PE Week Wire: Fri., May 9, 2008

The WSJ recently reported that Microsoft is sniffing around Facebook, less than seven months after investing $240 million in the social network at a $15 billion valuation. It was largely discounted as the hopeful fumblings of Steve Ballmer, in his search for a rebound acquisition after being dumped by Yahoo. But it got me to thinking: Microsoft’s initial investment may be one of the worst venture capital deals of all time.

Longtime readers know that the current title-holder is Hummer Winblad, for its Napster investment in the midst of that company’s legal morass. And it will remain that way, as Microsoft’s Facebook deal presents neither the legal difficulties nor the likelihood of a total write-down. In fact, it’s probably been a good strategic deal for Microsoft, which doesn’t need to sweat the small stuff (i.e., cash). The only caveat to that last part is that Microsoft is now expected to overpay for all its other acquisitions, which has led to a trickle-down throughout the Web 2.0 market. For example, it helped scuttle the Internet rollup envisioned by Ross Levensohn and Jon Miller.

Anyway, back to my thesis. The reason this might be one of the worst VC deals is that all of its negatives fall on its supposed beneficiary: Facebook.

This isn’t a dilution argument, but rather one of public perception. Social networks partially work because of functionality, and partially because of bandwagon popularity. You don’t necessarily join and use Facebook because it works well, but perhaps because your friends have joined and use it. And, as has been proven with MySpace-Facebook-Beebo, that usage can be fickle and prone to migration.

Public perception is very important, and I think the Microsoft investment has set Facebook up for a giant egg pie in the face. For example, imagine the endgame is to go public. If so, there is no way a company with such low revenue could possibly get near a $15 billion valuation (this isn’t 1999, and Facebook isn’t Google circa 2004).

So let’s generously imagine it could get $5 billion. Know what the headline will be? How about: “Facebook Files for IPO.” Looks good, but check the subhead: “Social networking company worth just one-third of 2007 valuation.”

Ditto for an acquisition, as no company in its right mind would pay close to $15 billion for Facebook. Yes, that includes Microsoft.

What this means is that Facebook is going to lose heat upon liquidity, and a loss of heat can lead to a loss of cache. Remember all the buzz when Facebook got the $15 billion? Now imagine it again, but with a negative spin (particularly outside the TechMeme bubble, where most of Facebook’s users actually live).

All of this is exacerbated by the fact that Facebook never really needed to take the Microsoft money (could have gotten it elsewhere), and certainly didn’t need to confirm the valuation in a press release.

The only out I see for Facebook is to take another big strategic investment at the $15 billion figure. It could provide liquidity for Facebook’s early VCs like Accel (whose LPs would really like some payoff) and other employees looking to turn their paper green. And, yes, that probably means Microsoft again. If not, that original investment will hurt Facebook far more than it will help it.

*** Note: Much of the above argument was first made (to my ears) by venture capitalist Stewart Alsop, at this year’s VC in the Rockies conference. It took my a while to come around, but I’m now there. Hope you didn’t mind the pilfering.

*** Earlier this week I chatted with Venrock partner David Siminoff, who led the firm’s $3 million investment in SlideShare (the YouTube of Powerpoint presentations). Part of our conversation was about the deal, including: (A) How it plans to make money, (B) If it can be sticky or just an embeddable application and (C) Why the site is often real slow when I try to upload items for peHUB. The answers were: (A) Contextual advertising, (B) He thinks yes, and challenges us all to browse the site without staying on it for a while, and (B) Growth outpacing active servers, but they’re working on it.

The subtext for our conversation, however, was that Siminoff has been rumored to be pressing for Venrock to increase its investments in public tech companies (probably small-cap). Not quite as extensive as what Sequoia is doing, but still something non-ventury.

His initial response was that Venrock already has made a few PIPE investments via Funds IV and V. But then he acknowledged that the firm does plan to hire “a dedicated group who lean toward larger companies, including public ones.” Siminoff said that such a practice could conceivably have its own dedicated fund, but that such decisions are a long way off.

