No Scandal To See Here

Pete Lattman has a piece in today’s WSJ about how individuals at Insight Venture Partners made a fortune off last year’s $300 million sale of Photobucket to News Corp., while the firm’s limited partners made nothing. I love a good VC scandal, but there is much less here than meets the eye.

The facts are undisputed: Certain IVP employees and acquaintances invested $3 million for 20% of PhotoBucket in 2005, while partner Jeff Lieberman took a seat on the company’s board of directors. They did not include the deal as part of its $675 million fifth fund (it has since raised a $1.25b sixth fund), which means that IVP’s limited partners never paid in nor got paid out on what turned out to be a blockbuster investment.

Someone apparently believes this is a case of IVP partners cherry-picking a sweet deal for themselves, at least judging by the number of media outlets he/she tipped off before WSJ ran with it. Maybe a bitter LP, rival VC, passed-over entrepreneur or jilted girlfriend. I don’t know or care, because it’s a bogus accusation.

IVP says it didn’t put Photobucket into its fund because the company was far too small and early for an investment mandate that focuses on growth-stage, revenue-generating companies. This seems to square with a data search I ran on recent IVP deals, in that I couldn’t find an initial check written for single-millions of dollars. The firm did once have an early-stage practice, but most of those folks left to form OpenView Venture Partners.
The “tipster” also accused IVP of not telling Photobucket executives that the deal was not being done via the fund – a charge that Jeff Lieberman denied during a phone conversation earlier this morning (that part isn’t in the WSJ story, but PaidContent had it).

Imagine if it had invested in Photobucket and the company had cratered? Then LPs would have a legitimate gripe. As it stands, everyone seems to have acted appropriately. No harm, no foul. Guess we’ll have to wait ‘till next time…


  • I don’t know if this should be a scandal or not, but I think there is an issue for LPs here. LPs normally (and always should) get priority on investments over the GP’s personal investing. If an investment is presented to the partnership, it is rejected, and a GP individually invests, then fine. But if multiple GPs are investing, it’s harder to argue that the partnership didn’t like the investment. Even if the investment is a bit different than their recent investments, you could argue that 1) it’s not that far afield; and 2) the investment may have come to them because of the franchise value (partially provided by LPs capital). Would it be right for one of their associates to intercept a business plan sent to Insight that is a bit off investment focus and invest on their own?

    I’m not trying to drudge up dirt here – I don’t know the facts of this situation – but I think you were a bit too dismissive of LP concerns. LPs should get the benefit of most of the GPs investment efforts – and Insight took an active board seat here.

  • I also wouldn’t be too dismissive here. On top of the issues highlighted above, one should also consider the time and attention issues that personal investing creates while also running a fund. GPs do not have infinite time; bandwidth is a critical factor when doing diligence on a fund. If a partner already sits on 5 – 15 portfolio company boards (typical for a VC of this size), what is the opportunity cost of sitting on a board and focusing on an opportuntity that lies outside of the fund?

  • [...] Wall Street Journal, CNET, Silicon Alley Insider, A VC, Valleywag, PE Hub Blog, Technology Live , Startup Chatter, [...]

  • IVP should have notified LPs about the investment at the time of the investment (from the WSJ piece it doesn’t sound like they they were)..That way, LPs could have then raised any concerns, or given their blessing…Regardless of whether IVP execs had a legal right to make a killing on the side, LPs have a right to feel miffed for a number of reasons…Time and again PE firms have stretched their investment strategies to take advantage of special opportunities or unusual market conditions; IVP could easily have done that here, given the size of the investment…

  • I wouldn’t be so quick to let IVP totally off the hook. On the surface, one can certainly make a strong case that LPs weren’t disadvantaged because the size and development stage of Photobucket made it an inappropriate deal for IVP’s fund given its mandate. However, there are at least two issues that LPs should have a problem with when GPs engage in this type of outside investment activity. The first is that by letting partners take on board seats involving their own personal investments, GPs dilute their board capacity and the amount of time and focus that should be devoted to managing capital for LPs (you know, the people that actually put them in business). Secondly, GPs instantly introduce potential conflicts in these cases becuase they most likely wouldn’t choose to invest, on the behalf of the fund, in a company that could come into direct competition with ! the&nbs p;business they’ve backed personally (thereby limiting the fund’s opportunity set). For sake of argument, just assume that in this specific case a company came along that had a similar business plan to Photobucket but whose size, stage and risk/return profile were consistent with IVP’s mandate. Would the GP have invested in such a company, even if it was a good deal for the fund LPs? I think not.

  • I’m not a VC guy so perspective may be off, but it seems to me that there is a difference between a single employee of a fund GP doing something off on the side (normal course) and a whole bunch of them (sure looks like a co-ordinated effort of people who are together only by virtue of being funded by the LP’s). To me, this group should have given the fund the typical 20% carry – i.e. reverse the normal situation. The fund carried their time costs so should get a cut.

  • [...] I thought most of you were going to agree with my take on the Insight Venture Partners/Photobucket situation. And perhaps the silent majority did, but the vocal minority did not. This even included my colleague David Toll, who wrote: [...]

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