, 2006 8:40 AM
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Folks, here's Forbes' response (and I can confirm they have seen all of the comments that preceeded this one):

"Forbes' Midas List is purely based on statistics (the methodology is explained on our Web site), and we work very hard to make the list a trusted
indicator of the success of high tech dealmakers. PR firms have no influence over our reporters and no amount of PR will get a person on the list if he
or she does not have the exits to warrant inclusion.

Regarding David Spreng at Crescendo, thank you for pointing out the error regarding Indigo. We have made the correction to our database. We strive to
be as accurate as possible but occasionally errors occur."

Matt Marshall on August 23, 2006 7:16 PM
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