Early stage VCs fell in love with venture growth equity last year, raised a fist full of funds and are already seeing returns.
The idea of growth stage investing has been around since the dotcom days. Sequoia Capital has invested in growth stage companies since 1999, when it raised the $350 million Sequoia Capital Franchise Fund.
There was, as the growth fund movement got off the ground this year, significant reason to be skeptical about its success. The Sequoia Franchise Fund had backed major dot-bombs. Experts and analysts warned of the dangers of “focus drift” and many predicted these lumbering funds would eventually go the way of the mastodon.
A keen-eyed observer might point to the fees extracted from the emerging class of new funds as the sole justification for their existence. When Sequoia Capital raised both a $225 million early stage fund and a $450 million growth fund for China this year the difference was particularly evident. The early stage vehicle expected to pay more than $50 million in salaries and fees to its officers, directors and affiliates, according to a regulatory filing. The growth fund expected to pay $100 million.
These positions seemed to justify themselves as other early-stage firms attempted to raise growth funds. Draper Fisher Jurvetson’s growth affiliate took 20 months to put together a $300 million fund, for example. But limited partners may have been more concerned about a first-time team pulling in premium 2.5% fees and 25% carry than the fundamentals of growth investing.
Whatever their initial qualms in the DFJ case, it seems limited partners have been happy to drink the growth investing Kool-aid. The firm did get the fund raised and other early stage players have added growth investing to their mandate since then. North Bridge Venture Partners closed $550 million for its first growth fund during the second quarter, Redpoint raised a $250 million “Omega” fund and Ignition closed a $275 million growth fund in October. Earlier this week, VentureWire reported that the growth bug spread to Europe and Index Ventures was in the market for a $577 million fund.
So what’s all the fuss about? Early stage funds have traditionally outperformed other stages of venture investing. Early stage funds returned an average of 37% over the past 10 years, according to Thomson Financial. But late-stage funds have outperformed their early stage peers over the last couple of years. Growth returned 22.9% in the fiscal year that ended with June. That’s significantly better than the 12.8% early stage funds managed.
Such numbers are a bit of a kludge for approximating real returns though. Everyone knows venture is a “hits game” and averages don’t mean much in that context. My intuition is that the funds focused on growth and later stage investments have a lower variance in their returns and that the median returns for early stage funds is significantly lower than that 37% 10 year average. Growth is a safer bet.
As dangerous as it is to confuse anecdotes for statistics and outliers as a trend, there are a few growth deals of particular note.
New Enterprise Associates does not have a separate growth equity fund. It has actively looking for this type of deal since the dotcom downturn though. Dick Kramlich once told me that the strategy was the product of deciding not to give limited partners back their money during the bust. The firm was sitting on a big pile of cash and decided to start putting it behind another class of companies.
NEA has done plenty of growth stage deals since then, but its investment in Tele Atlas sticks out. It took a $210 million investment in positioning company Tele Atlas (DB:TA6) in July 2004 alongside OAK Investment Partners. The public company is based in the Netherlands and provides infrastructure for locating mobile devices and delivering services to them. NEA bought in at less than $6 a share.
Navigation device maker TomTom agreed to buy the company for $43.14 a share earlier this month.
“Common knowledge said you couldn’t scale this business. If so, it would be the only business in the world,” Kramlich said in defense of his fund’s size at a conference earlier this year. “We pay attention to every dollar we invest.”
But NEA isn’t the only firm reaping benefits from its growth stage strategy. Sequoia has done well by its growth strategy as well. It can be difficult to keep track of all the firm’s growth investments, it has funds for the U.S., India and piled on another $450 million growth fund targeted at China this year.
But one deal does stick out. The China growth fund invested next to DCM, Haper Capital and LC Fund in IT service provider VanceInfo (NYSE:VIT ) raise a $25 million Series B in May 2006. The company went public earlier this month. A back of the envelop calculation puts the shares held by VCs currently worth about $221.1 million. That’s about 6.3 times the $35 million the company raised.
