On December 17, the partners of ComVentures gathered in Palo Alto for their regularly-scheduled Monday morning meeting. Within hours, the firm had new partners, a new name, a new investment strategy and a new website. It also had two fired partners and stunned investors. Velocity Interactive Group was born.
The story of Velocity, and the corresponding demise of ComVentures, is one of resurrection, desperation and back-stabbing. It’s about two investment groups that simultaneously arrived at dead ends, and took a bold shot at survival by teaming up. The question now, however, is whether the gambit will pay off, of if Velocity’s history will prove an insurmountable impediment. There is no smart bet.
“I wouldn’t invest in them, but that doesn’t mean that others won’t,” says a fund-of-funds manager familiar with Velocity. “Some might do it because they don’t really know what’s led up to this point, or because they feel the potential outweighs the risks… Win or lose, it’s going to be one of the year’s most interesting fundraising drives.”
Velocity Gears Up
Velocity’s initial incarnation began in early 2007, as a partnership between Ross Levinsohn and Jonathan Miller. Levinsohn was the former head of Fox Interactive, who had put together News Corp.’s seminal acquisition of MySpace. Miller had recently been ousted as CEO of AOL, despite having been credited with converting the Time Warner unit from a subscription-based ISP to a free Internet portal.
Both men had plenty of job offers – including CEO gigs – but became convinced that the next great opportunity was around “monetization of the blogosphere.” Not just a single piece of infrastructure, but a comprehensive platform that could make blogs both more popular and more prosperous.
The idea was a rollup of existing digital media companies, so Levinsohn and Miller began approaching venture capitalists about some sort of funding arrangement. They met with around 15 shops altogether, including ComVentures, Canaan Partners, General Catalyst Partners, Polaris Venture Partners and RRE Ventures. It soon became apparent that the capital costs were too high for VC firms, which led Levinsohn and Miller to the private equity community.
“Private equity understands the idea of platform investing, but what we really had to sell them on was the idea of buying young companies without much current revenue,” Levinsohn explains.
For a while, it looked like Levinsohn and Miller would end up partnering with Warburg Pincus. A source within the private equity firm says that the two sides had reached a tacit agreement, but that it fell apart once rival General Atlantic stepped in with more attractive terms. “I wouldn’t say there are necessarily hard feelings,” says the source. “But we certainly felt spurned.”
The Velocity-General Atlantic deal remained under-the-radar for several weeks, until it was leaked to The Wall Street Journal and PaidContent. General Atlantic put out a rushed statement on the Friday before Labor Day, saying that Levinsohn and Miller had been hired as advisors to the firm’s Media & Consumer practice. The statement did not address reports that General Atlantic also planned to bankroll Velocity’s acquisitions, but a firm spokeswoman denied them in later conversations. It is unclear why such denials were ever issued, but they were patently false (and have been since reversed).
peHUB has learned that Velocity and General Atlantic attempted to make four acquisitions, and in each case sent out term sheets. The targets were: Auttomatic, creator of open-source blogging tool WordPress; Broadband Enterprises, an online video network; Federated Media Publishing, an advertising sales network for blogs; and Sphere, an online search engine for blog and news content.
The rollup made a lot of sense on paper, but never materialized. Part of the problem was that some of the companies had dynamic leaders – like John Battelle of FM Publishing – who didn’t necessarily want to cede management control to Levinsohn and Miller (or to anyone, for that matter). There also was resistance from certain VC backers of Auttomatic, who would later organize a $29.5 million Series B round that included The New York Times Co.
Levinsohn acknowledges both issues, but adds that biggest bullet came when Microsoft valued Facebook at $15 billion. The move doubled or tripled asking prices overnight – putting them far beyond the realm of what General Atlantic was willing to pay.
This marked the beginning of a quick end for Velocity and General Atlantic. Levinsohn and Miller retained their advisory roles, but back out in search of a new financial sponsor. They wouldn’t need to look for long.
Palo Alto-based ComVentures was founded in 1987 by Roland Van der Meer (formerly of Partech International) and Cliff Higgerson (formerly of Vanguard Ventures). The strategy was to invest in early-stage communications companies, and the results for its first three funds were strong. For example, ComVentures was an early backer of optical networking company Chromatis, which Lucent acquired in 1999 from $4.7 billion in cash and stock.
By 2002, however, things had begun to sour. ComVentures hadn’t backed too many dotcoms, but the communications equipment and infrastructure market wasn’t faring much better. By February of that year, ComVentures cut the management fees on its $550 million fifth fund (raised in 2000) from 2.5% to 2 percent. Soon after, it would fire partner David Helfrich, who had been with the firm for six years.
Partner ousters became a signature trend at ComVentures. In all, there were five between 2002 and 2006. Most of the moves were orchestrated by Van der Meer, who admits that “no partners have ever left ComVentures voluntarily.” This included a power-play that pitted Van der Meer and partner Jim McLean against Cliff Higgerson, with Higgerson ending up on the short end of the stick. Just two years later, McLean was the one with the pink slip. That move proved slightly trickier, because it could have triggered a keyman provision for Fund VI, which had closed in 2003 but didn’t begin drawing down capital until 2005. The solution was to “promote” partner Michael Rolnick to keyman, which essentially made him and Van der Meer equals.
All of this personnel upheaval did not play well with ComVentures investors, who were already upset about the disastrous performance of Funds IV and V (Fund VI is said to look better). There also had been a lawsuit filed against the firm by one of its entrepreneurs, and accusations of self-dealing in a portfolio company firesale. As Higgerson would at one point tell Van der Meer, ComVentures was on a straight path to mediocrity.
He was being generous.
