For Paul Allen, tech investment isn't easy

When Charter Communications announced plans to file for Chapter 11, it was just the latest in a series of blows to the Microsoft co-founder's plan to sink money into a wired world.

This story was update at 1:59 p.m. PST, with information about a potential tax break for Allen regarding the Charter bankruptcy.

For Microsoft co-founder Paul Allen, 2009 is not starting well.

Paul Allen, who owns the Portland Trail Blazers, among many other assets. NBA

His largest investment, Charter Communications, announced last week it would file for Chapter 11 bankruptcy , pushing the value of his multibillion dollar investment down to a little more than $11.5 million, based on Wednesday's closing stock price of a little less than 3 cents per share.

Last month, Allen cut the workforce at his private investment and philanthropic company Vulcan by 7.6 percent, or 50 positions, according to a report on the Puget Sound Business Journal's TechFlash.

Meanwhile, Allen has seen his 2008 ranking on Forbes' list of global billionaires, fall to No. 41, as his estimated net worth dropped to $16 billion. In 2007, he was No. 19, with an estimated worth of $18 billion.

Allen's investment portfolio is a surprising mix of tech industry disappointments and successes in other areas, such as media and even oil. Since 2004, when Allen hired Lance Conn to oversee Vulcan's investment arm Vulcan Capital, Conn has pushed Allen's investments beyond its core theme of creating a wired world, which was based on creating a global broadband connection to link computers, televisions, and other devices together. Allen's investments now include companies ranging from the crude oil business to education and finance.

That's a good thing for Vulcan, because the wired-world strategy has never worked as well as many would have imagined for the 23-year-old investment company. Charter will bring the Microsoft co-founder $175 million in cash as part of the restructuring agreement reached with the debt holders. Vulcan also gets up to an additional $20 million in management fees, becomes the holder of $85 million in new debt for the cable operator, and gets a 3 percent stake in the Charter holding company, once the agreement goes into effect April 1.

Charter Communication's stock price (in dollars) over the past five days. Yahoo Finance

And Allen may also stand to receive a potential tax-break windfall, to the tune of $1 billion, if he qualifies for a provision in the recently-approved stimulus package, according to a report in The Wall Street Journal

The report noted:

Since Mr. Allen's stake in Charter is around 50 percent, his partnership share of the debt forgiveness could be as much as $4 billion. Assuming an effective tax rate of 25 percent, the new law could spare Mr. Allen the necessity of paying as much as $1 billion in taxes...at least until 2014.

Representatives from Vulcan were not immediately available for comment.

In fairness, some of Allen's media investments (even the online ones) have done well. Take, for example, his investment in the DreamWorks SKG entertainment company: Starting in 2004, Allen invested $700 million and took out a total of $1.5 billion prior to ending his relationship with the company last year, said one source. That more than doubled his money. The Nasdaq, in comparison, was up 24 percent during the same time period.

Vulcan also invested $300 million into the online women's network Oxygen Media, beginning in 1998. Allen pulled out about $450 million, or a 50 percent return, in the fall of 2007, after the company was sold to NBC Universal, added the source.

Allen is also an investor in Plains All American Pipeline, a company in the crude oil business. Since Vulcan made its investment stake in April 2004, when the stock was trading around $24 a share, the company's stock has largely risen, climbing as high as the mid-$60s in the summer of 2007, before retreating to end the day at $39 a share on Wednesday. Vulcan invested $200 million into Plains All American.

Vulcan has other sizable investments in non-wired world investments, such as a $1.5 billion investment in Makena Capital Management, in which Vulcan now holds a 10 percent stake, as well as investments that far exceed $100 million in Silvercrest Asset Management Group and Laureate Education, a for-profit education company, noted the source.

But many of Allen's other technology investments seem to have more mixed prospects, which is noteworthy for one of the pioneers of the high-tech industry:

• ZoomInfo, a search engine company formerly called Eliyon Technologies, received a $7 million funding round in 2004 from Vulcan and other investors. The privately held company, founded in 2000, says it's been cash-flow positive since 2003 and that its 2007 revenues grew 32 percent to more than $16 million. But it has yet to provide a payday for its investors with either an IPO or sale .

But Vulcan is unlikely to be writing off this investment quite yet. Another source familiar with Vulcan's investments said the company is known to take a five- to seven-year outlook on its investments in private companies.

• Infinia Networks is a solar energy company that in 2007 received a $9.5 million investment from Vulcan and a group of other investors. The following year, the company landed an additional $57 million second round of funding, with Vulcan participating.

Although Vulcan and the investors did well on the second round, with Infinia receiving a valuation that was eight times higher than the valuation assigned in the first round, solar-energy companies are a tough sell on Wall Street. GT Solar, a solar equipment maker, launched its IPO in July at $16.50 a share, falling 12 percent on its first day of trading. The stock closed at $4.61 a share Wednesday and it, along with other solar companies like SunPower, JA Solar Holdings, and Trina Solar, have underperformed the broader markets since October.

• Vulcan invested twice in Radar Networks, which in October launched Twine , a Web application that relies on so-called semantic Web technologies to automatically bookmark and organize a user's Web content.

Vulcan led a $5 million first round in Radar Networks in spring 2006 and followed that up with participation in a $13 million second round in February 2008. It's unclear how well it's doing so far, but it faces an uphill battle in the sour economy.

• In 2006, Vulcan Capital led an $8 million second round of funding in online residential real estate brokerage company Redfin. Vulcan followed that up a year later, participating in a $12 million third round with other investors. Since then, of course, the real estate market has tanked. While Vulcan was able to receive a higher valuation for Redfin on its second investment, it has yet to be seen whether it will be as fortunate in any subsequent funding rounds in the current climate.

From there, the track record on Vulcan tech investments gets a little uglier. According to a report on VentureBeat, Vulcan was among the investors that infused baby products retailer BabyStyle with more than $146 million before it filed for bankruptcy last year. Allen, however, fortunately unloaded the investment in 2003 to a private investor, a source familiar with Vulcan Capital said.

In May 2004, Vulcan investment RCN filed for Chapter 11 bankruptcy protection, according to a report on Bloomberg. Vulcan invested $1.65 billion in the company in early 2000.

Also added to the mix is wireless Internet service provider Metricom, which filed for bankruptcy protection in 2001.

For Allen, the Charter Communications, RCN, and Metricom bankruptcy filings speak volumes regarding his wired world strategy, one which he may increasingly want to disconnect.

"The underlying demographic trends that the wired world was based on have born out, like the growth of the Internet," said Paul Latta, an analyst with McAdams Wright Ragen. "But that doesn't necessarily make the stock price go up."

 

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