Stephen’s Posterous

In his weekly commentary in the Wall Street Journal, Karl Rove, former Senior Advisor to President George W. Bush, wrote that Speaker of the House Nancy Pelosi appears not be truthful about her knowledge of the CIA's use of enhanced interrogation techniques (EITs).

Mr. Rove writes:

Here's what we know. On Sept. 4, 2002, less than a year after 9/11, the CIA briefed Rep. Porter Goss, then House Intelligence Committee chairman, and Mrs. Pelosi, then the committee's ranking Democrat, on EITs including waterboarding. They were the first members of Congress to be informed.

In December 2007, Mrs. Pelosi admitted that she attended the briefing, but she wouldn't comment for the record about precisely what she was told. At the time the Washington Post spoke with a "congressional source familiar with Pelosi's position on the matter" and summarized that person's comments this way: "The source said Pelosi recalls that techniques described by the CIA were still in the planning stage -- they had been designed and cleared with agency lawyers but not yet put in practice -- and acknowledged that Pelosi did not raise objections at the time."

When questions were raised last month about these statements, Mrs. Pelosi insisted at a news conference that "We were not -- I repeat -- were not told that waterboarding or any of these other enhanced interrogation methods were used." Mrs. Pelosi also claimed that the CIA "did not tell us they were using that, flat out. And any, any contention to the contrary is simply not true." She had earlier said on TV, "I can say flat-out, they never told us that these enhanced interrogations were being used."

Mr. Rove writes that CIA director Leon Panett and Rep. Porter Goss have both disputed Mrs. Pelosi's account. He also states that Michael Sheehy, Mrs. Pelosi's top aide on the Intelligence Committee at the time and later her national security adviser, not only attended the September 2002 meeting but was also briefed by the CIA on EITs on Feb. 5, 2003, and told about a videotape of Zubaydah being waterboarded.

The question Mr. Rove asks is whether the Speaker of the House is lying about what she knows and when she knew it, and and whether the Democrats will do anything about it.

Mr. Rove continues:

If Mrs. Pelosi considers the enhanced interrogation techniques to be torture, didn't she have a responsibility to complain at the time, introduce legislation to end the practices, or attempt to deny funding for the CIA's use of them? If she knew what was going on and did nothing, does that make her an accessory to a crime of torture, as many Democrats are calling enhanced interrogation?

Senate Judiciary Chairman Pat Leahy wants an independent investigation of Bush administration officials. House Judiciary Chairman John Conyers feels the Justice Department should investigate and prosecute anyone who violated laws against committing torture. Are these and other similarly minded Democrats willing to have Mrs. Pelosi thrown into their stew of torture conspirators as an accomplice?

Mr. Rove thinks it's clear that after the 9/11 attacks, Mrs. Pelosi was briefed on enhanced interrogation techniques, agreed with what was being done, and even pressed the CIA to do more. He believes that Mrs. Pelosi decided to use enhanced interrogation as an issue to attack Republicans when the political winds shifted.

On another note, the Wall Street Journal wrote in their editorial about President's Obama reversal of now seeking to block the release of photographs collected as part of military accusations of prisoner abuse in Afghanistan and Iraq.

The editorial states that President Obama took the advice of Defense Secretary Robert Gates and his leading generals that the photos would complicate their efforts to win over Muslim allies for America's antiterror mission.

The Wall Street Journal writes:

Mr. Obama's change of heart was quickly denounced as akin to the "stonewalling tactics and opaque policies of the Bush administration" (the ACLU) and for "reneging on its legal obligation to release the torture photos" (Amnesty International). The President is learning, albeit slowly, that secrecy has its uses in wartime, and that the real goal of his allies on the left is to make it harder for the U.S. to defend itself.

Want To Position Your Start-Up To Be Acquired? Follow These Tips
By Scott Austin, WSJ.com

Last August 2008, Hewlett-Packard Co. signed a letter of intent to pay $360 million cash for LeftHand Networks Inc., a venture-backed provider of storage systems. A few weeks later, Wall Street’s collapse sent the economy in a tailspin and threatened to knock the screws out of the deal.

