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Jonathan Axelrad’s job has gotten more interesting since his venture capital clients started taking a beating in the downturn. The Wilson Sonsini Goodrich & Rosati partner represents venture capital funds, and his clients are finding they’re not as welcome in the market as they used to be. Returns on VC funds have plummeted since 2000 because many portfolio companies couldn’t go public, were sold on the cheap, or still languish, which ties up capital. That didn’t sit well with investors who favor VC funds, like public pension systems and foundations. Some demanded their money back, reneged on investment pledges, or shrank the fees they pay VCs to manage the portfolio until returns pour in. The investor demands generated new issues for Axelrad. For one thing, a fund provision most people thought was largely theoretical suddenly came into use when investors got angry. The so-called clawback provision said VCs had to refund the proceeds of portfolio sales if the market changed dramatically and current returns suffered. “It was an absolute perfect recipe for clawbacks,” Axelrad said. Investors are also making new and tougher demands on VCs as they try to raise new funds. And except for a few well-heeled venture firms, many VCs are giving in, he said. “People who are in less-advantaged positions are finding this to be a difficult and challenging environment,” Axelrad said. “In a market where the other side has leverage and can negotiate, it’s more interesting.” Investors are insisting that terms giving them bigger paybacks — especially in down times — are added to fund documents, Axelrad said. “We are at the beginning of a period where people will look back a year from now and say that’s where the trend started,” Axelrad said. Axelrad has also had to brush up on issues outside his practice area because of greater scrutiny of VC activities. Many public pension systems are facing pressure to disclose performance data from their venture capital portfolios because the market has performed so badly. As a result, Axelrad had to bone up on public records laws. Not that he’s complaining. “Every time the environment changes,” he said, “you have to master a new set of skills.”

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