Emergence Valhalla
9-804-056
REV: JANUARY 27, 2005
WILLIAM A. SAHLMAN
Emergence, Valhalla, and Orchid:
Divergent Models for Venture Capital Funds
As Ryan O’Mailey sat in his corner office at Dutton Capital in August 2003, he studied the three venture capital fund offering documents that he had just received. Dutton Capital, where O’Mailey had been a partner for the last year, was a successful fund of funds1 with $4 billion under management. The firm was seeking to add $10 million in venture capital investments to its portfolio.
O’Mailey had been asked by the investment committee to recommend in the next few days which venture capital fund, or combination of funds, would provide the most attractive investment. Each of the three funds O’Mailey was reviewing had a different investment focus and strategy—and very different general partners. After an initial review, O’Mailey thought all three had merit but was unsure how to proceed.
The returns in the venture capital business had been great in the 1990s and awful thereafter.
Established fund managers were being forced to support underperforming legacy portfolio companies, shut down failed ventures, and deal with disgruntled investors. This was consuming both the partners’ time and the funding that the venture funds had available for new deals.
Additionally, the economic downturn of the last few years and the poor performance of venture capital had created tensions among the partners in many funds. Many funds were struggling with these burdens, and it seemed likely that median returns in any fund started between the end of 1999 and 2002 would be negative. Yet, there were signs of improvement. The technology-laden NASDAQ
Index had risen 34% thus far in 2003, and major technology indicators were positive. For example,
U.S. broadband Internet subscribers had increased by 72% in 2002.2 Encouragingly, there were even signs of life in the initial public offering (IPO) market (see Exhibit 1).
O’Mailey was attracted to start-up funds like the
REV: JANUARY 27, 2005
WILLIAM A. SAHLMAN
Emergence, Valhalla, and Orchid:
Divergent Models for Venture Capital Funds
As Ryan O’Mailey sat in his corner office at Dutton Capital in August 2003, he studied the three venture capital fund offering documents that he had just received. Dutton Capital, where O’Mailey had been a partner for the last year, was a successful fund of funds1 with $4 billion under management. The firm was seeking to add $10 million in venture capital investments to its portfolio.
O’Mailey had been asked by the investment committee to recommend in the next few days which venture capital fund, or combination of funds, would provide the most attractive investment. Each of the three funds O’Mailey was reviewing had a different investment focus and strategy—and very different general partners. After an initial review, O’Mailey thought all three had merit but was unsure how to proceed.
The returns in the venture capital business had been great in the 1990s and awful thereafter.
Established fund managers were being forced to support underperforming legacy portfolio companies, shut down failed ventures, and deal with disgruntled investors. This was consuming both the partners’ time and the funding that the venture funds had available for new deals.
Additionally, the economic downturn of the last few years and the poor performance of venture capital had created tensions among the partners in many funds. Many funds were struggling with these burdens, and it seemed likely that median returns in any fund started between the end of 1999 and 2002 would be negative. Yet, there were signs of improvement. The technology-laden NASDAQ
Index had risen 34% thus far in 2003, and major technology indicators were positive. For example,
U.S. broadband Internet subscribers had increased by 72% in 2002.2 Encouragingly, there were even signs of life in the initial public offering (IPO) market (see Exhibit 1).
O’Mailey was attracted to start-up funds like the