*** Jeff Bussgang on the life of an entrepreneur: In Over Your Head.

*** Five Degrees of O.G.

*** peHUB First Read, including allegations that private equity firms buying rent-controlled properties in New York, and then pressuring tenants to move out?

Top Three

3M has agreed to sell HighJump Software, an Eden Prairie, Minn.-based provider of global supply chain solutions, to Battery Ventures. The deal is valued at approximately $85 million, including leverage. Read more…

Red Diamond Capital and Century Park Capital Partners have sold HTR Holding Corp. to Parker Hannifin Corp. (NYSE: PH). No financial terms were disclosed. HTR is an Anaheim, Calif.-based provider of precision plastic and elastomeric components for medical devices like septums, respirator hoses and catheters.

Noble Environmental Power LLC, an Essex, Conn.-based developer of wind-powered renewable electric generating projects, has filed for a $375 million IPO. It plans to trade on the Nasdaq under ticker symbol NEPI, with Lehman Brothers, Credit Suisse and JPMorgan serving as co-lead underwriters. The company’s principal shareholder is JPMorgan Partners (managed by CCMP Capital), while the CPP Investment Board is a minority backer.

VC Deals

Celleration Inc., an Eden Prairie, Minn.-based maker of a non-contact ultrasound device for medical applications like wound-care, has raised $25 million in Series D funding, according to a regulatory filing. Shareholders include Venture Investors LLC, Upper Lake Growth Capital, Baird Venture Partners, Aavin Equity Advisors, Triathlon Medical Ventures and New Science Ventures. It has now raised over $55 million since 2002.

iSekurity, a Washington, D.C.-based provider of identity theft protection and detection solutions, has raised $11 million in first-round funding from Equity 11 Ltd.

deCarta Inc., a San Jose, Calif.-based provider of software for the location-based services industry, has secured $10.5 million of a new $21 million Series C funding, according to a regulatory filing. The company had raised $15 million in an initial tranche last year. Company backers include Norwest Venture Partners, Mobius Venture Capital and Cardinal Venture Capital.

Airship Ventures, a Moffett Field, Calif.-based company formed to bring zeppelin airship operations to the U.S., has raised $8 million in Series A funding from six individual investors.

OrthoHelix Surgical Devices, an Akron, Ohio-based developer of medical devices for use in hand and foot reconstructive surgery, has raised $7.33 million in Series C funding, according to a regulatory filing. Backers include River Cities Capital Funds and Mutual Capital Partners.

Serious Business Inc., a San Francisco-based Internet application startup, has raised $4 million in Series A funding. Lightspeed Venture Partners led the round, with partner Jeremy Liew taking a board seat. The company is run by former Powerset engineer Siqi Chen, whose LinkedIn profile describes the company’s mission as “making stupid sh*t on Facebook for fun and profit.”

Heroku, a San Francisco-based provider of Ruby on Rails application tools, has raised $3 million led by Redpoint Ventures.

Tiny Prints Inc., a Mountain View, Calif.-based online stationary retailer, raised $59 million in private equity funding from Summit Partners and Technology Crossover Ventures, according to a regulatory filing. The round was announced in late April, but without a dollar amount. It represents Tiny Prints’ first outside funding round since being founded in 2004. Summit and TCV received minority ownership positions.

Buyout Deals

Barratt Developments, a UK construction group, has rejected an investment offer from Apollo Management. The deal reportedly would have given Apollo just under one-third ownership in Barratt, in exchange for between £300 million and £400 million.

The Carlyle Group has agreed to sponsor a $560 million management buyout of an LCD glass joint venture of Hoya Corp. and Nippon Sheet Glass.

H.I.G. Capital has agreed to acquire the U.S. oleo-chemical business of Croda International PLC. No financial terms were disclosed for the deal, which is being done in partnership with the business’ management.

Tinopolis, a Welsh television production company, is recommending a £44.7 million buyout offer from Vitruvian Partners.

Trilby Energy, a Denver-based private equity firm, has recapitalized Down Valley Septic LLC, an energy field services company operating on Colorado’s western slope. No financial terms were disclosed.

