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Photobucket’s Sale To Fox: How VC Insiders Made Big Personal Returns

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On July 31, an email landed in my inbox alleging that some venture capitalist insiders from Insight Venture Partners benefited disproportionately in last year’s sale of online photo site Photobucket to Fox Interactive Media (NYSE: NWS), for about $300 million. Turns out WSJ also got a similar tip, dug into it and was able to verify the details, minus the hyperbole, in its story tonight.

The allegation was that IVP partners invested personally in the deal, instead of getting the venture firm to invest in it, and then pocketed the returns personally, with no returns to limited partners in Insight’s technology fund. The email we got detailed that Insight partners and many other employees and friends invested about $3 million of personal funds into Photobucket in return for 20 percent of the then-nascent firm. Their $3 million turned into about $60 million when Fox acquired Photobucket, the email alleged, and funding documents show that none of Insight’s pension investors were told about the deal and none got to invest in it.

The documents showed that the primary investors were IVP founders Jeff Horing and Jerry Murdock, who each invested $300,000 into the company and personally made 20 times their money — or $6 million each from the investment. Our informer had this to say: “As shown in the stock purchase agreement, the LLC was called IVP/PB LLC, had a similar name to Insight Venture Partners, and even had the same address as Insight Venture Partners — 680 Fifth Avenue in New York — giving the founders of Photobucket the impression that an actual Insight fund was investing in the company.”

I am pretty sure Photobucket founders knew IVP, as a fund, was not investing, but turns out most of the other details are true, as WSJ lays out. WSJ says that the return for IVP partners was more than $40 million (not $60 million as the tip we got) and that Horing and Murdock got above $5 million (and not $6 million as our tip said).

This cautionary tale shows the conflicts that venture partners have in investing directly into startups, instead of the venture funds they manage. Some VC funds allow this if the investment is outside the scope of its own investing philosophy…in this case IVP, which has about $3 billion under management, makes later-stage investments in tech companies, often taking a controlling interest. The firm’s average investment size is about $35 million, Horing told WSJ. Photobucket didn’t come close to meeting those criteria, and hence the personal investment in Photobucket was the only option for these individuals who wanted to invest in the fast-growing (in terms of users) service.

It may be a tempest in a teacup this far down the line, but the relevant chart from the stock purchase agreement in Photobucket’s first round:


4 Responses to “Photobucket’s Sale To Fox: How VC Insiders Made Big Personal Returns”

  1. jack black

    come on, you can tell a hot deal when you see one.

    How many would like to invest in facebook, these guys learnt the best deals using their position collecting hefty management fees. VCs are middle men, they create no value other benefit themselves.

  2. I see your point, Joe, and agree on some levels. Imagine the brouhaha if they'd invested through the fund — outside their usual portfolio guidelines — and it had gone bad. As the story notes in a blind quote: "For every one of these successes, there are a hundred failures" and that the IVP investor said they took a chance and got "lucky." (IE, reward for risk.) I do, though, keep thinking that they had the option to do nothing. Pass on the deal, and move on to things that were of benefit to the fund. That, perhaps, would have been the decision with the highest ethical value and the one of most comfort to fund investors — spending their time on deals for the fund, disclaimers to the contrary in the WSJ story notwithstanding.

    Oh, and Joe: Happy Birthday.

  3. Joseph Weisenthal

    This is an interesting story, but I'm having a hard time seeing the there there, to use an overused cliche.

    This isn't like insider trading, where the VCs had some insider knowledge that they enriched themselves on.

    And this isn't frontrunning (investing in something personally, and then having their clients buy afterwords to push up the price.

    If it's true that IVP typically invests in latter-stage tech companies, it would've been odd for Photobucket to be part of the limited partners' portfolio. It's easy to say in retrospect that this grand slam investment should've been part of the portfolio, but the majority of the time a tiny speculative deal like this would've been a loser, one which would've stuck out like a sore thumb in IVP's actual portfolio.