Did Photobucket's investors break the rules?

Executives at Insight Venture Partners, which typically focuses on later-stage investments, backed the photo-sharing site before its acquisition without their own investors on board.

There's something funny going on in the venture capital world: a tipster pitched multiple media outlets the story that some sketchy business had surrounded the early-stage investment in photo-sharing site Photobucket, a 20 percent stake in a company that eventually was acquired by News Corp.'s Fox Interactive Media for about $300 million.

The Wall Street Journal, coincidentally also owned by News Corp., ran with the tip. The publication explained that an early investment in Photobucket had been made on behalf of Insight Venture Partners' executives, excluding the investors in the firm--which include, among others, the endowment fund for Yale University.

The firm's investors weren't notified and didn't reap any of the benefits of Photobucket's acquisition, and it didn't help that Insight itself has been reported erroneously as one of Photobucket's investors on occasion.

We all like a juicy, Smartest Guys in the Room-ish scandal, but legal experts quoted in the Journal indicate that Insight's executives weren't technically bending any rules. The venture firm focuses on later-stage investments, and Photobucket at the time had three employees.

As one of the firm's investors told the Journal, "Perhaps they should have told us about this, but it was such a small deal. Would we have wanted a piece of it in hindsight? Sure. But for every one of these successes, there are a hundred failures."

This instance of VC deal making doesn't deserve much scandal mongering other than wondering what kind of beef the anonymous tipster has against Insight Venture Partners. But the broader issue deserves a look: to what extent should fund executives make their investors aware of personal investments? It's debatable.

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About the author

Caroline McCarthy, a CNET News staff writer, is a downtown Manhattanite happily addicted to social-media tools and restaurant blogs. Her pre-CNET resume includes interning at an IT security firm and brewing cappuccinos.

 

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