But after a two-week pause the two sides got back together and in November 2008 closed the acquisition on the same terms. LeftHand was able to hold its ground because it had proven itself valuable well before Hewlett-Packard offered to buy it. H-P had been reselling LeftHand’s software on some of its servers for nearly three years, and realized it couldn’t do without it.

The deal signifies the importance of setting up strategic relationships with possible acquirers, especially in this environment, said the aforementioned investor, Matthew McCall, a managing director with Draper Fisher Jurvetson Portage Venture Partners.

“When your hair’s on fire as a corporation, you’ll try anything to make the pain go away,” he said. “Now’s a great opportunity [for start-ups] to enter partnerships, distribution agreements, and dialogues with larger corporations.”

McCall was on hand at the National Venture Capital Association’s annual meeting in Boston last week to provide some pointers on how start-ups can position themselves effectively for a possible exit. McCall, who says his firm has scored 10 exits in the past 18 months, offered a few “key elements” that have helped his portfolio companies exit the past couple of years:

Form a strategic relationship with a potential buyer.

“Companies that have been successful in this enviroment are great at identifying who the strategic players are out there that would rather see you alive versus dead. Some of our portfolio companies are aggressively approaching them as a sugar daddy, as a protector in the market place.

They’re going to them and saying, ‘We’re going to get a production line out for you, but getting lease financing is very difficult, would you do that for us?’ And we’re seeing some of these guys come up with corporate lease lines for them or helping guaranteeing those lease lines.”

Look at it from the acquirer’s perspective. “Too many people try and sell from the position of fear. Especially in this marketplace, instead of saying, ‘How can we sell this?’ you need to get into their shoes and say, ‘Why do they need to buy it?’

One of our most successful sales in the last year happened because this was a critical piece of the buyer’s portfolio. You could see this was a hot part of the market, that they didn’t have a strong position in it and there are two or three competitors. If you can identify that and position it accordingly, you’re in a great position.”

Identify the alternatives. “If you’re the clear superior company in the market and there are no alternatives, you’ve got leverage. If you’re the No. 2 or 3 technology out there, you can push as hard as you want, but they’re going to push back on you. And then at the end of the day they could buy one of your competitors and could really put you in a bind.”

Make sure at least two mortal enemies are bidding on your start-up. “We had a company that was looking to sell, and went to a potential acquirer and said, ‘If you don’t move now, so and so will.’

They said, ‘Go ahead sell to them, we’d love to kick their ass in the market.’ About three weeks later we engaged their mortal enemy - the two had a Coke/Pepsi type of relationship. Two weeks later, we signed a letter of intent and closed it in six [weeks], at twice the original bid.”

Source.

Tech start-ups find funding by Joseph Menn, FT.com

With Wall Street all but closed to market listings, investors in Silicon Valley's technology start-ups are turning to informal methods to sell some of their holdings.

The rise of this secondary market has opened a back-door way to invest in private companies at knock-down prices, according to backers, because the sellers are often forced by their need for immediate liquidity to cut their holdings, even in the middle of the downturn.

The informal secondary trading has emerged as an important outlet at a time when frozen public markets might otherwise have damaged the start-up financing system, said veteran venture capitalist Tim Draper, whose firm has backed one of the new intermediaries in the field.

"Without liquidity, venture capital investors will stop investing in VC funds, who will no longer be able to support entrepreneurs," he said. "The American Dream is at risk."

The dearth of capital for flotations has fuelled the rise of the new class of investment funds, which specialise in snapping up stakes in venture capital funds, direct holdings in venture-backed companies, or both.

Investment vehicles created to invest in this booming area, such as San Francisco-based Industry Ventures and Saints Capital, report rapid inflows of funds. At the same time, specialist dealers and brokers have emerged to bring together buyers and sellers of stakes in individual start-ups, or even of entire portfolios of venture investments.

