Reversal of Fortunes

Sarah Lacy

Dan Primack has good posting today that compares the fortunes of two small venture funds trying to take advantage of the hot and heavy fundraising market to up the caliber of their limited partners and their street cred. Apparently, the Boston firm is looking better than the valley one.

According to Primack, San Francisco-based VSP Capital, which raised a $185 million fund two months ago, has now lost two of its five general partners and one limited partners is already mulling selling his stake in the secondary market. Meanwhile IDG Ventures Boston, who took longer to close its own $180 million fund, is looking like the fabled tortoise.

The bigger issue is whether VSP represents a slip in limited partner due diligence—something that has been a big worry to the old school venture firms since this particular fundraising cycle began early last year. A few years ago they were confident upstart firms wouldn’t be able to raise another fund due to a oft-talked about “flight to quality” that never seemed to happen. Troubled by all the money chasing a finite number of good companies, many are looking like the equivalent of the cranky old man yelling “Get off my lawn!” to no avail.

Last week, DealFlow blogged that more scrutiny was happening than was meeting the eye, even when successful firms with several funds under their belts have been out raising money. I still think that’s happening. But the VSP story shows that there are also LPs who may not be dotting all their I’s and crossing all their T’s when it comes to evaluating partner compatibility-- which any LP will tell you is crucial to a fund's success. If that turns out to be more widespread, expect the gap between the top tier venture firms and all the rest to get even wider this time around.

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