Front page article in today's WSJ ($) on how a coalition of disgruntled pensioners, university students, and newspapers have used state FOIA requests to force the University of California to reveal financial performance data on the venture capital funds in which it invests. The VCs, of course, resent this - and rightfully so:
Venture capitalists argue that it's only fair to judge results after the full life of the fund, typically 10 years. Interim results are likely to look bad because they reflect the fund's fees, the quick failure of some start-ups and the immaturity of others. As those early numbers are made public, institutions like the University of California may feel pressure to nit-pick every decision. That would make it hard to invest for the long term, venture capitalists complain. Besides, they say, people might figure out how badly some of their start-up companies are doing, which would discourage potential business partners of those companies.We have done remarkably well here at the UC by investing in VC funds:
Data released by UC show just how lucrative venture-capital investments can be. For the 10 years ended June 2003, the university earned an average annualized return of 41% from venture-capital funds. That was largely thanks to windfalls from funds that started life in the mid-1990s, just before the Internet boom. In the case of one Kleiner Perkins fund, UC put in $15 million starting in 1994 and earned $483 million as of March 31, 2003. The fund's remaining investments had an estimated value of $4.7 million on the date, giving UC a total return of 32.5 times its original investment. The UC system has assets of $58 billion under management. UC's more recent funds mostly show negative returns so far, partly due to the collapse of the Internet bubble. But the university predicts that performance will turn upward in the next few years as some of the venture-capital-backed start-ups mature and either go public or are sold.Indeed, presumably due at least in part to these VC investments, the University's equity retirement fund has outperformed the S&P 500 over the last 5 years and did reasonably well relative to the index over the last 10.
As a result of a suit by Woodward & Bernstein wannabes in the press, wet-behind-the-ears students who probably can't even spell investment let alone read a financial statement, and grumpy old fart pensioners, however, the university has been required to disclose a host of financial data on its VC fund investments. The predictable result?
[Big VC] Sequoia sent [a] letter severing relations with UC. "It is not in the interests of Sequoia Capital's other clients that we be hounded, badgered, and stalked by entities wishing to either profit from or publicize our private and confidential information," wrote Mr. Moritz, the Sequoia partner. He called it "the saddest business letter ever dispatched on Sequoia Capital stationery."FYI: Sequoia put the UC into a fund that made a major early investment in Google that is about to pay off to the tune of zillions. And it's not just Sequoia or, for that matter, the UC:
Since [the adverse lawsuit, UC investment manager] Russ says, calls by his office to some of the leading firms go unreturned. As venture capitalists reduce the size of their funds, public institutions are often the first to be left out. Charles River Ventures, a leading venture-capital firm, has rejected new investments from public institutions, as reported by Private Equity Week. The University of Michigan and the state pension funds of Massachusetts, Pennsylvania and Virginia are among those who have gotten the snub from venture capitalists.These do gooders are messing with my retirement money. If I had my way, they'd all get a swift kick in the pants.
Update: Gordon Smith has more, concluding:
Given that most public institutions invest only a small portion of their funds in venture capital, the drive to disclose venture capital results seems motivated more by politics than principle. This seems like a pyrrhic victory for the public.Yep.
