PE Week Wire: 9.6.06

It’s an age-old story: Entrepreneurs meet VCs. VCs fund entrepreneurs. Entrepreneurs’ get washed out. VCs get sued by entrepreneurs.

The latest chapter is being written by two co-founders of Rapt Inc., a San Francisco-based provider of price optimization and profitability management solutions. They are suing Rapt backers Accel Partners and Levensohn Venture Partners – plus Rapt’s third co-founder and current CEO – for breach of fiduciary duty and fraud. The two sides are scheduled for a case management conference later this month, and a settlement is likely. After all, no similar case in recent memory has actually progressed to trial. If this is the exception, however, smart money is on Accel and Levensohn prevailing.

The case is justly referred to as complex civil litigation, because there are a large number of moving parts. So please bear with me as I try summarizing chronologically, as told in the complaint:

• Rapt was founded in 1998 by Adam Galper, Paul Dagum and Tom Chavez. They raised their first outside funding in 1999, with a convertible note financing led by Bristol Investment Co. (also a plaintiff). The deal meant that the three co-founders and Bristol all would hold Rapt common stock.

• In July 1999, Rapt raised $4.7 million in Series A preferred funding at a $6 million pre-money valuation ($0.44 per share), led by Accel Partners. Arthur Patterson of Accel was named company chairman. In May 2000, Rapt raised $27.8 million in Series B preferred funding, at a pre-money valuation of $80 million ($2.78 per share). Summit Partners led, with Accel following on. Kip Sheeline of Summit took a board seat. Five months later, Galper left to pursue other ventures (he currently is CTO of XTime). The compliant alleges that the departure was largely due to disagreements between Galper and CEO Tom Chavez.

• In March 2002, Rapt raised $9.13 million in Series C funding at a pre-money valuation of $32 million ($0.83 per share). The down-round was largely due to the preceding bubble burst, and Levensohn Venture Partners came aboard as a new lead investor (Kip Sheeline had since joined Levensohn, and kept his seat). In January 2004, Rapt raised around $5 million in a convertible bridge loan from existing preferred shareholders.

• Paul Dagum (chief science officer) and Tom Chavez (CEO) also had numerous run-ins, and Dagum indicated a desire to leave in May 2004. According to the complaint, both Chavez and Patterson warned Dagum that he would be leaving a lot of money on the table, and that his departure would result in his existing common stock being “smashed” down (i.e. severely diluted). Dagum left anyway.

• The Series D round seems to have held multiple closes in late 2005 and early 2006, at a pre-money valuation of just $35 million ($0.132 per share). The deal also included a provision whereby preferred shareholders would receive 9 common shares for each held share of Series A or Series B stock, and 12 common shares for each Series C share. The result was a massive dilution of common equity holders. This included company employees, but they were later “made whole” by the distribution of even more common stock.

• Galper and Dagum believe that the Series D round breached fiduciary duty to common shareholders, and also feel that the deal was primarily transacted for the purpose of retaliation. Rapt, they argue, had little need for additional financing, and any Series D round should have come at an increased valuation from Series C (based, in part, on revenue). Moreover, they accuse Accel and Levensohn of basically closing the deal before soliciting shareholder approval – while also providing Chavez with a carve-out so that he wouldn’t get similarly washed-out.

Assume, for a moment, that the primary complaint is valid: That Accel and Levensohn truly were angry at Dagum for bailing, and exacted revenge via a recap. Clearly an immoral move, but not necessarily an illegal one. There is a strong case to be made that a company is best off when incentivizing current employees. As such, it could have been in Rapt’s interest to dilute former employees like Galper and Dagum, to the benefit of current employees and directors.

Let’s move on to the assertion that Rapt didn’t need extra cash, let alone an insider round. I don’t have access to the pertinent financials, but it is worth noting that Summit Partners did not participate in the Series D. In fact, Summit had essentially written off its entire investment by late last year. If Rapt was truly such a strong concern – as Galper and Dagum allege – why would an existing preferred shareholder (with deep pockets) not participate pro rata in a pro rata recap? Summit isn’t talking, but the only logical explanation is that they thought Rapt was a lost cause.

