Redpoint Ventures: Making Money the Old Fashioned Way

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Last week we broke the news of the impressive-but-not-jawdropping $200 million acquisition of Cloud.com by Citrix and the stellar year of returns that Redpoint Ventures is having. What makes Redpoint’s record so unique is that the firm is having a good year despite the fact that they’re not in one of the big five: Zynga, Facebook, LinkedIn, Twitter, or Groupon. Hell, let’s make it a big six and throw in Pandora since the IPO made so much noise.

The venture world has never been more polarized between have and have-not firms. There’s talk that Accel is sitting on a fund that will have the highest returns the industry has ever seen, thanks mostly to Facebook. Meanwhile, Greylock must be sitting on one of– if not the– best funds in its history between early stakes in LinkedIn, nicely priced stakes in Facebook and Pandora and a late stage investment in Groupon. Of course no single individual in the venture business may be in a better position to enjoy 2011 than Reid Hoffman: He’s the founder and largest shareholder in LinkedIn, the first money into Zynga, a partner at Greylock, and an angel investor in Facebook.

Meanwhile, there are dozens of venture firms on the other side of this divide who are going out of business. Like the kid stuck practicing the violin while he watches his neighbors play football in the yard, these firms can only look on as we endlessly debate whether it’s a bubble or not. It certainly doesn’t feel like 1999 to them. 1999 was a time that anyone with a plausible reason to call themselves a venture capitalist could raise money. These firms– and there are a lot of them– are struggling to raise another dime.

My best guess is there are dozens of them, but there could be more. Dying venture firms are like the walking dead. They can have years of staggering around with stakes in still active portfolio companies, hoping they’re still holding a lottery ticket that could put them back in the game. If not, they just slowly wind down.

Part of the reason for such an industry disconnect is the polarity of returns. The consumer Web companies that are this cycle’s winners are some of biggest the world has ever seen, thanks to the spread and maturity of the Web, and the fact that most of them have waited so long to seek an exit. But the other big trend has been the feature/app company flip for less than $100 million. It’s been well documented that small and mid-cap companies can no longer go public, and those several-hundred-million-dollar acquisition singles and doubles– like Cloud.com and fellow Redpoint exit Clearwell– have been hard to come by.

All of that is what makes Redpoint’s winning 2011 such a hopeful sign that there’s still something in between the two extremes. The firm has found multiple exits affording them returns of 10x or more without stakes in the big Web 2.0 names. They’ve done it through less sexy Internet companies like Home Away, international exits like Qihoo, and some solid doubles and triples in the enterprise business. Redpoint hasn’t counted on lucking into the big score, the firm has made well-reasoned investments at reasonable prices and dug out its own luck.

I caught up with Redpoint’s newest partner Satish Dharmaraj on video last week to talk a bit more about the firm’s run. He joined the firm two years ago after a stellar record as an entrepreneur, and Cloud.com was his first deal. We talked about how Redpoint is making money, and we also talked about what it was like for Dharmaraj to be on the other side of the table.