Traditionally, venture capital funds would take small companies through three or four rounds of financing and then reap the rewards with a market listing.

"There now exists an epic void in the ability of capital markets to bridge to an [initial public offering]," said David Weild, a former vice-chairman of Nasdaq. Mr Weild last month joined the board of Inside Venture, a match-maker for institutions and the late-stage venture-backed companies that in ordinary times would be going public. He said one such candidate was earning $80m on annual revenue of $1bn and still could not get out of the gate.

Industry Ventures' investment pool has more than tripled in three years to $500m. Saints Capital said it had invested $360m since last May, compared with just $20m over the previous 18 months. The National Venture Capital Association yesterday launched a campaign aimed at easing the costs and regulations associated with a Wall Street listing.

Source.

Venture Industry Presses Congress to Reauthorize SBIT Program byTomio Geron, WSJ.com

With a deadline fast approaching, the venture capital industry continues to push for a change in the way the Small Business Innovation Research program is administered to allow the participation of venture-backed companies.

Josh Green, a general partner at MDV-Mohr Davidow Ventures, and three entrepreneurs were in Washington on Aparil 22, 2009, to testify in front of the House Committee on Small Business about the need to reauthorize the SBIR the program, which is set to expire at the end of July 2009.

A 2001 administrative law judge ruling, and subsequent rulings by the U.S. Small Business Administration, closed the program to many venture-backed companies.

The principal reason: SBA has interpreted the law to mean that start-ups majority-owned by venture firms must count the employees of the firms’ other companies. As a result, venture-funded companies petitioning federal agencies that issue SBIR grants, such as the U.S. Department of Defense and the National Institutes of Health, have in many cases been judged to have more than 500 employees.

The National Venture Capital Association has opposed this interpretation, arguing that venture firms aren’t involved in the day-to-day operations of portfolio companies, and that most venture-backed businesses are small, typically employing fewer than 25 people.

“Companies receiving venture funding may have other innovation in the pipeline worth pursuing,” Green told the committee on Aparil 23. ”It’s for these projects that companies would apply for SBIR grants. Businesses must continue to innovate and the current SBA interpretation forces companies into an uncomfortable dilemma for worthy new projects. This scenario results in small businesses at best delaying important discovery projects and at worst abandoning this important work altogether.”

Rep. Nydia Velazquez, chair of the committee, asked Rachel King, chief executive of venture-backed GlycoMimetics Inc. whether her company would be able to develop new research through SBIR grants that it could not otherwise.

“Absolutely. We have a family of compounds that could be useful in a number of infectious diseases, such as HIV and tuberculosis,” King said. “We can’t focus on that program because we have to focus on our lead program. If we were able to access that funding source then we and other companies would be able to invest in more early stage, very promising research than we can now.”

Will Rosellini, chief executive of medical-device company MicroTransponder Inc., said venture capitalists are only interested in having his company focus on one indication, chronic pain. But he believes that by tapping SBIR funds the company could help develop the device for four other indications.

“We’ve mobilized other neuroscientists to use our device in different ways, and the way that we’ve motivated them is by saying, ‘Hey, go after these SBIR funds,’ so we can come up with further innovation in a non-dilutive way for other disease indications….If we didn’t have that opportunity, all of these innovations would have stopped.”

Those testifying also drove home the point that many venture-backed companies employ only a few people, yet the program in its current form hands out grants to larger corporations with hundreds of employees and tens of millions of dollars in revenue.

In his testimony, Green attempted to debunk an argument by some critics who say that venture-backed companies would crowd out other small businesses with SBIR funding. Green cited a recent National Academy of Sciences study that found that no other small businesses have been significantly affected by venture-backed businesses due to SBIR funding.

Green, in a telephone interview after the hearing on April 22, said he received a relatively positive reaction to his testimony.

