Spinning by the Bay

Bay Partners appears to be trying to rewrite its history, judging by Matt Marshall’s post over at VentureBeat. The very strong implication is that MP Neal Dempsey pushed out the firm’s non-performers. We’ve been covering the troubles over at Bay for a while. This is less a case of Dempsey proactively “transforming” the firm than it is Dempsey making the best of the hand he was dealt. When it comes to spin, D.C. has nothing on Silicon Valley.

Check out our past coverage from Private Equity Week and Venture Capital Journal and tell me what you think.

PE Week, Oct. 9, 2006

Bay Partners looks to amend fund XI

Bay Partners is asking investors to amend the terms of its current fund, so that general partners Chris Noble and Bob Williams can transition into part-time roles. It may be just the out that certain LPs were looking for.

The Cupertino, Calif.-based firm closed Bay Partners XI nearly a year ago with $290 million in capital commitments. It was not, however, an easy process. The firm had not yet made a single distribution from its $365 million predecessor fund, and also had seen firm founder John Freidenrich retire during fund-raising and General Partner Loring Knoblauch resign.

Partner Neal Dempsey told PE Week at the time that Bay Partners was in “advanced negotiations” with “a couple of senior general partners,” but no such senior hires were made. Nonetheless, limited partners, such as Horsley Bridge and Paul Capital, signed on to fund XI, and Bay kept chugging along with five general partners: Noble, Williams, Dempsey, Atul Kapadia and Dino Vendetti.

A few months later, 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. Rumors continued to swirl that Noble and Williams were looking to scale back.

The limited partner agreements for fund XI, however, include keyman provisions that would be triggered if two more general partners were to step down. To pre-empt such a scenario, Bay Partners is presenting LPs with an LPA amendment.

Dempsey declined to confirm or deny that such an amendment exists, but he did acknowledge that the firm was “planning for the future,” and that any possible changes are “not new items.”

Neither Noble nor Williams returned requests for comment. Bay Partners X still had not made a distribution, according to data from the California Public Employees’ Retirement System through Q1 2006. It had called down 75% of its capital with a -16.5% internal rate of return.—Dan Primack

VCJ, September 2006

Bay Partners loses 2 of 6 GPs from fund XI

Two of the six general partners who helped to raise Bay Partners’ 11th fund have left the firm in the past year, and the status of a third partner has been called into question by two sources close to the firm.

The two GPs who have departed are Loring Knoblauch, who had been with Bay since 1999, and Dino Vendetti, who had been with the firm since 2001. Two sources say a third GP, Chris Noble, plans to leave Bay, but Noble told VCJ via email: “I am an active GP at Bay. That is the end of the story.” Asked if he would lead any new investments for Bay going forward and continue to work full time at the firm, Noble declined to comment. [Update on 3/2/07: Noble is now listed as a Venture Partner on Bay’s website.]

Neal Dempsey, Bay’s managing partner, also says that Noble is still on board. “Chris is very much a part of this firm and a full-time employee,” he said via email. “As for why people are talking about his departure, I can only say that they are [doing] just that, talking.”

Bay Partners XI closed last year with $290 million in commitments. Its 10th fund, which closed with about $365 million in 2001, returned a negative IRR of 18.3%, as of Dec. 31, according to investment data from the California Public Employees’ Retirement System, an LP in the fund. But fund performance may not have been the issue with the departing GPs from fund XI. One source close to the firm says that the two GPs have left in part because of an issue that plagues many Silicon Valley firms: succession. The source says that Vendetti and Knoblauch were unhappy with the “vastly different managing style” of Dempsey, who took the helm of Bay two years ago as firm founder John Freidenrich segued into retirement.

“Neal isn’t quite as egalitarian [as Freidenrich],” says the source. “I don’t think that sat well with some of the people who’d come to the firm on John’s watch.”

Dempsey did not respond when he was asked in an email if he attributed the exodus to his management style.

How LPs will react to the partnership changes remains to be seen. It’s not clear whether the GP departures will trigger a contract clause that would allow LPs to pull their money out, which happened at San Francisco venture firm VSP Capital last year. LPs ultimately pulled the plug on VSP’s third fund, which totaled $185 million (see VCJ, July 2005). One of the sources says that LPs of Bay, while not happy about the departure of its GPs, appear to be taking a wait-and-see stance. Another says that LPs have expressed concern, but are unlikely to reduce the size of their commitments for now.

Investors in fund XI, according to a release issued by Bay last year, include Paul Capital Partners, Horsley BridgePartners, AlpInvest Partners, CS First Boston, BP Pension Fund, Portfolio Advisors and GIC Investments, along with several other new and returning limited partners. Several LPs were contacted for this story and some declined to discuss while others did not return requests for comment.

Dempsey insists that Noble is “actively engaged” with his portfolio companies. Noble, who has been with the Cupertino, Calif.-based firm for six years, has been focusing on wireless equipment and Internet infrastructure companies and is listed as a board member for seven companies for Bay, including M-factor and PicksPal.

Vendetti, who joined Bay Partners from Paul Allen’s investment firm Vulcan Ventures, left Bay earlier this year to become the third investing partner at Formative Ventures in Palo Alto, Calif. Vendetti continues to sit on the boards of two Bay portfolio companies: Ultra-Wideband components company Staccato Communications and Pulsewave RF, which develops power amplifier semiconductors. Vendetti did not respond to email requests for comment.

VCJ was unable to determine the wereabouts of Knoblauch. Of the last two boards that Knoblauch served on for Bay, one company, ElectriPhy, which developed semiconductor chips for high bit-rate DSL, went under last year. Meanwhile, Dempsey took over Knoblauch’s other board seat at Silverstorm, formerly known as Infinicon, a startup focused on the high-performance computing market.

Besides Dempsey and Noble, Bay has four other partners: Bob Williams, a longtime general partner who Dempsey has said is being groomed to succeed him; Atul Kapadia, who joined Bay from his post as CEO of Maple Networks in late 2003 and was promoted to GP in 2004; Erin Chin, who joined Bay as a venture partner last year and was promoted to GP this year; and Neil Sadaranganey, who joined in 2005 as an EIR and was also promoted to GP this year.

According to his bio, Chin co-founded Internet software company WebSpective, which was acquired by Inktomi for $106 million in 1999 (it raised $13 million from VCs). He also co-founded semiconductor developer TelASIC Communications, which has so far raised about $83 million from ComVentures and RedPoint Ventures, among other investors.

Sadaranganey ran product management at Good Technology before joining Bay. Before that, he helped start the IP traffic management company Afara WebSystems, acquired by Sun Microsystems in 2002 for $28 million after raising $5 million from Sequoia Capital.

This summer, Bay added Richard Gorman as a venture partner. He most recently was a senior vice president of products at Siebel Systems. —Constance Loizos