Stories such as these will become a regular read in 2008 as the other early stage firms who put their backs behind growth funds get their investments rolling. Success is likely to spawn further imitation. Big fees, shorter investment horizons and a bigger chance of success can sound very sweet.
alex.haislip@thomson.com
Thanks to Eamon Beltran, my Thomson Financial coworker who artfully put together the deals section of the PE Week Wire all week long. His peerless work carried this publication.
***Thomson Financial will publish PE Week Wire again on December 31, 2007. Check out PEHub.com for breaking news.
Top Three
BC Partners Ltd.’s Serafina Holdings Ltd. investment vehicle has received Federal Communications Commission approval to acquire Intelsat Holdings Ltd. for $16.4 billion. The deal will see Intelsat Holdings, which is the parent of Intelsat Ltd., a provider of fixed satellite services, go private. www.intelsat.com
The California State Teachers’ Retirement System (CalSTRS) has started a search for independent fiduciaries to screen partnerships, make recommendations and help investment negotiate with prospective partners for the CalSTRS Private Equity Proactive Portfolio. No more than five firms will be selected to serve and the final filing date for proposals is Feb. 5. www.calstrs.com/rfp
Highland Capital Management, a Dallas-based asset management firm known best for its hedge funds, is raising its first private equity partnership that will seek to take controlling positions in distressed securities, according LBO Wire. The firm is seeking to raise $1 billion for Highland Restoration Capital Partners LP, which will invest mainly in the bank loans of U.S. mid-market companies with revenue ranging from $250 million to $1 billion, though it has a sweet spot of $500 million. www.hcmlp.com
VC Deals
Cogentus Pharmaceuticals Inc., a Menlo Park, Calif.-based company, has completed a $62.5 million private placement that will allow it to advance its novel antiplatelet therapy for cardiovascular disease. TheDeal.com reported that Keffi Group of New York led the Series C financing, with participation from Apothecary Capital of Chicago; Pinnacle Ventures and Prospect Venture Partners, both of Palo Alto, Calif.; and Ridgeback Capital of New York. www.cogentus.net
SensorTran Inc., an Austin, Texas-based developer of a temperature sensing technology, has received $8 million in venture capital financing. The round was co-led by new investor Advantage Capital Partners and prior investor Expansion Capital Partners, with all existing investors participating, including Stonehenge Capital Co. and WHEB Ventures. www.sensortran.com
LineaGen Inc., a Salt Lake City, Utah-based biomarker discovery company, has announced its launch with the close of a $5.8-million funding round led by Sanderling Biomedical Ventures and vSpring Capital. Mesa Verde Venture Partners was the third strategic investment partner in the Series A round. LineaGen has named Dinesh Patel of vSpring, Fred Middleton of Sanderling and Dan Wood of Mesa Verde to the company’s board of directors. www.LineaGen.com
Agile Therapeutics Inc., a specialty pharmaceutical company in Princeton, N.J., has raised $5.6 million in an extension of its Series E financing round, bringing the total raised in the round to $17.6 million. Hillman Co., Novitas Capital (formerly PA Early Stage Partners), ProQuest Investments and TL Ventures are current investors who participated in the round. www.agiletherapeutics.com
Silicon Line GmbH, a German fabless integrated circuit company focusing on ultra-low power analog integrated circuits, has secured initial funding in a Series A round led by Belgium-based Capital-E and Germany-based Munich Venture Partners. Details were not disclosed. www.silicon-line.com
Nirvanix, a San Diego-based media storage and delivery network company, has added Intel Capital to its investor base. The size of the investment was not specified. www.nirvanix.com
Buyout Deals
Ford Motor Co. (NYSE: F) probably will not name the preferred bidder for its Jaguar and Land Rover units until early in January, two people briefed on the negotiations said. The Associated Press also reported that Indian automaker Tata Motors Ltd. could be given preferred bidder status as early as Friday. Tata is vying with another Indian automaker, Mahindra & Mahindra Ltd., as well as U.S. private equity firm One Equity Partners LLC, for the units. www.ford.com
Carlyle Group can proceed with its $6.3 billion acquisition of Manor Care Inc. (NYSE: HCR) after the West Virginia Heath Care Authority decided to lift a stay on the proposed sale of the company’s nursing homes in the state. Toledo, Ohio-based Manor Care owns seven facilities in West Virginia. Pennsylvania Health Department approved Carlyle’s bid for Manor Care earlier this week. www.carlyle.com
North Castle Partners, along with co-investors, has acquired a controlling interest in Cascade Helmet Holdings Inc., a provider of premium protective athletic headgear. The terms of the investment were not disclosed. www.northcastlepartners.com and www.cascadelacrosse.com
