Bay Partners created an accelerated approval program for making small investments in new media companies trying to use Facebook to launch in a bid to reinvigorate the troubled firm.
The program, which Bay Partners calls AppFactory, aims to invest between $25,000 and $250,000 in “tens” of startups that take advantage of Facebook’s application programming interfaces (APIs).
Bay Partner Salil Deshpande called Facebook a Social Operating System in a prepared statement and hailed it as an entry point into a new economy.
The firm has been trying to re-invent itself since it closed Bay Partners XI in 2005 with $290 million in capital commitments.
Last fall, Bay Partners asked investors to amend the terms of its current fund, so that general partners Chris Noble and Bob Williams could transition into part-time roles. The two have subsequently been dropped from the firm’s website. The departure of Noble and Williams came after firm founder John Freidenrich retired during 2005 and General Partner Loring Knoblauch resigned.
A few months after Noble and Williams left, Dino Vendetti left to join startup firm Formative Ventures. Bay Partners responded by promoting Eric Chin and Neil Sadaranganey to partner. They each joined in 2005; Chin as venture partner and Sadaranganey as an entrepreneur-in-residence.
The firm’s previous fund, vintage-2000 Bay Partners X, has not posted stellar returns, according to data from the California Public Employees’ Retirement System through December 31, 2006. It had called down 82.5% of its capital with a -10.5% internal rate of return. CalPERs scaled back its participation in Bay Partners XI to $5 million, down from the $20 million it had committed to its last fund.
The move to establish an expedited funding mechanism for early stage opportunities mirrors the QuickStart program Charles River Ventures started last fall. In that program, CRV debt finances early stage startups with loans ranging between $100,000 and $500,000. The loan converts to equity financing at a discount to what the next round of investors are paying. The idea, spearheaded by Partners George Zachary and Bill Tai, is designed to get the firm’s fingers into as many possible early stage opportunities as possible.
Seed and early stage investing have returned more than 20% for the last 20 years, nearly 40 basis points higher than the venture industry average, according to data compiled by the National Venture Capital Association and Thomson Financial (Publisher of VCJ).
But VCs have increasingly focused on later stage startups as fund sizes have swollen.
VCs have left a vacuum in the early stage for a handful new fund structures to swoop in and innovate early stage finance.
Y Combinator, a firm founded by a group of MIT hackers, has been one of the more successful new entrants. The firm invites startups to apply for financing and then typically offers $5,000 per employee for a 6% ownership stake in the company. The firm has already had success. It sold Reddit to Conde Naste last year for an undisclosed amount.
Then there’s Ariva Partners, which is trying to raise $150 million for its first fund. The firm limits the number of portfolio company board seats per partner to a maximum of three, and shares half the carried interest with its venture partners.
But Bay Partners’ move is the first effort to focus specifically on the Facebook platform.