“I was surprised there was absolutely not a single dissenting voice among members or staffs in terms of expanding the program to venture-backed entities.” Green said. “My understanding is there is some opposition out there but it was completely not visible to me today.”

The testimony from April 22, 2009, is viewable on YouTube, broken up into 25 videos.

Source.

Just when venture capitalists think they’ve safely avoided the crosshairs of regulators, they find themselves lumped together again with hedge funds and the scrutiny that comes with it.

In his testimony today about regulating risk (read the transcript here), U.S. Treasury Secretary Timothy Geithner proposed that hedge funds, private equity firms and venture capital firms should be required to register with the Securities and Exchange Commission.

No further details were provided, but it’s implied that Geithner is aiming to follow the proposals outlined in a recent bill titled, The Hedge Fund Transparency Act, which calls for these investment firms to file with the SEC and publicly divulge the value of their funds and the names of their investors.

This blanket-like proposal infuriates the venture industry, which has largely escaped the regulatory clutches of the SEC and Treasury Department. The National Venture Capital Association, which represents the venture capital industry, has lobbied hard to drive a wedge between it and hedge funds, characterizing venture firms as job generators and innovators, not wealth creators. Venture capital is a long-term business and an engine of the nation’s economy, it argues.

But with legislators pressured to heal a sickly economy and prevent another financial catastrophe, nearly every private pool of capital faces regulatory oversight. It’s why the Obama administration, which has generally befriended the venture capital industry, didn’t exclude VC firms from its plan to tax carried interest at the higher ordinary income rate.

We chatted today with Mark Heesen, the president of the NVCA, to talk about Geithner’s latest proposal. Here’s an edited excerpt of the Q&A:

Q. What is your reaction to Geithner’s testimony?

There are a couple of things that jump out to me in his discussion about “hedge funds and other private pools of capital.” No. 1, he says they’re looking at those types of funds that “individually or collectively pose a threat to financial stability.” As much as we want to talk about how the world revolves around venture capital, the fact is that it’s a very small asset class, relatively speaking.

We’re talking about $30 billion being invested per year. If suddenly you were to lose it all, would that pose a threat to financial stability? No. When you’re seeing buyout funds or hedge funds that raise one fund that is almost the entire amount raised by the entire venture industry, you have to realize these are very different asset classes.

The other thing that jumped out, he says, “…in the wake of the Madoff episode it is clear that, in order to protect investors, we must close gaps and weaknesses in regulation of investment advisors and the funds they manage.”

Well, our investors, those that invest on behalf of college endowments and pension funds, are not only highly sophisticated within the bounds of law, there even more sophisticated than the law requires them to be. They aren’t your individual, everyday investors in venture capital. These people aren’t going to get ripped like Madoff’s investors did.

Q. Is this your worst nightmare as the head of a venture capital trade group that venture firms are being wrapped in with hedge funds with regards to regulation?

Absolutely. This is déjà vu. After 9/11, when the Patriot Act came out, the Treasury was going to register a lot of different financial institutions because of the threat that they might be used by foreign entities for illicit purposes, like laundering money.

We were swept into that. So we sat down with the Treasury and Department of Homeland Security, and asked them, “Do you really think a terrorist group would put $5 million into a venture capital fund and sit there for 10 years until they got a return?” They of course said, “That’s not going to happen.” This is kind of the same idea.

Q. Do you think that Congress has enough of an understanding about venture capital to exclude these firms from regulation?

We’re at a point where policy makers have too much on their plate. They are not by and large educated in distinguishing between hedge fund and buyouts and venture. They’re expected to know everything, but they can’t know everything. So a simple solution is to use a broad brush. We have to be there to continue to educate.

History repeats itself, it’s kind of like Sarbanes-Oxley. There was a rush to regulate and then take care of problems that arise from it afterward. You’re seeing that now with a group of policy makers that “want to get something done.”

