Valley Scribe

I got some not-so-surprising news in my email inbox this morning: Levensohn Venture Partners, a boutique firm based in San Francisco, has decided not to raise another fund “for the forseeable future,” according to firm founder Pascal Levensohn.

Levensohn’s firm is pretty tiny, to be sure. Its last fund, raised in 2004, was only $70 million. Pascal and his partners also have had some incredibly bad luck in the personnel department lately: Partner Keith Benjamin, a wonderful guy I’d known since my days as a finance reporter in the late 1990s, died after a sports accident in 2008. More recently another Levensohn partner has been battling unrelated, serious health problems. I’m sure those tough staffing issues contributed to the firm’s woes.

But it’s also true that Levensohn is stuck in a larger, very tough business predicament—and one that may torpedo the fortunes of many other VC outfits unless they take action to differentiate themselves in this rough climate.

The IPO market is still tepid, making it hard for VCs to take their portfolio companies public and realize big returns. That’s put a damper on M&A, since acquirers can offer less money for startups, knowing those companies don’t have an IPO option. The financial crisis was the final straw: Some big institutional investors flipped out as the value of their liquid investments shrank, leaving them over-allocated to risky alternatives like buyouts and venture capital. Now, many of those big institutions are looking for less risk. And that means less money being funneled to venture.

Smaller firms without decades-long track records and large scale—or a successful, laser-like focus on one investment area, a la First Round Capital and Web 2.0–may be the first ones to take the hit.

Institutions “are not really interested in hearing how great your portfolio is, and how much money you’re going to make with it” in the future, Pascal told me by phone this morning. “They want to see it done.” What’s more, he says, “they’re looking back at their 10-year (venture) returns, and they’re not so good.” Pascal stressed to me that he and the firm’s three other partners would continue managing their current investments and serving on those companies’ boards. He says the portfolio still has the potential to achieve “significant results.”

Pascal, currently a board member of the National Venture Capital Association and a prolific blogger on corporate-governance and other issues, will now keep busy expanding his existing institutional and family-office advisory business, Levensohn Capital Advisors. He is merging it into Presidio Financial Partners, a wealth-advisory firm.

He also gets kudos for actually writing a thoughtful letter about his firm’s situation, and its reasons for stepping back from new, early-stage investing, and sharing those thoughts with a few journalists. Normally VC firms on the bubble deny they’re bowing out of the business even when it’s pretty clear to everyone else they won’t be able to raise another fund. (See this Wall Street Journal story from 2006, which noticeably lacks much comment from most of the firms mentioned. It followed a related story I wrote a month earlier, containing one of the best quotes a VC has ever given me: “I know what we have distributed to our investors over the last six years, and it’s damn little.”—Paul Ferri, founder of Matrix Partners.)

I think the VC industry is becoming increasingly bifurcated between the haves and the have-nots. The gap between firms that can raise more money and those who can’t will only widen in the next few years, absent a big change in the capital markets. Firms will have to work hard to stand out and prove to LPs that they deserve the right to manage their cash.