VC Firm Binary Imperiled After Co-Founder Admits Misconduct

  • Co-founder Caldbeck resigns, says used power for ‘sexual gain’
  • A second Binary partner, Mazzeo, also quits, leaving just one

The fate of venture capital firm Binary Capital LLC hung in the balance after co-founder Justin Caldbeck admitted misconduct toward female entrepreneurs.

Caldbeck, a Binary Capital co-founder, apologized on Friday and resigned late Sunday after a report by The Information detailing his sexual advances to women seeking funding.

Matt Mazzeo, a venture capitalist who joined San Francisco-based Binary as a partner in recent weeks, also resigned. The nature of the ongoing allegations surrounding Binary and the facts that have come to light made it clear that he could no longer be associated with the firm, a person close to Mazzeo said.

"While we are disappointed with this outcome, we are committed to handling this transition smoothly and properly," Binary’s remaining managing partner Jonathan Teo wrote in a statement to the firm’s investors. "We couldn’t have achieved our success without you and we are deeply grateful for your support."

Binary Capital fund investors, known as limited partners, are meeting Monday to discuss their options. They face few palatable choices, said lawyers who specialize in venture capital and the limited-partnership agreements that govern the relationship between investors and fund managers. Scenarios range from invoking clauses that halt new investments by Binary funds, to letting the vehicles continue with a dented reputation and potentially fewer opportunities to back entrepreneurs.

The challenge facing Binary was made clear late on Sunday when a startup backed by the firm asked to cut ties. Lee Mayer, chief executive officer of online interior-design firm Havenly Inc., told Binary and Caldbeck to step down as a board observer at the business.

"It’s horrifying," Mayer said. "Women, in my experience, don’t come forward on these things unless it’s pretty bad and it’s just a reminder that it happens way too often."

Venture capital is a relationship business in which investors cultivate long-term bonds with successful engineers and technology entrepreneurs and battle to be the earliest and biggest backers of their latest projects. Caldbeck’s actions may mean Binary is pushed further down this pecking order when startup founders are deciding whose money to take.

"Many of our most important investors and entrepreneurs are women. I helped found Binary Capital with the mission of creating a more authentic connection and access for all," Teo wrote on Sunday. "Moving forward, we will redouble our efforts to promote and ensure gender equality in all of our endeavors as we remain focused on our fund and investors."

Binary hired law firm Gibson Dunn to conduct an independent internal investigation and Teo said the venture firm looks forward to reviewing and implementing the appropriate recommendations based on their findings.

“The first question is, is the problem fixable?” said Jonathan Noble, a lawyer at Montgomery & Hansen LLP, whose clients include venture funds and is not involved in the Binary Capital situation. “If it’s not fixable, then you have to ask yourself, whether you want to ride it out or try to terminate the fund.”

The risk for investors in continuing to support the funds is that, even with Caldbeck gone, Binary may no longer be able to attract promising startups due to reputational damage. Sexual harassment and gender inequality has become a hot-button issue in Silicon Valley this year, so the name Binary risks becoming synonymous with these issues.

Most investors in Binary Capital contacted by Bloomberg did not respond to requests for comment. Those that did are weighing their options.

“LACERA strongly values workplace diversity, inclusiveness and respect,” said Jonathan Grabel, chief investment officer of the Los Angeles County Employees Retirement Association, when asked about the group’s investment in Binary. “We have been made aware of the allegations. LACERA will continue to monitor its investment.”

Venture fund agreements generally have provisions that allow the vehicle to be suspended in cases of breach of fiduciary duty or negligence, which is hard to prove, investors say. Suspension means a fund can no longer invest in new companies, usually temporarily. 

Most fund agreements also have "key man" provisions, which give investors the right to request measures such as suspension if an important partner leaves. The most serious penalty allows investors to vote for the termination of the fund, meaning the general partners simply manage the existing portfolio and never make new investments.

In recent years, increasing numbers of fund agreements have created a lower threshold, adding clauses that allow for the “no fault” suspension of a fund if a high percentage, typically three quarters, of investors vote for it, investors say. It is unclear if Binary has such a provision in its agreements.

While getting such a high percentage of investors to agree would prove a challenge, it is not impossible, especially given the current atmosphere around gender issues and harassment.

“Maybe these guys end up being made examples of,” said Chris Douvos, managing director of Venture Investment Associates, a fund that invests in other venture funds. It isn’t a Binary backer.

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