The Great Debate

from DealZone:

Pay-to-play funds scandal: Time for a change

primackDan Primack is the editor of peHUB, a Thomson Reuters publication.

The New York State Pension Fund kickback scandal is making new headlines. The Wall Street Journal reported that Steven Rattner, the head of the Obama administratino's auto task force, was one of the executives involved with payments that are under scrutiny, citing a person familiar with the matter.

On Thursday, New York State Attorney General Andrew Cuomo filed a criminal complaint against Raymond Harding, former chair of New York’s Liberal Party, for scheming with the already-indicted David Loglisci and Hank Morris. Cuomo also coaxed a guilty plea and financial remuneration out of Barrett Wissman, a crooked former hedge fund manager.

All of this got me to thinking more about the issue of raising fund capital from public pension systems, a process that often is just begging to be corrupted. Inexperienced and smaller general partners (GPs) can have real difficulty getting in front of a pension system’s investment staff, because there is rarely a transparent or streamlined process.

The result is that many of these GPs hire a “finder,” which is typically a politically-connected individual who can gain access from the top-down. Most of these finders aren’t splitting their fees with the pension system’s investment staff – a quid pro quo that allegedly occurred in New York – but even the most above-board of these relationships boils down to influence peddling from my humble perspective.

Here’s how one GP explained it: “We hire finders because there’s sometimes no other way to get our 20 minutes in front of someone from the [pension system’s] investment staff. We’re not paying the finder for the fund commitment, but just for the opportunity to make our case and then have the system or its consultant conduct due diligence on us.”

Sway and irrational VCs

Jeffrey Bussgan– Jeff Bussgang is a General Partner at Flybridge Capital Partners, an early-stage venture capital firm in Boston. This post originally appeared in the Vox Populi section of www.peHUB.com. The views expressed are his own. –

I recently read Malcolm Gladwell’s new book, “Outliers”, with great interest and delight. Gladwell is a fantastic author: always thought-provoking on human behavior and a quick, entertaining read. But I confess this book did not resonate with me or strike me as relevant for the VC-entrepreneur dance in the same way his previous book, “Blink”, did (see: VCs Blink). It was intellectually interesting, but not professionally illuminating.

Instead, I have been even more taken by another book, which also analyzes human behavior in a thought-provoking way called “Sway”. Written by Ori and Rom Brafman, “Sway” was recommended to me by my friend and co-investor Howard Morgan at First Round Capital. It is a fascinating analysis of why human beings naturally fall into irrational behavior. The book has very relevant implications for venture capitalists and entrepreneurs, particularly in today’s environment, as VCs are likely to allow irrational behavior to seep into their portfolio management decisions in the coming years.