San Francisco's 12 Entrepreneuring Inc. may go down as the last of the Internet highfliers. When the incubator was founded in February, 2000, it was packed with a who's who of tech. The co-founders and co-CEOs, Eric Greenberg and Halsey Minor, were super-successful Web entrepreneurs. And 12's board of directors was just as star-studded, with the likes of Gateway Inc. (GTW) founder Theodore W. Waitt and Netscape Communications Inc. (AOL) co-founder Marc Andreessen.
What's more, despite 12's being little more than an idea, investors--including Goldman Sachs (GS), Benchmark Capital, and former Vice-Presidential candidate Jack Kemp--couldn't shovel money in fast enough. The company, which was launched with about $30 million, was able to raise an additional $100 million from investors by June--even as the appetite for anything Internet had already waned. 12's value then: $700 million. "This was the dream team," says Ronald C. Conway, a well-known angel investor who put $1.5 million into 12 at the June valuation. "Everyone was saying you couldn't get a sweeter deal."
Seventeen months later, the situation is decidedly more sour than sweet. Greenberg is no longer co-CEO, having been ousted by the board in November, 2000, after months of conflict with Minor. Andreessen resigned last December. Investors close to the board say he disapproved of how Greenberg's departure was managed. Now, Conway and a handful of other shareholders, including Andreessen, are leading a nasty battle with 12 to get their money back.
They may soon get their way. According to an investor near the negotiations, the board is close to approving a plan to give much of 12's remaining $78 million back to investors. The move would effectively shut down 12. Minor will only say a resolution has been reached that should make all parties happy. Waitt says, "Something different will happen and does need to happen. But it's a difficult process."
That such a public battle could break out in clubby Silicon Valley is, perhaps, more a sign of the times than anything else. With the economy tanking and tech investments out of favor, companies born at the peak of the bubble are taking the biggest lumps. Their inflated valuations, along with sky-high expenses incurred during more frothy times, are turning once-friendly comrades into snarling enemies. "The biggest problem we have is that we raised money at a very high valuation," concedes Minor. "We all want our money back from our investments in the last 2 1/2 years."
BIG SPENDERS. Disgruntled investors say their beef is about much more than high valuations. It starts with the belief that the business model of a tech incubator is broken. Incubators were established in the '90s to provide money to startups, plus real estate and management expertise. But all the early incubators, including CMGI and idealab!, have crashed to earth. Conway and his supporters also claim that 12's shareholders haven't been adequately informed about pivotal events such as Greenberg's departure. And they say 12 has spent recklessly on everything from extravagant offices to salaries of as much as $500,000. As one disgruntled investor puts it: "This company screams 1999."
In early 2000, that was the perfect draw. Greenberg, who founded e-commerce consultancy Scient Inc. (SCNT), joined with Minor, known for online-content company CNET Networks Inc. (CNET). The duo oversaw a firm that funded and helped build cutting-edge Web startups. 12's ranks swelled to 60 employees, and a satellite office was opened in New York. Executives quipped that 12 would be a component of the Dow Jones industrial average within a decade.
But almost from the start, the relationship between Greenberg and Minor was troubled, according to former employees. Pet projects that one partner liked, the other one didn't. Minor and Greenberg declined to give further details about their differences. But a former employee said it got so bad that they rarely held meetings together since each would try to one-up the other. Both also traveled a lot, making the scheduling of meetings even harder. Indeed, 12 went for six months in its early days before its board had its first powwow.
By fall, 2000, according to sources close to the board, Minor and board member David Beirne, a general partner at Benchmark, were trying to find a way to gracefully remove Greenberg. Negotiations led to a proposal, approved by the board, that had Minor staying on as CEO and personally buying $8 million worth of Greenberg's stock in 12. Greenberg says the situation was "dysfunctional." Minor says the move to one CEO was necessary to run the company effectively.
Although the CEO situation was resolved, insiders say Andreessen was unhappy. An investor close to the board says he felt that board members, other than Beirne, weren't as informed as they should have been about such a critical decision. Andreessen resigned from the board in a huff. Minor and other board members say the six-member board was involved in everything concerning Greenberg, and shareholders were told as soon as a resolution was reached. "The process that the board and management followed was one of being sensitive to shareholders and to their obligations," says board member Jeffrey Edwards, a general partner at JGE Capital Management.
BAD TIMING? This year, 12 scaled back its ambitious agenda. In February, 2001, 12 shut down its 15-person New York office. It also reduced its expected number of investments. Says Minor: "I was willing to change based on the environment."
Not enough to satisfy investors like Conway. As an August board meeting approached, they badgered 12 for more financial data. They asked why $45 million in office lease commitments for 60,000 square feet had been made. They wondered why more than $13 million had been spent on swanky furnishings and tech equipment. And they asked about the exorbitant salaries. "They aren't losing money because the market is bad," argues Conway, co-founder of Angel Investors. "They are losing money because they're wasting it."
While Minor doesn't dispute the figures, he says the allegations of waste are ridiculous. Much of the problem, he says, stems from bad timing. When the lease was signed in early 2000, he says 12 got a below-market deal because it allowed the landlord to invest in 12. He says the office improvements were in keeping with what other companies spent. And Minor, who personally earns just $1 a year and has sunk $22 million of his own cash into 12, says the salaries are what the market requires for top talent. If he were squandering funds, he adds, much of it would be his own.
The warring factions got so contentious that when Conway asked to visit 12's offices in late August, the company's general counsel, Stuart Fagin, denied the request at management's direction. In an Aug. 27 e-mail to Conway, he wrote: "You will not be allowed past the security guards and will be asked to leave." Minor concedes the denial was a mistake and that he later invited Conway to his offices.
Seeking a truce, Minor allowed Conway and three other investors to make a 30-minute presentation to the board at its Aug. 31 meeting. The group, representing about 15% of the shareholders who put $100 million into the company, aired their concerns and asked the board to consider folding 12 and returning the money to shareholders, according to a document prepared for the meeting.
Since then, 12 has taken drastic measures. In October, it shuttered iBuilding Inc., a Web-services firm it had financed in early 2000. On Nov. 1, the incubator laid off half of its 60-person staff. Minor and board members say the moves were motivated by economics, not Conway and his group. Since venture capital is so scarce, 12 will need to finance its companies longer. That means it will have less money for new deals and so need fewer people. "At the end of the day, we're doing what is right," says Waitt.
It would seem that the end of the day is near. Soon 12 is expected to announce details for its future--and those of its two remaining portfolio companies. While the two startups are likely to get more funding, 12 probably will not. Instead, it may come to represent the end of an era. " is the final supernova," says one shareholder. "It's the last blowout because no one will ever raise that kind of money for this kind of thing again." Until the next bubble, that is. By Linda Himelstein in San Mateo, Calif.