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Pulling The Plug

As some of you already know, a couple of weeks ago my partners and I decided to pull the plug on our investment firm, Sempre Management.  This post will include the short version of the story, but over the next few posts I plan to tell the story from the beginning in more detail.  There are good lessons here for any sort of entrepreneur.

The bottom line for us is that this is a horrible environment for raising investment money, particulalry for "first-time" funds.  While we were raising money, we followed the standard advice of not publicizing what we were doing.  The SEC worries about raising money from the general public.  Since we aren't raising money any more, I can talk about what our strategy was.

We were raising money for a variant of a venture debt fund.  Venture Debt means loaning money to companies that would typically be backed by venture capitalists.  In practice, most venture debt loans are made to very early stage companies.  These companies often don't have revenues to pay back the loans.  Instead, the venture debt firms count on the investors to put additional capital into the company to pay back the loan.  The hope for the company is that the company will make more progress with the borrowed money and will therefore earn a higher valuation for that follow-on investment.  More on that when I get to the chapter on venture debt.

Sempre was targeting companies that had revenues and were near break-even.  We were not looking for investors to put in additional capital.  Instead, we were looking for good businesses that were trying to cross the threshhold from losing money to making money and needed some additional cash to do it.  Most would be worthy of an equity investment but, for a variety of reasons ranging from investors out of money to not wanting to suffer additional dilution, the company would prefer to borrow money rather than take on more equity capital.

To cut to the end, we found out a few weeks ago that our potential lead investor had to delay their commitment to us for another six months due to issues around the timing of liquidity in their own fund.  They decided that they needed to raise a new vehicle in order to invest in Sempre.  Our other potential investors couldn't step up in their place and were likely to wait for some other lead to emerge.  This additional time and risk on top of everything else we've been through in this crazy time was the last straw.  We decided that we would stop now rather than carry on for 6+ more months with an (always) uncertain ending. 

Although we had a great strategy, a solid and current track record in implementing that strategy, had worked together as a team for more than 2 1/2 years, and were willing to fund the start-up of the fund out of our pocket, we still couldn't get over the bar in this tough fund raising environment.  Being a first-time fund is very tough -- many investors refuse to consider you.  And, we believe that 2010 will be even worse for first-time funds as many big name VCs will be in the market and the availability of capital isn't likely to improve.  The first-time funds will continue to get squeezed out.

Each member of our team is now embarking on their own path.  For me, I plan to return to an operating role.  I'd like a senior management position in a young company, ranging from a company about to collect its first revenue to one that is looking to add to its management team in order to scale.  I'll stick to the information technology and clean tech sectors where I have the most experience.  Likely titles for me would be CEO, COO, or VP of Sales and Marketing.  If you know of something that looks like a fit, let me know.

We plan to keep our Sempre Management contact info alive, so no need to update your contact info on me.  I look forward to reconnecting with many of you soon.

Over the next week or so, I plan to tell the story of how our team came together, how we chose our strategy, how we dealt wtih the market meltdown in the midst of fundraising in 2008, and how we revised our strategy and continued fund raising in 2009.  This won't be any sort of 'tell all', but will focus on lessons that apply to any entrepreneur.  I look forward to your feedback.

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