Genstar Capital LLC, a middle market private equity firm based in San Francisco, has acquired TravelCLICK, a provider of interactive distribution solutions and marketing services to independent and chain hotels worldwide. Genstar is acquiring TravelCLICK from Bain Capital and TravelCLICK co-founders Richard Gray and Ray Cohen. Bain Capital Ventures is participating in this transaction through a new investment alongside of Genstar and will own a minority equity position. www.travelclick.com
London-based Cognetas has bought Italian vending-machine operator Gruppo Argenta in a secondary buyout from Advent International Corp. Cognetas is buying Gruppo Argenta together with Italian private equity firm Investitori Associati, according to Dow Jones. Financial details of the transaction were not disclosed. www.cognetas.com
PE-Backed IPOs
Danger Inc., a Palo Alto, Calif.-based provider of an integrated end-to-end solution that delivers mobile data and Internet services, has filed a registration statement with the Securities and Exchange Commission for an initial public offering. The number of shares to be sold and the price range for the offering have not yet been deter-mined. Deutsche Bank Securities and UBS Investment Bank are serving as joint book-running managers. Danger has previously raised funds from Redpoint Ventures and T-Venture (the venture capital arm of Deutsche Telekom). www.danger.com
ANDA Networks Inc., a provider of technologies to telecommunication companies, has filed its initial public offering plans with U.S. regulators. The Sunnyvale, California-based company will seek to raise up to $86.25 million through the offering. The company intends to list its common shares on the Nasdaq under the symbol “ANDA.” It did not reveal how many shares are planned for sale or the expected price. www.andanetworks.com
PE Exits
Aeroplan Income Fund has acquired Loyalty Management Group Ltd., which owns and operates the Nectar loyalty program in the U.K. Warburg Pincus LLC amd LMG Chairman Sir Keith Mills were the sellers. The payment totaled £368 million ($730.5 million). www.aeroplan.com
AOL has completed its acquisition of advertising company Quigo. Financial terms of the deal were not disclosed. Quigo’s primary venture backers include Highland Capital, Institutional Venture Partners, and Steamboat Ventures (the ! venture capital arm of The Walt Disney Co.—NYSE:DIS). www.quigo.com
PE-Backed M&A
An affiliate of Arcapita Inc. has purchased PODS Inc., a Clearwater, Fla.-based provider of moving and storage solutions to residential and commercial customers, for approximately $430 million. In July, PODS had announced its commencement of a process to explore strategic alternatives to maximize shareholder value. www.pods.com
XATA Corp. (Nasdaq: Xata) , a Minneapolis-based provider of fleet management solutions to the truck transportation industry, has signed a definitive agreement to acquire GeoLogic Solutions Inc., a Herndon, Va.-based provider of wireless asset management programs to the commercial trucking industry, for approximately $17.5 million. The transaction is expected to close in the first quarter and closing is subject to certain closing conditions. GeoLogic is a portfolio company of Platinum Equity. www.xata.com
Cell Genesys Inc. (Nasdaq: CEGE) has received $12 million from GBP IP LLC in exchange for all intellectual property and previously established licensing agreements relating to its lentiviral gene delivery technology. Cell Genesys will retain rights to use the technology for research and development purposes, including potential future use with cancer immunotherapy products. GBP IP is an affiliate of GBP Capital, the majority shareholder in privately held Lentigen Corp. www.cellgenesys.com
US-based private equity fund Cerberus Capital Management will form a consortium with OHB Technology AG to acquire German plants from Airbus. As part of the deal, Cerberus will take a minority stake in the facilities. OHB had previously said it was aiming to buy the plants jointly with a financial investor, but did not say which company was part of the consortium. www.cerberuscapital.com
Yamaha, a Japan-based producer of musical instruments, has acquired piano maker Boesendorfer Klavierfabrik GmbH from BAWAG PSK. According to Agence France Presse the Japanese firm also agreed as part of the deal to maintain Boesendorfer’s headquarters and production site in Austria. The sale price was not disclosed but earlier reports said Yamaha had agreed to pay €15 million ($21.5 dollars). BAWAG, which was recently taken over by Cerberus, acquired Boesendorfer for $25 million in 2001. www.yamaha.com
Hypercom Corp. (HYC), a Phoenix-based payment technology company, plans to acquire Thales SA’s e-transactions business line for $120 million in cash with a potential earn-out of up to $30 million more. It also has obtained a $60 million financing commitment from Francisco Partners. In addition, it has made a number of management changes, including the naming of Philippe Tartavull as chief executive officer and a director. It has also named Norman Stout chairman, and expects to appoint Keith Geeslin and Jack McDonnell, Jr. to the board. Geeslin is a partner of Francisco Partners.