They have real pressure from their constituents who have lost their jobs or their mortgages. So they’re trying to get something done quickly. This is very much a Washington issue: We’ll deal with it now and clean it up later.

Q. Do you think it’s practical for the SEC to suddenly oversee hundreds of more firms?

I think you need to balance oversight and regulation with the practicality of government bureaucracy. The government can only do so much with the amount of people and money they have. They need to pinpoint the major concerns and work on those as opposed to trying to cover the ocean and do every job simultaneously.

The SEC goes to the hill every year and requests more people and more money. I don’t begrudge them for that. But should they spend time reviewing hundreds of venture capital registrations each year, or more financially questionable issues from other entities out there?

Q: So what happens from here for the NVCA?

We’ll talk to the treasury folks, but Obama has appointed very few people to key positions. You have your career bureaucrats, but they don’t make these policy decisions.

So getting into the Treasury to talk to those who make policy decisions as opposed to technical ones is hard. It’s only going to get more problematic going forward, Geithner can’t keep working for 23 hours a day. He needs help.

Source.

The slow pace of initial public offerings has forced venture capitalists to find a solution to their late-stage liquidity woes, funding private exchanges such as InsideVenture Inc. and Web portals that let wealthy individuals in on the action.

The drought, which started in early 2008, even spurred the National Venture Capital Association to launch a committee to investigate the issue, with the group’s chairman, Dixon Doll, urging the committee to move beyond clichés, such as Sarbanes-Oxley bashing.

Moving beyond clichés is one thing, says Paul Deninger, a vice chairman of middle-market investment bank Jefferies & Co. But, he asks, will venture capitalists own up to the part they have played in the withering of IPOs? As investment banking has become more consolidated over the last decade, Deninger said venture firms have largely stopped listening to the advice from smaller banks like his and tied their interests to those of the brand-name investment banks to their own detriment.

“Venture capital needs to take stock of itself and realize the error of its ways,” Deninger said. “The strategy of a Goldman Sachs is to serve [large companies like International Business Machines], not the VC ecosystem. When things were great, who was leading the charge?”

In the 1990s, four smaller investment banks, dubbed “the four horsemen”-- Alex.Brown Inc., Hambrecht & Quist Group, Robertson Stephens & Co., and Montgomery Securities -- underwrote a large number of the venture-backed IPOs, which averaged about 130 a year before the dot-com bubble, compared with about 40 a year since, he said. 

Those full-service boutiques employed a large group of research analysts that offered potential investors insight into the latest technologies being developed, and held conferences where technology companies could present to these investors.

The problem with the large banks, he believes, is they tend to serve only the largest institutions, which must put a more substantial portion of money into an IPO offering to make it worth their while.

Smaller banks, meanwhile, cater to the next tier of institutional investors for whom $1 million is a meaningful position. By catering to smaller investors, but more of them, banks like Jefferies can get smaller offerings out the door and create demand for the stock after the initial offering, Deninger said.

The silver lining to the current economic climate, Deninger said, is that smaller banks are getting more attention from venture capitalists and institutional investors. “The firms that have gotten in the way of [the IPO] market are the firms that have gotten us into this mess.”

Source.

Claremont Creek Ventures recently had to decide which of its young to forsake. The venture-capital firm had invested in such companies as online travel site cFares Inc. and genetic-technology start-up Gene Security Network Inc., with cash from a $130 million venture fund it launched in 2005.

Amid the financial crisis and the plunging stock market, Claremont Creek decided to focus on the fund's best investments and stop backing the less-promising start-ups. It wanted to be sure it had enough cash for the next few years for the winners. The venture firm ranked the start-ups in the fund's 16-company portfolio with an A, B or C grade.

"We're doubling down on the As and likely won't invest any more capital in the C companies," says John Steuart, a Claremont Creek managing director. "The portfolio is competing against itself and it's survival of the fittest. It's brutal."