Dead End Junction
Not all of the partner traffic at ComVentures was outbound. In late 2006, the firm hired Keyur Patel, a serial entrepreneur who had helped turn around Inktomi Corp. He had also co-founded Fabrik, a ComVentures portfolio company that Ross Levinson had considered trying to buy while at News Corp. That relationship was one reason why Velocity met with ComVentures during its first incarnation, and the two had remained in close contact. In fact, Levinsohn had helped make Hollywood introductions for several ComVentures portfolio companies, including a music-focused virtual world operator called Doppelganger.
Reports began circulating by early last October that Velocity was planning to use ComVentures as an early-stage financial sponsor, just as it was using General Atlantic as a late-stage sponsor. Levinsohn and Miller denied that any formal arrangement was in the offing, but everything changed once the General Atlantic deal basically fell apart by early December.
What happened next has become a point of controversy, and may well find its way into a legal complaint. Van der Meer went to Levinsohn and Miller with a novel concept: Let’s form a brand new venture capital firm focused on digital media. It would continue to manage the legacy ComVentures funds, and will begin raising a new fund within six months. Miller and Levinsohn would be part of a five-man management group, that would also include Van der Meer, Patel and existing ComVentures partner David Britts. Michael Rolnick and fellow ComVentures partner Jeb Miller would be kicked out. Neither Rolnick nor Miller was aware that these discussions were taking place.
For Van der Meer, the plan was a last-ditch effort to save at least some vestige of ComVentures. He felt that the reconstituted firm would give him a puncher’s chance at raising a new fund in 2008. As for what he was about to do to his partners Rolnick and Miller, Van der Meer said: “It wasn’t a pleasant thing to consider, but sometimes you just have to rip the bandage off and make the change. This was about whether or not there would still be a firm left to turn around.”
For Levinsohn and Miller, the attraction remains murkier. Friends remain bewildered as to why the two would choose to partner up with a firm whose closet is full of so many skeletons. “I think the world of Ross and Jonathan, but I’m still scratching my head over this one,” says one technology entrepreneur. “It’s almost like they just wanted to get something going, or maybe didn’t realize the depth of the problems over there.”
Levinsohn brushes off such criticism, saying he and Miller did their due diligence. He adds that the reasons to partner were twofold. First, it was a small partnership, where they would have a large influence. Second, they already had developed a level of comfort with the existing ComVentures team… Well, at least the part that wasn’t about to be fired.
All of this culminated on the morning of December 17, when the existing ComVentures team convened for its regular partnership meeting. As they sat down with coffees in hand, neither Rolnick nor Jeb Miller had any clue as to the actual agenda.
As promised, the cut was swift. Van der Meer informed both men of the move, and basically told them to clean out their desks. What followed has been described as surreal, including a conversation in which Van der Meer asked Jeb Miller questions about an upcoming portfolio company board meeting. Three hours later, a press release had been sent out and a new Velocity website was hosted on the old ComVentures.com page.
“They were blindsided,” says a venture capitalist familiar with the situation. “There was no reason to treat people that way… Rolnick had been there nine years. This isn’t a giant company doing layoffs, it’s a small partnership. It was simply wrong.”
Well, there may have been at least one reason for Van der Meer to do it the way he did. The existing ComVentures partnership agreement had an odd clause that allowed either of the two managing partners – Van der Meer and Rolnick – to fire the other. The only caveat was that you had to do it first. Van der Meer claims he was unaware of the clause, and simply relied on a 3/5 majority vote of the partners. It’s a tough statement to believe, particularly given how carefully most other parts of the process were conceived and executed.
It’s also worth noting that most ComVentures limited partners were not told of the moves until after they had been made. Some who spoke with VCJ expressed exasperation with being kept out of the loop, but also suggested their hands were tied. Yes, they could now exercise the keyman provision, but to what end? The current fund is mostly committed, so who would the LPs use to manage it? One suggestion has been that Rolnick and Miller could be handed the general partner keys, but no such discussions have actually taken place.
“Roland is the king of making partnership terms irrelevant,” said one ComVentures limited partners. “And we’re all going to bend over and take it, just like we have before.”
The challenge now for Velocity is proving that it can escape its historical demons. The firm has already made a few deals, including a minority investment in Broadband Enterprises (one of the original Velocity roll-up targets). It also has begun meeting with limited partners, in pre-marketing for a new fundraising drive that will target between $400 million and $500 million.
Van der Meer is confident that Velocity will be able to raise its fund, saying that most ComVentures limited partners will return. He may be right, but VCJ wasn’t able to find any who would make that commitment. Instead, we heard comments like this:
“Levinsohn and Miller are impressive guys, but it’s tough for me even if I want to invest with them. To do so, I have to believe that this entire team is going to still be together in five years, and I just can’t trust that. Either Levinsohn and Miller will decide to leave because they aren’t VCs at heart, or Roland will fire them for some reason or another. Either way, it’s too risky.”
Another: “ComVentures VI is turning out OK, particularly because of the Indian deals that Patel has been doing. But how do you raise money on that track record, after blowing up the overall team that created it. It’s like Hillary Clinton being her own woman when it comes to something bad Bill did, and being the first Lady when it comes to something good he did. You can’t have it both ways.”
Van der Meer and Levinsohn grimaced when apprised of these comments, but continued to exude optimism. It’s a case of reintroducing themselves to certain investors, they say, and making good deals in the interim. They also may look to solicit funds from big media and entertainment companies, where Levinsohn and Miller have an extensive network of well-positioned contacts.
Van der Meer adds that even Cliff Higgerson has applauded the move as a necessary Hail Mary, through what had to be gritted teeth.
Taken in its entirety, Velocity is a long-shot. On the other hand, so was Levinsohn and Miller teaming up with ComVentures in the first place. Again, there is no smart bet.