CDNetworks of South Korea has received a strategic private investment of $96.5 million. The funding was led by Oak Investment Partners, with co-investment from Shinhan Private Equity and Goldman Sachs International. CDNetworks will issue approximately 5.3 million more shares of common stock at the price of 17,000 Korean Won ($18.09). In the transaction, Oak, Shinhan, and Goldman Sachs International will receive 2.3 million, 1.8 million, and 1.2 million shares, respectively, and all of them will enter into a one-year lock-up agreement. As part of this transaction, a representatives from Oak and Shinhan will be joining CDNetworks’s board. www.cdnetwork.com
Firms & Funds
VenGrowth Private Equity Partners Inc. and its affiliates have welcomed the Ontario Government’s move to boost retail venture capital for innovative Canadian companies. The Ontario government has introduced legislation to extend the provincial Labour Sponsored Investment Fund tax credit and increase the maximum investment that qualifies for the LSIF provincial tax credit. Provincial LSIF tax credits will now be offered until the end of the 2011 tax year. The full 15 percent provincial tax credit will remain unchanged until the end of the 2009 tax year. www.vengrowth.com
Trimble (Nasdaq: TRMB), a Sunnyvale, Calif.-based company, has introduced its FuelGuard reporting feature, a suite of fuel management reports for improved Mobile Resource Management. Trimble’s FuelGuard reporting feature combines FleetCor MasterCard fuel purchase information with Trimble’s TrimWeb fleet productivity services. FleetCor is privately owned by management and by a group of institutional private equity investors including Advent International, Bain Capital, and Summit Partners. www.fleetcor.com
Human Resources
Sionix Corp. (Nasdaq: SINX) has named Richard H. Papalian chief executive officer and Mark S. Maron as a special advisor. Papalian founded and serves as chief executive officer of Papalian Capital Partners Inc., a real estate investment and development firm. Maron is a principal with Birchmont Capital Advisors LLC, a real estate private equity firm. www.sionix.com
Partners Group, a Switzerland-based firm, has promoted Pam Alsterlind and Henning Eckermann to partner, and promoted Nan Leake, Reto Schwager, Marc Weiss and Cyrill Wipfli to principal. VentureWire also reported that the firm plans to move Erik Kaas, co-head of markets, to the business development committee. Philipp Gysler, currently head private alternative investment strategies, will join the Asia/Mid-East markets group. www.partnersgroup.net
Natixis Global Asset Management U.S. has named Duncan Wilkinson as executive vice president, director of U.S. Affiliates. He will be responsible for day-to-day management of the firm’s relationship with its 15 affiliated investment managers, as well as corporate development activities aimed at enhancing the firm’s investment offerings. The Boston company is active in corporate and investment banking; asset management; private equity and private banking; financial services and receivables management. www.globalam.natixis.com
Correction
I misspelled Adam Erlebacher’s name Thursday. Apologies Adam.
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