PE-Backed IPOs

Noranda Aluminum Holding Co., a Franklin, Tenn.-based producer of primary aluminum products and rolled aluminum coils, has filed for a $250 million IPO. It plans to trade on the NYSE under ticker symbol NOR. The company is owned by Apollo Management.

PE Exits

BS Private Equity of Italy has sold Indian fabric manufacturer Klopman to competitor S Kumars for €70 million.

GMAC is considering several asset liquidations for its ResCap mortgage unit, which has been hemorrhaging money for more than a year. Cerberus Capital Management acquired a 51% stake in GMAC from General Motors in 2006.

Nanometrics Inc. (Nasdaq: NANO) has acquired Tevet Process Control Technologies Ltd., an Israel-based provider of metrology solutions to the global semiconductor and solar manufacturing industry. No financial terms were disclosed. Tevet has raised over $7 million in VC funding since 2002, from firms like Intel Capital, Eurofund, Eurovestech, LTG Development Capital, Cipio Partners and Ofer Hi-Tech.

Silverfleet Capital (fka PPM Capital) is looking to sell German truck component maker Jost, according to Financial Times Deutschland. The asking price is reported to be around €600 million.

PE-Backed M&A

PlayPhone Inc., a San Jose, Calif.-based mobile media and entertainment company, has acquired Pitch Entertainment Group, a UK-based provider of mobile entertainment content. No financial terms were disclosed. PlayPhone has raised around $30 million in VC funding from Scale Venture Partners, Cardinal Venture Partners and Menlo Ventures.

Firms & Funds

Lime Rock Partners has closed its fifth fund with $1.4 billion in capital commitments. The firm focuses on private equity investments in the global energy sector.

NewSpring Capital is raising up to $150 million for its second healthcare private equity fund, according to a regulatory filing. It already has secured at least $55 million.

Pappas Ventures is raising its fourth fund with a $200 million target, according to VentureWire. The Durham, N.C.-based firm focuses on early-stage life sciences companies.

Fortress Investment Group reported a $69 million net loss in Q1, compared to a $62.1 million net profit in Q1 2007.

Onex Corp. reported C$45 million in Q1 profits, down from C$149 million in Q1 2007.

Human Resources

Ian McKenzie has joined GMT Communications Partners as a senior advisor. He is the former executive chairman of Invitel, a Hungarian fixed-line telecom provider that was once a GMT portfolio company. The firm also has hired Maria Trokoudes as a senior associate. She previously was with McKinsey & Co. GMT is a European private equity firm focused on the communications sector.

Actis Capital has added three directors to its infrastructure team: Robert McGregor and Vivek Dixit in Singapore, and Sanjiv Aggarwal in Delhi.

LGV Capital, the private equity unit of Legal & General Group PLC, said that managing director Ivan Heywood will succeed Adrian Johnson as chief executive officer.

Philip Sanderson has been named head of private equity at UK-based law firm Travers Smith. He has been a partner with Travers Smith since 2001, and succeeds group co-founder Charles Barter. Read more…

O.G. Greene has joined Navigation Capital Partners as an operating partner. He has served as CEO of multiple companies, including Burroughs Corp., National Data Corp., GridNet International, Skylight Financial and Speer Communications.

Grant Haggard and Bill Kindorf have joined Madison Capital Funding as senior vice president and vice president, respectively. Haggard previously has worked at such firms as Antares Capital, Linsalata Capital Partners and CapitalSource. Kindorf was last at Cochran, Caronia & Co.

Bruce Dunlevie, a general partner with Benchmark Capital, has been named chairman of the board for Rambus Inc. (Nasdaq: RMBS), a provider of technology licensing for high-speed memory architectures. He has been on the Rambus board since its 1990 inception.

Harris Barton and Kenneth Karmin have been named independent directors of JMP Group Inc. (NYSE: JMP), an I-banking and alternative asset management firm. Barton is managing partner of HRJ Capital, while Karmin is a principal of High Street Holdings. Read more…