Time was, when almost no venture capitalist worth an Hermès tie felt good about putting investors' money into an entrepreneur's pocket. That cash was for building businesses, not for buying houses in Aspen. But as venture capitalists become increasingly eager to buy into proven businesses they like, they are more willing to play by a looser set of rules -- and they're putting big checks directly into founders' bank accounts.
Dismayed by the average returns of early-stage investments (less than 5% annually, by some estimates), venture people are scouting for safer bets. Some of the companies they're targeting were not originally venture-financed and don't really need money, and so are not prepared to give venture capitalists the privileges they're used to -- preferred stock, voting control, and other special rights. But VCs are taking what they can get. "If we want to participate," says TA Associates partner Jeff Chambers, "we've got to be willing to buy secondary shares." During the summer of 1989, TA bought about $6 million worth of TSC, a three-year-old computer-systems-implementation company located in Chicago. Earlier that year TSC's president, Albert Beedie, had told other would-be investors that he wasn't seeking any more capital. So TA did its deal by purchasing stock directly from TSC shareholders. The venture people got 15% of the business and one board seat.
Such secondary stock deals are being designed to meet a range of founder needs. For example, a group of investors, led by Summit Partners, recently purchased a small block of the shares of Rosco Laboratories Inc., a supplier of light filters to entertainment industries. Stan Miller, the 58-year-old president and 100% owner, wanted to diversify his holdings for estate purposes. "I still wanted to grow the company," he says. "But I hesitated to put my name on more bank loans."
Some hard-liners continue to believe that giving founders a pile of money while they are still active in the business weakens their commitment. But the folks who invest in secondary deals don't see it as a major problem so long as founders still have the lion's share of their net worth tied up in the company's future. L. John Doerr, general partner of Kleiner Perkins Caufield & Byers, which participated in a $10-million deal with the founders of Intuit Inc., a software maker, says: "We're helping the company. The idea is to make it easier for these guys, not harder." -- Bruce G. Posner* * *