Making The Venture Capitalists Play By The Parents' Rules

The New York Times

April 21, 2006

VC Nation

By MATT RICHTEL

IN February, Forbes magazine listed Parag Saxena as one of the nation's top 25 deal makers. But at the end of this month, Mr. Saxena will step down as managing partner of Invesco Private Capital, punctuating a major management shake-up.

His departure highlights what can happen when members of two exclusive clubs with different rules are forced to share the same dinner table. Crabcakes and dinner rolls fly.

Soon, Invesco Private Capital will have lost, in three months, four of the six senior partners who have invested hundreds of millions of dollars in start-ups.

The resignations have essentially paralyzed the firm's future direct venture business. The company — a subsidiary of Invesco, the American fund company owned by Amvescap of Britain — has put off raising or investing the $400 million it originally planned for its latest fund, Chancellor VI.

The departures stem from a conflict between the subsidiary, Invesco Private Capital, and Invesco. The subsidiary is run by venture capitalists, the parent by corporate executives and their lawyers and accountants.

Venture capitalists see themselves as maverick, fast-moving entrepreneurs with a need for relatively loose hiring rules and marketing needs. The big public company has rigid standards, compliance issues and little patience for making exceptions for a relatively small subsidiary.

But as more attention and success is splashed on the venture capital industry, the more big corporations from financial institutions to technology companies like Intel and Qualcomm have developed their own venture capital arms.

The troubles at Invesco, then, present lessons for other companies.

The upheaval at Invesco "is a very timely issue," said Paul Kedrosky, the executive director of the William J. von Liebig Center at the University of California, San Diego, which is devoted to the study of the venture capital sector. "Every single corporate venture group has this tension."

The sources of tension are generally ones of culture and law. Culturally, big corporations sometimes do not make room for the often looser habits of venture firms like flexible work hours and employment contracts (with part-time consultants). Indeed, a rigid hiring structure was among the issues at Invesco, Mr. Saxena said.

"I was losing the ability to attract really good people," he said.

Mr. Saxena, 50, spent 20 years at Invesco Private Capital and Chancellor Capital Management, which Invesco acquired in 1998. "It was impossible to do what I wanted to get done," he said. "They felt they wanted to exercise control over everything."

In response to questions about the departure of the fund managers, Invesco said in a statement: "We have always supported investment autonomy within our product centers and believe that this autonomy is a critical component of the success of our business. Invesco is fortunate to have a strong, talented and seasoned team of investment professionals at I.P.C. with that investment autonomy, as well as the resources, commitment and drive to continue to succeed in the private equity fund marketplace."

Alessandro Piol, 49, who resigned as general partner at Invesco last week, said the parent company did not interfere with investments. Rather, he said, it imposed a rigid corporate culture, for instance, making fund partners attend corporate meetings that were unrelated to investing in start-ups.

And this year, he said, Invesco, fearful of running afoul of regulators, made its venture subsidiary remove from its Web sites the companies it had invested in, making it tough for entrepreneurs and investors to grasp the company's business easily.

At times, Invesco's compliance concerns seemed rather small.

Mr. Saxena said that after Forbes named him one of the top venture capitalists, he was told by the parent company that his marketing department could not circulate the article to clients or entrepreneurs until its compliance group had checked the facts about others included on the list.

"When I first heard that, I thought it was a joke," Mr. Saxena said.

Mr. Piol said Invesco's sensitivity was heightened by the fact that it had been sued by the New York attorney general and other regulators, accusing it of improper mutual fund trading. The lawsuits, and the subsequent $450 million settlement in 2004, made it harder for the venture capitalists to raise money from pension funds and others afraid of any association with Invesco.

"When the whole thing happened with the mutual funds, people stopped talking to us," Mr. Piol said. "We were put in the black box, too."

Other companies, however, have taken steps to create a legal and operational distance between them and their venture divisions. J. P. Morgan Chase is spinning off its private equity group, J. P. Morgan Partners, and Morgan Stanley has done the same with its own group, Metalmark Capital.

A split nearly happened at Invesco, according to Mr. Piol and Mr. Saxena. Both said they had felt they were close to reaching a deal that would have put their division at arm's length. At one point, Mr. Saxena said, he thought he had reached a deal to buy out the fund from Invesco.

But as it became clear there would be no deal, the bleeding began. In February, Howard Goldstein, a general partner on the fund since 1982, resigned. Mr. Piol said that in addition to the loss of its four partners, the fund had recently lost a principal and a financial manager.

Both Mr. Saxena and Mr. Piol said they planned to become involved in raising new venture capital funds. But not without some regret.

"I devoted a quarter-century of my life to this, to see it implode now is a sad thing," said Mr. Saxena, but he added that the conflict with Invesco did not feel personal. "Corporations think in different ways than a small group. It's a structural issue."