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The Emperor’s Clothes

November 11

The tug-of-war continues over demands by certain limited partners and advocates of the “public interest” that VC’s disclose details on their portfolio company and fund performance.

According to the Wall Street Journal, Austin Ventures has threatened to cut off two of its limited partners -- pension funds Teacher Retirement System of Texas (TRS) and University of Texas Management (Utimco) -- if they don’t join its suit contesting the Texas Attorney General’s ruling that would require the VC to release details on portfolio company and fund performance.

Earlier, TRS and another investment group, Texas Growth Fund, had supported Austin’s Venture’s position before the AG, but the AG responded by stating that they had failed to show how divulging the information “would bring about specific harm to their marketplace interests.”

Last year Sequoia Capital dumped two limited partners -- the universities of Michigan and California -- rather than comply with state disclosure laws. VC’s argue that such public dissemination would damage the competitiveness of their portfolio companies. The debate becomes most pointed when VC’s limited partners are themselves required to disclose their investments in pursuit of their obligations to shareholders or pension investors, though there have been cases in which limited partners have themselves initiated requests for such information.

We sympathize with both sides of the issue: it may indeed disadvantage VC portfolio companies when their details are released to competitors who may not themselves be required to reciprocate. However, by keeping such information under cover, many underperforming VC’s may be tempted to manipulate admittantly subjective valuation estimates in the service of future fund-raising goals. And VC's propertly worry that they may become the target of litigation-happy limited partners in the event that they revise portfolio company valuations downward after earlier releasing more optimistic estimates.

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