07/30/2008

Prism Heading Down Tough Marketing Trail

Prism VentureWorks is marketing its sixth fund, which could prove a tough sell with investors despite efforts by the firm to address lackluster performance through a change in leadership.

The Needham, Mass., venture capital shop, which is seeking to raise at least $275 million, began talking to existing limited partners about the offering a month or two ago and started circulating marketing documents to a broader audience in recent weeks. It hopes to hold a first close in the fourth quarter of this year.

However, the effort comes at a time when Prism - like many venture capital firms - can't rely on its track record alone to attract investors amid a generally tough capital-raising environment. In fact, the firm, which invests in life-science and technology companies, has produced disappointing returns through funds assembled over the past decade.

Some investors recently said stakes they took in Prism's third fund were among their worst holdings. That 2000-vintage vehicle started with $338 million, beating its $300 million equity target. But its performance lagged as the technology market crashed soon after the final close, and now one limited partner says he ultimately expects to recoup only about 25 cents on the dollar for his contribution.

Another source pointed out that Prism's net internal rate of return since just after the 1997 launch of its debut Prism Venture Partners 1 is in break-even territory.

The upshot is that new and existing investors aren't likely to give the latest vehicle an enthusiastic reception, and it remains to be seen whether changes Prism has made over the past few years will be strong-enough selling points to win them over. Most notably, the outfit has swapped out much of its senior management for new staffers - something it refers to in its marketing efforts.

At the same time, Prism hasn't included past performance figures in the offering documents for its new fund. While that tactic isn't unheard of, it shows that the firm is determined to draw a clear line between its past and present incarnations. "They're saying, 'There's a second-generation team here,' " one source said.

In 2006, for example, co-founder Bob Fleming scaled back his activities as the shop was investing through its fifth fund. Another founder, Duane Mason, retired with the launch of that vehicle. And general partner David Baum left around the same time to launch his own shop, a consulting outfit called CCVentures that later merged with Ametron Technologies to form Stage 1 Ventures of Waltham, Mass.

Fleming, meanwhile, teamed up with Venrock Associates alumnus Michael Feinstein to form investment shop Sempre Management. That operation, which buys publicly traded technology companies, began raising capital this year.

Prism has also hired a clutch of new investment staffers in the past four or five years. They include top partners Woody Benson, Brendan O'Leary and Joe Pignato, along with Mark Canha, Peter Lee, Tony Natale and Gordie Nye.

Prism is essentially trying to portray those professionals as an entirely new group. But that also presents some problems, as they've only been on board for the firm's fifth fund and part of the investment period for the fourth - neither of which has matured enough to give prospective limited partners an indication of performance following the dot-com crash.

"I think that's going to become a more common story, because there are a lot of people in that boat," another market player said.

Prism's fourth fund finished raising capital in early 2002 with $429 million, slightly shy of its $450 million goal. Its fifth fund then gathered $250 million of commitments in 2005, after originally setting out for $400 million.

In the plus column, Prism has taken profits by exiting a number of investments in its fifth fund, including some high-profile deals. The firm sold biopharmaceutical company BioRexis to Pfizer last year in a deal that apparently returned more than four times its investment. It also sold software-management company Softricity to Microsoft in 2006 for an undisclosed amount and video-hosting company Maven Networks to Yahoo this year for $160 million - both of which yielded more than three times its investments.

The biggest recent haul for Prism was an early-2007 sale of online identity-security company GeoTrust to VeriSign for about $125 million. That deal returned eight times Prism's initial contribution.