The Gift That Keeps On Giving

The Gift That Keeps On Giving

In the fall of 1998, twenty-five years ago, my long-time friend and partner, Bruce had an idea. A group of us had invested with Bruce in a company founded and run by two of his friends a year or so earlier, and now that our firm was selling itself to the big German bank Deutsche Bank, most of us were thinking about our next act. To put it into perspective, I was 44 years old, which is not an unusual age for a successful Wall Street banker to retire, but was certainly way too early for me to think about hanging up my spurs. The company we had invested in was in the digital media space, so an interesting space , but not one that I could claim was similar enough to my skillset to make for an interesting work opportunity for me. But Bruce was keen to figure something out, and he started talking about a venture capital fund that would somehow be linked to the digital media company. It seemed like an interesting idea, but then Deutsche Bank came at me in a way that I hadn’t expected. I knew that the private banking business that I ran would get blended into Deutsche Bank’s bigger global business in that space, but I thought that meant that I would just be given my golden parachute (I was a member of the Management Committee and so was eligible for that very lucrative perk) and that I would go on my way. But suddenly, Deutsche Bank decided that they couldn’t live without me, specifically to run Deutsche Bank Asset Management, what would become after consolidation, the third largest money management business in the world (the combination of the Deutsche Bank, Bankers Trust Morgan Grenfell and Alex. Brown). I agreed to take that job, under some degree of duress from my colleagues in the executive ranks of Bankers Trust, but also, in all honesty, it is always nice to be wanted and they really seemed to want me.

I stayed with DBAM for about 18 months, which fulfilled my contract both legally and ethically. I had bridged the team that was uncomfortable with Deutsche Bank to a place where they had become comfortable and the consolidation was complete. DB tried hard to get me to stay, offering several different arrangements to appeal to me, but by then the discussions with Bruce and his two friends about starting our own venture capital company had progressed. As one last effort to stay connected with me, Deutsche Bank agreed to invest $20 million in our VC start-up in the relatively heady days before the dot.bomb hit the VC industry full broadside. So off I went from a fancy suite of offices on Park Avenue and a bank car and driver, to a shared office space on 12th Street and Broadway with a view of The Strand Bookstore in the Central Village. It was a refreshing change to be out of 25 years of big bank bureaucracy and to be working in our own business. My first efforts were fundraising and with the start of $25 million coming from Deutsche Bank and our four partners, I was able to round up enough money to have a very credible first fund. I tapped all sorts and manner of friends and colleagues and ended up raising something like 93% of all the funds we collected. It became a bit of a crunch to close on the funds since the NASDAQ died literally while we were fund raising and that couldn’t help but put a wet blanket on the prospects for a venture fund. I had several people run for the hills, but most of the investors stayed the course and we closed and went about reviewing investment opportunities.

The next few years proved to be an interesting environment for investing in start-up businesses. Despite feeling like we were being very prudent in our investment decisions, it was hard not to feel like we were working in a sinking arena. After two years I’m not sure anyone thought this fund would end up working out very well. We ended up making eleven investments in a blend of the finance area and the new media space. Our foundational and eventually largest investment was the new media company run by our two partners. We had one or two modestly successful investments and plenty of early-stage goose eggs. In some ways we followed the typical VC pattern and had one very successful investment out of ten with a few modestly successful investments for good measure. But none of that happened like clockwork. Rather than a two or three year turnover, our big winner took almost fifteen years to fully ripen. In fact, we two-stepped the ultimate sale and still got a massive multiple on our investment. Along the way, one of the things that really boosted the multiple was that Deutsche Bank did what big banks tend to do, it cut and ran. As the venture space sank, the legal eagles at DB started to worry that they might be deemed somehow liable to the other investors for endorsing this band of Houlihan as that had previously b even senior guys at Deutsche Bank. It was a bit far-fetched, but it worked to our advantage. They agreed to sell us their stake for a penny (literally) if we repaid a small loan to them and absolved them of all liability. One thing I am very proud of my partners about is that we offered that deeply discounted purchase to all of our investors even though we had a legal opinion that we could keep it to ourselves. That decision, at the end of the day, meant that about $90 Million of value would be split among all investors rather than just the four of us general partners. That was a big and very righteous decision that allowed us to give our investors an overall return multiple of over 8X. That put our little fund in the ranks of the best performing funds of the 2000 year vintage.

We had originally thought our fund would wrap up in eight years. It took us closer to fifteen years to realize on our investments and even then we have two of the eleven investments that are still not resolved or turned over. Sooner or later, we will have to sell those interests or do something to get us out of the business of keeping this partnership alive with all the annual bookkeeping and tax filings. Today, my pal and partner Bruce called me. He asked me about one of our investors that I had corralled into our stable lo those twenty three years ago. That investor I’m sure is very happy with the outcome of our fund, but I haven’t spoken to him in over five years. It seems that the last few distributions we made (this would be before COVID), his checks were never cashed. My o partners are trying to clean up the books and records and we want to figure out how to get him his money. I am more used to chasing down people who owe me money than people who won’t take money that’s owed to them. I made a dozen calls trying to track him down and finally managed to leave him a voicemail. It prompted him to send me a text with is contact information, so that should suffice to get him his money.

In the meantime my partners told me that they were going to make a hefty distribution of monies that we have been sitting on. When I did the math I realized i would be getting an unexpected windfall from this, as would all my friends that I cajoled into this investment all those years ago. As the world turns, I am reminded that the decision to “do the right thing” in taking the position with Deutsche Bank not only panned out in getting their $20 Million investment into the fund and their subsequent fire-sale out of the fund, but that again “doing right by our investors” by offering them the DB resale deal means that we keep having distributions for all our investors including ourselves. These decisions all compound on one another and have become the gift that keeps on giving, not just to me and my partners, but to all my good friends that believed in us way back when.