Constellation Once More a Star

Constellation Ventures is back in market with a third fund, and already has scored at least $90 million in commitments from LPs like GKM, New York Common Retirement Fund and longtime backer Bear Stearns ($50m cornerstone nut). Its ultimate target is between $200 million and $250 million.

So why does it merit its own post? Well, first because it’s a scoop. More important, however, is the utter improbability of Constellation not only raising a third fund, but actually getting LP traction. Less than a year ago, the firm seemed to be on the ropes due to the departures of managing directors like Dennis Miller (to Spark Capital) and Virginia Turezyn (to American Capital Strategies) – which left Cliff Friedman as the only senior investor on staff. Yes Cliff was Bear Stearns’ designated king of the Constellation hill — don’t think that didn’t play into some of the personnel issues – but LPs were openly skeptical about salvaging the 2000-vintage portfolio with just a couple of junior folks to help him. And that’s saying a lot, because Constellation did not have too many sophisticated LPs.

But such skepticism has since been put aside, as Constellation has indeed turned its fund around. Sources say that recent liquidity events like a huge sale of Savvis Inc. shares likely will help the firm return between 1.5x and 2x its capital to LPs, which is outstanding performance for a 2000-vintage fund…

A Bear Stearns spokesman declined to comment, including to a question about whether or not it will continue its past practice of taking eight of Constellation’s twenty carry points

For context, what follows is a PE Week print article from March 2006:
Stars Begin to Fade for Constellation Ventures
Constellation Ventures, a venture affiliate of Bear Stearns & Co., has seen its staff dwindle to just a single managing director, raising doubts about the New York-based firm’s future.

Bear Stearns was Constellation’s sole LP when it raised its first fund of $101 million in 1998. The investment bank put up another $85 million when the firm raised a second fund of $350 million in 2000.

At that time, Constellation added several other LPs, including Sony Corp. of America and the commercial and consumer finance company CIT Group.

In the past year-and-a-half, Constellation has lost seven team members, including two managing directors, two general partners, a vice president, an associate director and an associate.

The latest investor to leave is Managing Director Virginia M. Turezyn, who is in the process of resigning from her Constellation board seats. She joined the firm in 2003 after a stint at Infinity Capital in Palo Alto, Calif.

Turezyn confirmed that she is leaving Constellation, but declined to comment on her departure, noting: “It’s against Bear Stearns’ policy to speak to the press.”

Turezyn’s investments for Constellation include business process management software startups Agentis and Webify Solutions, as well as customer data integration software developer Siperian, regulatory compliance software developer Orchestria, educational software developer K12, and Internet marketing company Fathom Online. All are still private.

Turezyn’s departure comes on the heels of a string of departures. Last month, Constellation’s only partner abroad, Tokyo-based Associate Director Ross Miyamoto, left to join SAVVIS Communications Corp., a publicly traded IT utility services provider based in St. Louis. SAVVIS has received financing from Constellation.

In October, former Constellation Associate Joe Medved left to join Softbank Capital as an associate in its Boston office.

Others who have left Constellation over the last one-and-a-half years include former General Partner Melissa Blau, who is now a managing director at St. Minver, a U.K.-based gaming company; former Vice President Angie O’Keefe, now an account executive at TV One, a Constellation-backed, New York-based cable television network; former Managing Director Dennis Miller, who joined Boston-based Spark Capital last year as a managing director; and former General Partner Ronald Celmer, who left to be CEO of MediaBay, a publicly traded digital media and publishing startup. (Celmer has since been replaced as CEO of MediaBay by Jeffrey Dittus.)

Constellation’s former employees either declined to comment or could not be reached before PE Week’s press time. However, two sources close to the firm attribute the revolving door to internal strife. Says one: “I don’t know what Bear Stearns or Constellation is saying publicly, but LPs know about this and they aren’t very happy about it. You start to question why you would [back a fund whose managers have left]. You invest in people, and those people are gone.”

Almost. At least one investoer reamins: Senior Managing Director Clifford Friedman, formerly a senior managing director in Bear Stearn’s Media and Technology Group. Friedman did not return several messages left at Constellation’s office seeking comment.

Associate Directors Liza Boyd and Tom Wasserman also remain with the firm, but it’s not clear if they can invest.

What the future holds for Constellation is unclear. Its portfolio has 17 active companies. One LP who asked to remain anonymous says that his firm would not re-invest in Constellation if given the opportunity.

But he added: “It’s nothing to do with poor performance. We’ve received dividends. I think the fund is at worst mediocre. It’s not a disaster. It’s just not top-of-mind for us.”

Constellation has had its share of ups and downs. In the spring of 2001, it made the serious misstep of announcing plans to invest $100 million – or roughly one third of its second fund – in companies developing applications for telecommunications company Global Crossing.

At that time, Global Crossing had introduced a new media and entertainment platform that it planned to run on its fiber-optic network.

Six months later, Global Crossing filed for bankruptcy protection. (Some of Constellation’s LPs were individual investors with connections to Global Crossing, according to published reports at the time.)

More recently, Constellation’s fortunes have been turning. In November, for example, CBS said that it would buy Constellation portfolio company CollegeSports for $325 million, a deal expected to close this quarter. CollegeSports, a 24-hour, all-college sports television programming company, had raised $97 million from 10 investors over four rounds. Two of those rounds were led by Managing Director Dennis Miller, who left Constellation for Spark.

Constellation also enjoyed a hit in May 2005, when Aetna paid $400 million in cash for portfolio company ActiveHealth Management, a health care technology concern. ActiveHealth had previously raised about $48 million from about a dozen investors, including Constellation. GP Ronald Celman, who left Constellation in 2003, led the deal for the firm.

Constellation’s biggest hit to date is believed to be Network 24 Communications, which was acquired by Akamai Technologies in January 2000 for about $185 million in cash and stock. It had raised a $6 million Series A from Constellation and Prism Venture Partners, with current Senior Managing Director Cliff Friedman leading the deal for Constellation. — Constance Loizos