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Rumor Mill: Three against 12 Entrepreneuring

12 Entrepreneuring is under attack from a group of investors in the business incubator who demand their money back.

4 min read
In a recent column we deplored the use of military terminology to describe high-tech corporate rivalries. This week we are forced to eat our words, as drastic layoffs and an investor rebellion threaten to reduce Halsey Minor's incubator, 12 Entrepreneuring, to a state of internecine warfare.

Last week, 12 laid off half its staff in a sign that the company is working to aggressively cut costs after blowing through nearly half of a $137 million fund raised from Silicon Valley luminaries in the past 18 months. Now some of those investors are demanding their money back.

Skinformants say a troika composed of Netscape and Loudcloud founder Marc Andreessen, Angel Investors CEO Ron Conway, and Harvey Allison, of Attractor, in Burlingame, Calif., are trying to liquidate their stakes in 12. Skinformants familiar with the investors describe them as hopping mad and determined to pull out at any cost.

The insurrectional investors and ex-employees aver that the company has indulged in dot-com excesses--including salaries in the $200,000 to $500,000 range--long after the party officially ended.

"They've burnt through an incredible amount of money," one person close to the irate investors said of the fund managers. "They were supposed to be an incubator, but they've become an incinerator."

Warring parties are trading threats and accusations while employing what a 12 executive termed "nuclear" tactics in the escalating conflict.

Among the tactics, Skinformants say, the trio is trying to thwart the company's proposed conversion to a limited partnership, a move that would ease investors' tax liability. A vote on the conversion was scheduled for Friday at high noon.

In an e-mail to a 12 investor dated July 25, 2001, and seen this week by the Rumor Mill, Conway acknowledged using the limited partnership (LLC) vote as a means to put pressure on the board.

In the e-mail, Conway said he "was rounding up as many Series B shareholders as I could to block this transaction in favor of getting the Series B shareholders their money back...If we can get a good number of Series B shareholders to withhold the LLC documents and demand liquidity now, it will have a profound effect."

Conway is a prominent Silicon Valley moneyman, having invested in more than 200 Silicon Valley start-ups, according to a journalist who has covered his career extensively.

"Conway made his fair share of bum investments--more than his fair share--but this is the first I've heard of him demanding his money back," said former Industry Standard reporter Gary Rivlin, author of the recently published "The Godfather of Silicon Valley: Ron Conway and the Fall of the Dot-coms."

Minor, you may recall, is the founder and former CEO of CNET Networks, publisher of News.com. In addition to thinking up CNET, he also was behind Vignette and launched portal also-ran Snap, which NBC bought and folded into NBCi.

On his departure from CNET, Minor launched his incubator, targeting Web services. In addition to Conway, Andreessen and Allison, the start-up has garnered investments from industry heavyweights including Benchmark Capital, Goldman Sachs, Merrill Lynch, Morgan Stanley, eBay founder Pierre Omidyar, Gateway CEO Ted Waitt and CNET Networks CEO Shelby Bonnie.

Even by bubble standards, 12 had grandiose plans. It launched in February 2000 and raised money based on a valuation of $750 million, which the company later diluted to $500 million.

Executives pointed to 12's two Web services companies--Grand Central and Oxygen Software--as evidence that its money has been well spent. They also said the company has acted prudently in halving the staff and scaling back its ambitions by planning to launch and focus on only one company per year. In addition to the two start-ups stabled at 12, the company has funded iBuilding, an application service provide for commercial real estate applications.

In an e-mail interview, Minor, who does not draw a paycheck from 12, said the company and its investments are sound, but admitted that its initial valuation ultimately came back to haunt it.

"The problem we are having at 12 comes down to one simple issue: valuation," wrote Minor, who is the founder and CEO of 12. "We asked for too high a valuation, and our investors willingly paid too high a valuation. When you have a situation like this coupled with the dramatic decline in equity values, it can turn some of the same shareholders who might otherwise be your greatest supporters into corporate adversaries. It's the last unfortunate vestige of the Internet bubble that needs to be fixed."

According to sources close to the rebel investors, the seeds of the skirmish were planted in October 2000, when 12's original co-CEO, Viant and Scient founder Eric Greenberg, left. Minor acquired much of Greenberg's equity and was made sole CEO.

The move prompted Andreessen to resign from the board, according to one source familiar with the dust-up. This Skinformant predicted a protracted legal battle over the future of the fund.

Greenberg declined to comment for this column.

Atherton manhunt
Investment woes may have been the least of Conway's concerns this week, after he found himself the unwitting host of a suspected criminal discovered camping out in the pool house of his Atherton home.

The uninvited guest is suspected of breaking into the bedroom of a 12-year-old girl.

"On Saturday our housekeeper saw him wandering around and found him hiding behind a door," Conway told the Rumor Mill. "Then she called the police. They verified it was the same guy...and they started a manhunt all over Atherton. Unfortunately they didn't catch him."

In the two days before he was discovered, the suspect took a shower, slept in the pool house bed, wore the Conway kids' clothes, and watched TV.

Does Conway plan any security improvements on his estate?

"Lots, is all I'll say," he replied.