This post could be about 10 pages long… when thinking about how to build positive working relationships with partners of any sort (spouses, friends, children, co-workers), there are many “best practices” that apply. But I am going to focus on only one right now, and it is a high-level one:
With regards to a partner, don’t take any action that, when it comes to light, you aren’t prepared to fully defend to them with a straight face.
Jeff Horing and Jerry Murdock (image from the Wall Street Journal article)
To wit, see this article from yesterday’s Wall Street Journal (yesterday’s paper was chock-full of great articles!). In a nutshell, the general partners (GPs) of a venture capital firm made a HUGE personal profit on a smart investment that they made outside their fund, and some of their limited partners (LPs) were steamed that they didn’t get to participate in the success.
In an analysis of the situation, Daniel Primack, who writes the PE Week Wire, was surprised that most of his readers didn’t share his point of view that this situation wasn’t a big deal. From his original post:
Pete Lattman has a piece in today’s WSJ about how individuals at Insight Venture Partners made a fortune off last year’s $300 million sale of Photobucket to News Corp., while the firm’s limited partners made nothing. I love a good VC scandal, but there is much less here than meets the eye.
The facts are undisputed: Certain IVP employees and acquaintances invested $3 million for 20% of PhotoBucket in 2005, while partner Jeff Lieberman took a seat on the company’s board of directors. They did not include the deal as part of its $675 million fifth fund (it has since raised a $1.25b sixth fund), which means that IVP’s limited partners never paid in nor got paid out on what turned out to be a blockbuster investment.
Someone apparently believes this is a case of IVP partners cherry-picking a sweet deal for themselves, at least judging by the number of media outlets he/she tipped off before WSJ ran with it. Maybe a bitter LP, rival VC, passed-over entrepreneur or jilted girlfriend. I don’t know or care, because it’s a bogus accusation.
IVP says it didn’t put Photobucket into its fund because the company was far too small and early for an investment mandate that focuses on growth-stage, revenue-generating companies. This seems to square with a data search I ran on recent IVP deals, in that I couldn’t find an initial check written for single-millions of dollars. The “tipster” also accused IVP of not telling Photobucket executives that the deal was not being done via the fund – a charge that Jeff Lieberman denied during a phone conversation earlier this morning (that part isn’t in the WSJ story, but PaidContent had it).
Imagine if it had invested and Photobucket had cratered? Then LPs would have a legitimate gripe. As it stands, everyone seems to have acted appropriately. No harm, no foul. Guess we’ll have to wait ‘till next time…
My take: IVP should have seen this train wreck coming, and should have been open with LPs about how they were going to spend their time, or they should come up with an easy way to allow LPs to decide which of these “angel” investment they would like to participate in. IVP was OK according to the “letter of the law”, but they have been burned by not understanding the spirit of their relationship with their LPs. Now they have plenty of splainin’ to do.
When I was in high school, I had a part-time job playing in the orchestra pit of a local dinner theater that put on musicals; I asked a very good friend to substitute for me when I went on vacation, but I only paid him half of what I was making. When he found out what I was making, it almost wrecked our relationship. Although I was technically in the clear (he has agreed to play for what I offered him!), he was offended that I would establish that sort of relationship with him. I paid him in full for his time, and have been embarrassed ever since. That was a tough lesson, but one I was glad to learn when I was 17 years old.