Softbank takes the wheel
Softbank Capital Partners has taken a controlling stake in one of its portfolio companies--a once-rare move that is on the rise as VC firms invest in companies with dropping valuations.
"It's a situation that's reflective of the market we're in," said Steve Murray, chief financial officer of Softbank, which invests in mature companies seeking later stages of investment. "It wouldn't surprise me if we see more of it in the industry."
Softbank took a controlling stake in Naviant, which announced Monday it received an additional $14 million investment from Softbank. The venture giant will receive two of five board seats and one of its partners will serve as acting chairman.
Softbank's move is rare among venture capitalists--a group that tends to prefer making investments in companies, rather than owning them. But as valuations drop, venture funds that are semi-mandated to dole out large chunks of money per investment may reluctantly find their money is going a long way--to the point of taking them beyond the 50 percent ownership stake.
Softbank is an investor in CNET Networks, publisher of News.com.
"We typically invest $25 million or more in companies we're interested in," Murray said. "If we own 50 or 60 percent of a company these days it's more a function of the (valuations) and fund-raising process."
Although a VC firm isn't required to invest in any company, they may be looking to safeguard earlier investments and decide an ownership stake is worth the added headaches.
"There are issues we don't like about holding a controlling interest. It demands more of your time because you have to make decisions on corporate transactions and it's harder to liquidate a position and get capital back to the (VC) partners," Murray said.
Another chief concern is keeping a company's management team and founder heavily involved in running the company.
"I feel that when late stage (VC) firms take a controlling interest in a company, it takes the incentive away for management. You run the risk of management not coming through," said Venky Ganesan, vice president of Jafco Ventures.
Company founders and employees typically own 20 percent of a company after it goes public and venture capitalists, as a group, roughly hold 45 percent, Ganesan said. But when one venture capitalist takes a controlling stake, it can significantly cut the slice of the pie for the founders and employees.
Ray Butkus, chief operating officer and co-founder of Naviant, said his company welcomed the ownership change.
"We find it more appealing to have one majority holder and a more streamlined board," Butkus said, noting the management and employees will retain their same investment stake.
Butkus and Murray said there were no objections to Softbank gaining control of the company.
Despite the potential headache, some venture firms may find they have little choice but to get more involved.
"In the case where late stage funds take a 50 percent stake or greater, it's often done (on) unfavorable terms--as opposed to a belief the company is doing well," Ganesan said, agreeing that there will be more late stage VCs owning their portfolio companies.
Murray said Softbank already anticipates the possible need to take a controlling stake in five other portfolio companies, if the markets continue to struggle for the rest of the year. The fund, which raised nearly $1.5 billion in 1998, has upwards of 25 companies in its portfolio.
"We would seek a controlling interest in companies that are similar to Naviant's situation," Murray said. "We invested in Naviant when the valuations were high last year. We spent a lot of time with management and realize the company is executing (the) plan. But Naviant doesn't have access to the capital markets and the other existing investors had other problems to deal with. When we can make a material difference in a company, we would rather make a larger commitment of our resources and time."