Employees work at Gene Security, a maker of genetic tests to identify potential embryo abnormalities. The company got high marks from backers and will continue to receive funding. Other start-ups aren't so lucky. Gene Security, a fast-growing maker of genetic tests to identify potential abnormalities in embryos, got an A. Last month, Claremont Creek poured $3 million into the company on top of $2.7 million it has already invested.

CFares, which Claremont Creek says hasn't performed as strongly, got a C. The venture firm says it will give the Web site the $3.2 million it has already committed, but won't fund the start-up further unless it hits aggressive milestones. CFares Chief Executive Tom Kalinske says his company likely will be profitable by year end, based on the funding that already has been committed. Gene Security CEO Matthew Rabinowitz says his venture capitalists "are bringing out the best in us."

Many venture-capital firms, which put money into start-ups with the aim of profiting when those firms go public or are sold, are going through a similar Darwinian exercise of sorting through their potential winners and losers. While the venture business enjoyed something of a revival in the past few years, the financial crisis has slowed the spigots of cash going into the sector. It also has crimped returns by damping the market for initial public offerings of stock and for mergers. Meanwhile, many venture-backed start-ups are getting hurt as demand for their products shrinks.

As venture firms save their cash for their most promising start-ups, it often means pulling the plug on weaker companies. "Ultimately, there's some fallout," says Theresia Gouw Ranzetta, a venture capitalist at Accel Partners. "For companies that can't weather this storm, [there] may be a smaller asset combination to achieve scale and last longer."

Claremont Creek passed on putting more money into two start-ups in addition to cFares. Meanwhile, it lined up bridge financings for three others to get them through most of 2009. Since October, the firm raised new money for two of its start-ups at a higher valuation than in the past, though it accepted a lower valuation for a financing round for a third start-up.

Pressure is on young venture-capital firms like Claremont Creek, which have a shorter track record than older, better-known firms such as Sequoia Capital and Kleiner Perkins Caufield & Byers. There were 741 venture-capital firms in the U.S. as of 2007, the most recent data available, according to the National Venture Capital Association. Many expect that number to drop as the financial crisis plays out.

Claremont Creek finished raising a new $175 million fund in September and then laid off two members of its 10-person team in December. The stress sometimes led to arguments between Mr. Steuart and his two main partners, Randy Hawks and Nat Goldhaber. Last month, they brought in someone Mr. Steuart calls "a corporate shrink" to facilitate internal communication.

"We're burning the candle on both ends," says Mr. Hawks, who co-founded Claremont Creek in 2005. "Partnerships have to work hard to keep it on a calm and smooth trajectory."

As of last October, Claremont Creek had deployed $44.3 million of the $130 million fund it launched in 2005. After an analysis showed its 16 portfolio companies were burning through more than $30 million a year, it quickly pushed some start-ups to cut costs.

CFares laid off four employees, reducing its work force to 18 people. Mr. Kalinske, the CEO, says he wasn't surprised when Claremont Creek said it didn't plan to give cFares more new money. Given the tough economy and the relatively small size of Claremont Creek's fund, "that's business."

At the same time, Claremont Creek persuaded some of its A-graded companies to raise more funds to survive the downturn. Gene Security CEO Mr. Rabinowitz wasn't planning to look for new money last year. In October, Mr. Steuart, who is on the start-up's board, helped convince him to speed up fund raising and raise more than enough cash for the company to beef up product development and weather the recession.

Mr. Rabinowitz worked with Mr. Steuart to find new investors. Venture-capital firm Alafi Capital last month participated in a new $6 million funding round for Gene Security at more than twice the valuation of the startup's previous financing.

Overall, Claremont Creek has trimmed $10 million a year in expenses from its start-ups since October. While the firm once planned to invest in 20 companies with its 2005 fund, it now plans no new investments so it has more cash for existing start-ups. It has set aside $40 million for companies it will keep funding, up from less than $30 million previously. Mr. Steuart says Claremont Creek has now made enough changes for many of its start-ups to live to see 2011. Source.