Finally, there is the matter of fraud. This is the only place I see possible trouble for the defendants, since the complaint alleges that both they and employees were essentially lied to about the status and consequences of the Series D round. Under California law, however, a company does not have to preemptively solicit consent from all shareholders for a material event, so long as all shareholders are eventually informed.

The reality here is that two company founders got the short end of their own sweat-stained stick. It should be a cautionary tale for entrepreneurs who could get bank loans in lieu of venture capital. Galper and Dagum either didn’t have participation rights, or couldn’t afford the pro rata participation anyway. Either way, they certainly have the right to be disgruntled. I just don’t think they have the right to a positive verdict.

I contacted Galper, Dagum, their attorneys, Accel (Patterson and Jim Breyer) and Levensohn (Sheeline and Pascal Levensohn). None were willing to comment. Also, thanks to my colleague Alex Haislip for both getting the actual complaint from the San Mateo courthouse, and for playing devil’s advocate with me (he changed my mind).

Top Three

Coles Myer Ltd., Australia’s second-largest retailer, has rejected a Au$17 billion buyout offer led by KKR, saying that the Au$14.50 per share price was “far too cheap.” Other members of the buyout consortium included Bain Capital, Blackstone Group, Carlyle Group, CVC Capital Partners, Macquarie Bank, Merrill Lynch, Texas Pacific Group and Pacific Equity Partners. The deal would have been the largest-ever buyout of an Australian company.

Sybase Inc. (NYSE: SY) has agreed to acquire Mobile 365 Inc., a Chantilly, Va.–based provider of mobile messaging and content delivery. The deal is valued at $425 million in cash, and is expected to close next quarter. Mobile 365 was formed in 2004 by the merger of Inpho Match and Mobileway, and is backed by firms like Draper Atlantic Ventures, Draper Fisher Jurvetson, 3i Group, Institutional Venture Partners and Mayfield.

Georganne Perkins has joined Fisher Lynch Capital as a managing director. She previously was director of private equity for the Stamford Management Company.

VC Deals

RenaMed Biologics Inc. (f.k.a. Nephros Therapeutics), a Lincoln, R.I.-based biotech company focused on the treatment of diseases associated with compromised kidney function, has secured $27.5 million of a $40 million Series E round, according to a regulatory filing. Backers include SeaFlower Ventures, BD Ventures, CDP Capital, Portage Venture Partners and Genzyme. RenaMed previously had raised around $73 million in total VC funding.

Inside Contactless, a France-based semiconductor company, has raised $25 million in new venture capital. Granite Global Ventures led the deal, and was joined by EuroUs Venture and return backers Sofinnova Partners, Vertex Venture Capital, Vertex Management, GIMV and Siparex Ventures. Inside Contactless now has raised over $52 million in total VC funding since its 1995 inception.

Sylantro Systems Inc., a Campbell, Calif.-based provider of hosted PBX and IP Centrex solutions to service providers, has secured $15 million of an $18 million Series D round, according to a regulatory filing. Return backers include Accel Partners, Argo Global Capital, BA Venture Partners and Vanguard Ventures.

Trovix Inc., a Mountain View, Calif.-based provider of intelligent search technology, has raised $13 million in Series B funding. Granite Ventures led the deal, and was joined by return backers U.S. Venture Partners and 3i Group.

Eloqua Corp., a Toronto-based supplier of automated demand generation software and services for B2B marketers, has raised US$12.8 million in Series B funding. Bay Partners was joined by return backer JMI Equity.

Course Advisor Inc., a Wakefield, Mass.-based provider of online lead generation and marketing solutions for the post-secondary education market, has raised $12 million in Series A funding. ABS Capital Partners led the deal, and was joined by The Washington Post Co.

Exeros Inc., a Santa Clara, Calif.-based provider of data mapping and automated data relationship discovery software, has raised $12 million in Series B funding. AllianceBernstein Holding (NYSE: AB) led the deal, and was joined by return backers Bay Partners and Globespan Capital Partners.

Alvine Pharmaceuticals Inc., a Palo Alto, Calif.-based drug company focused on Celiac disease, has secured nearly $8 million of a $21.33 million Series A round, according to a regulatory filing. Backers include Prospect Venture Partners and Sofinnova Ventures.

