By Rafat Ali
On July 31, an email landed in my inbox alleging that some venture capitalist insiders from Insight Venture Partners benefit disproportionately in last year's sale of online photo site Photobucket to Fox Interactive Media (NYSE: NWS), for about $300 million. Turns out WSJ also got a similar tip, dug into it and was able to verify the details, minus the hyperbole, in its story tonight.
The allegation was that IVP partners invested personally in the deal, instead of getting the venture firm to invest in it, and then pocketed the returns personally, with no returns to limited partners in Insight's technology fund. The email we got detailed that Insight partners and many other employees and friends invested about $3 million of personal funds into Photobucket in return for 20 percent of the then-nascent firm. Their $3 million turned into about $60 million when Fox acquired Photobucket, the email alleged, and funding documents show that none of Insight's pension investors were told about the deal and none got to invest in it.
The documents showed that the primary investors were IVP founders Jeff Horing and Jerry Murdock, who each invested $300,000 into the company and personally made 20 times their money - or $6 million each from the investment. Our informer had this to say: "As shown in the stock purchase agreement, the LLC was called IVP/PB LLC, had a similar name to Insight Venture Partners, and even had the same address as Insight Venture Partners - 680 Fifth Avenue in New York - giving the founders of Photobucket the impression that an actual Insight fund was investing in the company."I am pretty sure Photobucket founders knew IVP, as a fund, was not investing, but turns out most of the other details are true, as WSJ lays out. WSJ says that the return for IVP partners was more than $40 million (not $60 million as the tip we got) and that Horing and Murdock got above $5 million (and not $6 million as our tip said).
This cautionary tale shows the conflicts that venture partners have in investing directly into startups, instead of the venture funds they manage. Some VC funds allow this if the investment is outside the scope of its own investing philosophy...in this case IVP, which has about $3 billion under management, makes later-stage investments in tech companies, often taking a controlling interest. The firm's average investment size is about $35 million, Horing told WSJ. Photobucket didn't come close to meeting those criteria, and hence the personal investment in Photobucket was the only option for these individuals who wanted to invest in the fast-growing (in terms of users) service.
It may be a tempest in a teacup this far down the line, but the relevant chart from the stock purchase agreement in Photobucket's first round:
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