By Dan Primack
February 17, 2012

Not believing everything I hear.

A few months ago, a source told me that a notable VC firm had been propping up one of its larger portfolio company’s valuations in order to raise a big new fund. I looked into it, but couldn’t make the dots properly connect. So I sat on it.

Since then, however, I’ve heard the exact same theory from two other, independent sources. And then came news that the SEC was inquiring about PE firms boosting portfolio valuations while fundraising. So I revisited. And found compelling evidence that the “conspiracy” was unfounded.

Part of me was just going to reshelve this one in the mental bookcase, but then I decided that if three people had mentioned it to me, countless more had heard it. And the firm deserves to have its name cleared. Therefore…

I’m talking about Khosla Ventures and portfolio company KiOR (KIOR) – a renewable fuels company developing technology to convert biomass into renewable crude oil. Khosla basically created KiOR, and held a majority stake both before and after the company went public last June. Some of the position is held in third-party Khosla funds, while firm founder Vinod Khosla also has personal interests.
The so-called conspiracy was based on the fact that Khosla floated a small number of KiOR shares at a high price ($1.7b initial market cap, despite no revenue) last June, and that the stock was propped up for several months via open market purchases by hedge fund Artis Capital. Artis already was a small shareholder, and one of its investors (David Lamond) was the son of Khosla partner Pierre Lamond. In October, Khosla announced that it had closed its fourth fund with $1.05 billion in capital commitments.

In other words, Khosla and Artis had allegedly conspired to keep KiOR’s price high, in order to attract limited partners to Khosla who would be swayed by inflated IRRs on past funds.

Sounds bad, except the timing doesn’t actually work. Khosla may have announced the fund close in October, but almost all of its commitments were hard circled before KiOR went public. Moreover, one of its LPs tells me that Khosla was carrying KiOR at just $520 million through February 2011 – which was the last mark available before the LP committed. So that actually would mean Khosla marketed its fund with KiOR at a discount to where it would ultimately price and trade.

Moreover, the Artis motive never worked. A hedge fund was going to basically overspend its own clients’ money in order to provide a bit more fee juice for the father of one of its investors? Leave aside the legal issues, it doesn’t even make sense financially.

Just wanted to clear that up…

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