Laszlo Systems, a San Mateo, Calif.-based developer of an open-source platform for building and deploying Ajax applications, has raised $8 million in Series C funding. WI Harper Group led the deal, and was joined by return backers General Catalyst Partners, Sofinnova Ventures and Mitsui & Co. Venture Partners.

Kilopass Technology Inc., a Sunnyvale, Calif.-based provider of embedded non-volatile memory technology, has raised $7.75 million in Series C funding. Pitango Venture Capital led the deal, and was joined by return backers U.S. Venture Partners, BlueRun Ventures and iGlobe Partners.

BMG Seltec, a Livermore, Calif.-based provider of support software and other services to the bulk construction materials market, has raised $6 million in VC funding from DFJ Element.

Tumri Inc., a Santa Clara, Calif.-based provider of contextual online advertising solutions, has raised $5.42 million in Series B equity funding, according to a regulatory filing. Shasta Ventures led the deal, which also included around $1.09 million in convertible promissory notes.

Serendipity Technologies Inc., an Israel-based provider of enterprise infrastructure software, has raised $5.1 million in Series A funding. Genesis Partners led the deal, and was joined by Index Ventures and Shlomo Kramer (Checkpoint Software co-founder, Imperva CEO). Genesis and Kramer previously had provided $500,000 in seed funding.

Epion Corp., a Billerica, Mass.-based developer of gas cluster ion beam (GCIB) equipment for the manufacturing of semiconductors, has raised $4.14 million in Series C funding, according to a regulatory filing. Shareholders include the Venture Capital Fund of New England and JDS Uniphase.

Anaptys Biosciences Inc., a La Jolla, Calif.-based developer of protein therapeutics technologies, has secured $2 million of a $3 million Series A round led by Avalon Ventures, according to a regulatory filing.

vSocial Inc., a Tempe, Ariz.-based online video sharing site, has raised around $1.5 million in Series A funding led by Consor Capital, according to a regulatory filing.

Infinite Power Solutions Inc., a Golden, Colo.-based maker of thin-film batteries, has raised $34.7 million in Series A funding. PE Week Wire previously reported the deal to be around $35 million (8/21/06). Core Capital Partners, Polaris Venture Partners, D.E. Shaw and Applied Ventures were jhoined by return backers Advanced Energy Technology and SpringWorks LLC.

ITN Networks Inc., a New York–based television advertising platform for national broadcast advertisers, has raised an undisclosed amount of private equity funding from VSS, ZelnickMedia Corp. and Sony Pictures Television.

KFx Medical Corp., a San Diego-based developer of minimally-invasive percutaneous repair systems for rotator cuff repair, has raised a $2 million working capital loan facility from Lighthouse Capital Partners. KFx backers include Charter Life Sciences, Arboretum Ventures, Montreux Equity Partners and MB Ventures.

Offertrax, a provider of RSS-based shopping applications for merchants and consumers, has raised an undisclosed amount of venture funding from The Boston Associates.

Buyout Deals

TA Associates has completed its acquisition of SmartStream Technologies from 3i Group. No financial terms were disclosed, except that RBS provided senior leverage. SmartStream is a London-based provider of transaction lifecycle management solutions.

Leonard Green & Partners has agreed to lead a buyout of luxury watchmaker Tourneau for more than $300 million, according to Women’s Wear Daily.

Court Square Capital Partners has offered to buy specialty chemicals company MacDermid Inc. (NYSE: MRD) for $32.50 per share (13% premium to last Friday’s closing price).

Chrysalis Capital Partners has acquired Canton, Mass.-based Plymouth Rubber Co. and its subsidiary Brite-Line Technologies Inc. No financial terms were disclosed for the deal, which approved by the U.S. Bankruptcy Court in Boston. Plymouth makes PVC and rubber tapes for use in the automotive industry, while Brite-Line produces rubber reflective highway marking tapes and materials..

GIMV has acquired a majority stake in Low Land Fashion from Synergia Capital and Friesland Bank. Company management will retain a minority position. Low Land is a Dutch clothing company.

Waud Capital Partners has acquired a controlling interest in Hospitalists Management Group Ltd. from Emergency Medicine Physicians Ltd. and company founder and CEO Stephen Houff. Houff will continue to serve as CEO, with both he and EMP retaining a minority position. No financial terms were disclosed. HMG is a Canton, Ohio–based outsourced provider of hospitalist physician programs to acute care facilities.

JER Partners has acquired the Sheraton Phoenix Airport Hotel in Tempe, Arizona. No financial terms were disclosed.

PE-Backed IPOs

Clean Energy Fuels Corp., a Seal Beach, Calif.-based provider of natural gas as an alternative fuel for vehicle fleets, has filed to raise $287.5 million via an IPO of common stock. It plans to trade on the Nasdaq under ticker symbol CLNE, with WR Hambrecht & Co. and Simmons & Co. serving as co-lead underwriters. Perseus holds a 19.4% pre-IPO position.

Hawkeye Holdings Inc., an Iowa Falls, Iowa-based ethanol producer, has set its proposed IPO terms to around 15.91 million common shares being offered at between $21 and $23 per share. It plans to trade on the NYSE under ticker symbol HWY, with Credit Suisse, Morgan Stanly and BofA serving as co-lead underwriters. Thomas H. Lee Partners holds a 79% pre-IPO position.

Rosetta Genomics Ltd., an Israel-based drug company focused on microRNAs, has filed to raise up to $39 million via an IPO. It plans to offer three million ordinary shares at between $11 and $13 per share, and trade on the Nasdaq under ticker symbol RSOG. C.E. Unterberg Towbin is serving as lead underwriter. Backers include Insight Capital and Kadima Hi-Tech Ltd.

PE Exits

Goldner Hawn Johnson & Morrison has sold Samuel Lawrence Furniture Co. to Pulaski Furniture for an undisclosed amount. SLF is a Phoenix-based designer and marketer of high quality residential wood furniture.

Intervoice Inc. (Nasdaq: INTV) has purchased the assets of Nuasis Corp., a Mountain View, Calif.-based provider of Internet-enabled customer contact software. The deal is valued at $1.7 million in cash. Nuasis had raised around $97.5 million in VC funding from firms like Dali, Hook Partners, Mayfield Fund, Menlo Ventures, NIF SMBC Ventures, Novus Ventures and Tudor Ventures.

Cognizant Technology Solutions (Nasdaq: CTSH) has acquired AimNet Solutions Inc., a Holliston, Mass.-based managed infrastructure and professional services firm. The deal was valued at approximately $15 million in cash. AimNet had raised nearly $60 million in VC funding since its 2001 inception, from firms like Mellon Ventures and North Atlantic Capital.

Firm & Fund News

Thomas, McNerney & Partners has closed its second healthcare VC fund with $375 million in capital commitments. The Stamford, Conn.-based firm’s inaugural fund had been capped at $216 million in 2002.

Human Resources

Baruk Pilo has joined Fidelity Ventures as a venture partner in the firm’s London office. He previously was manager of Cisco Systems’ European M&A group.

Larry Wilson has joined Pequot Ventures as a venture partner. He most recently served as co-founder and managing general partner of The Trelys Funds. Before that, he ran Mynd Corp.

Elie Wurtman has joined Benchmark Capital as a general partner in Israel. He spent the past three years as CEO of JVP Studio, where he led such deals as Double fusion, Game Array and Funtactix.

Navin Chaddha has joined Mayfield Fund, according to VentureWire. He previously was a general partner with Gabriel Venture Partners, with a focus on India.

Barclays Capital has named John Kelting as head of European leveraged finance. Kelting is currently co-head of sponsor origination, and will replace Chris Coles, who is leaving to pursue a Master’s degree in international development. John Leach will serve as sole head of sponsor origination.

Alan Aria and Melanie Brensinger have joined the healthcare group of GE Global Sponsor Finance as a managing director and senior vice president, respectively. Aria previously served as team leader for JPMorgan I-banking/mid-corporate group. Brensinger had been with Scotia Capital as a director on the private equity sponsor coverage team.

Tom Monath, a partner with Kleiner Perkins Caufield & Byers, has joined the board of Novamax Inc. (Nasdaq: NVAX). Monath also is an adjunct professor at the Harvard School of Public Health.