PE Week Wire: Friday, January 23, 2009

Last month, I moderated a panel discussion about reinventing the venture capital model. I’ll be doing the same next Friday in New York. In both cases, the underlying thesis was that the venture capital model is broken at worst, and dysfunctional at best. It’s a thesis with which I won’t argue, given that median fund returns since 2002 are underwater. When most LPs would have been better served by putting their money in the mattress, it’s clear that something must be done.

Unfortunately, almost all of the discussion to date has been around the edges. Very reminiscent of the 2002-2003 “back to basics” era, which focused on things like reduced fund sizes, more conservative valuations and fewer investments into saturated spaces. Those were necessary steps, but in many cases slowed the bleeding rather than stemmed it. What we may need is something far more radical.

The trouble with radical proposals is that they’re tough to come by. Luckily, a Boston-area VC has come up with one such suggestion, which I lay out below. For reasons that should become obvious, he asked not to be identified. There are obviously a lot of moving parts here – both pragmatic and philosophical – and I’ve already gotten feedback from some prominent LPs and GPs. I hope you’ll also contribute either via email or over at peHUB. And if you have a different concept for reinventing venture capital, please be sure to pass it on:

Venture capitalists are a lot like professional athletes. They often work in teams, but are largely judged on their individual statistics. A great VC can be part of a lousy fund, because his successful deals get drowned out by the aggregate performance of mediocre partners. To keep the analogy going, think Paul Pierce on the ’06-’07 Celtics.

But what if you could have changed the ’06-’07 NBA from team vs. team to one-on-one? Wouldn’t Pierce have become far more successful?

That’s kind of the idea here. This proposal would have an experienced institutional LP (likely a fund-of-funds), create a series of loosely-affiliated evergreen “funds,” with each fund to contain just a single VC. In other words, cherrypick the cream of the crop. Give the VC an annual salary of around $1 million, an assistant, an associate and 15% of any carry. Perhaps a three-year contract, with a two-year LP option.

If the VC’s investments are successful, both he and the LP would make more money than had they both been working under the traditional structure. If the VC’s investments fail, then the LP presumably would lose less money than had it invested in a failed fund of multiple partners.

There obviously would be tons of issues raised by something like this, so let me briefly address a few of them

• Isn’t the VC partnership model inherently valuable, because it provides a VC with feedback and advice? In many cases it is, but in just as many cases it becomes a quid pro quo of silence. Don’t knock someone else’s deal too hard, because then that guy might come at me. Plus, a good VC should have his own network of industry experts to provide advice.

• What would be the relationship between the individual VCs selected? The LP would have to hire some sort of general manager and CFO to oversee the whole thing. I could also envision a monthly meeting for all the VCs, in which they’d discuss their own work. This could provide some of the aforementioned feedback, but without any risk of veto power. It also would help lay the groundwork for the group to (at least temporarily) manage one of the VCs deals, in case he gets hit by a bus.

• Just a monthly meeting? Yes, which means LPs would get three extra workdays per month from their VCs. That’s 36 extra workdays per year.

• Wouldn’t you have to legally structure this as a partnership, to maintain preferential tax treatment? Yes.

• Would a superstar VC want to be beholden to a single LP? If the LP has deep pockets, I don’t see why not.

• Are LPs smart enough to pick the right individual VCs? This is the multi-million dollar question. A good LP should already know which individuals in his general partnerships are performing better than others. This includes younger partners who may have strong deals, but who have not yet generated returns due to the macro exit blockage. It’s entirely possible that an LP would pick wrong, but that’s also true of the current partnership model. My advice would be the following: Imagine each of your GPs was trying to raise follow-on funds. Is there an individual or two at any of those firms whose departure would cause you not to reinvest. If so, that might be your guy (or gal).

Again, this is a very rough draft of something. I’m hoping you, dear readers, can help polish it up…

Top Three

4Info Inc., a Palo Alto, Calif.-based provider of mobile SMS advertising and publishing services, has raised $20 million in sixth-round equity and debt funding. Peacock Equity and Gannett Inc. co-led the round, and were joined by fellow return backers U.S. Venture Partners, Draper Fisher Jurvetson, and Sand Hill Capital. The round’s only new investor was Shelby Ventures. 4Info has now raised over $50 million in total VC funding.

Tribune Co. has narrowed down the bidders for the Chicago Cubs to three groups. One is led by Tom Ricketts, CEO of Incapital, one is led by Chicago real estate executive Hersh Klaff and the other is led by Marc Utay, a managing partner with Clarion Capital Partners.

Mike Musuraca has joined Blue Wolf Capital Management as a managing director. He previously was assistant director of research and negotiations for District Council 37 of the American Federation of State, County and Municipal Employees. While with AFSCME, he served on the Investment and Proxy Committees of the New York City Employees’ Retirement System (NYCERS).

VC Deals

Lytix Biopharma, a Tromso, Norway-based developer of lytic peptide drugs for the treatment of resistant bacterial and fungal infections, has raised around $10.4 million in new VC funding. No investor information was disclosed.

IMVU Inc., a Palo Alto, Calif.-based online destination where adults and teens meet new people in 3D, has raised $10 million in Series D funding. Best Buy Capital led the round, and was joined by return backers Menlo Ventures, Allegis Capital and Bridgescale Partners.

CloudSwitch, a Waltham, Mass.-based cloud computing startup, has raised $7.4 million in Series A funding, according to Scott Kirsner’s Innovation Economy blog. Backers include Atlas Venture and Matrix Partners (which incubated CloudSwitch last year).

DBV Technologies, a French developer of non-invasive epicutaneous diagnostics and immunotherapies for peanut allergies, has raised a €6 million in second-round funding. ALK-Abello was joined by return backer Sofinnova Partners.

Orthopaedic Synergy Inc., a Raynham, Mass.-based provider of products for the orthopaedic device market, has raised $4.8 million in Series A funding. Pioneer Capital Partners (New Zealand) led the round, and was joined by Birnie Capital Partners. The company was formed via the merger of OMNI life science, Inc. and Enztec Ltd., and hopes to close the round with a total of $6 million by March.

Buyout Deals

H.I.G. Europe has acquired FNZ Holdings, a UK-based provider of trade execution and custody services. No financial terms were disclosed.

The New York Times Co. (NYSE: NYT) is in advanced talks to sell a large portion of its Midtown Manhattan headquarters to W. P. Carey & Co., in a sale-leaseback transaction.

Platinum Equity has acquired a majority stake in DAUM Commercial Real Estate Services, a provider of commercial real estate services in Arizona and Southern California. No financial terms were disclosed.

First Quench Retailing, a UK drinks retailer that owns the Threshers chain, said that it has shut 100 stores over the past six months, and is reviewing other sites for possible closure. The company is owned by Vision Capital.

PE Exits

Adtech Global Solutions has acquired the IP assets of video surveillance company Steelbox Networks Inc., in a foreclosure sale. No financial terms were disclosed. Steelbox had raised $10.2 million in a 2006 funding round led by Sierra Ventures.

Ask Sponsored Listings, a division of IAC (Nasdaq: IACI), has acquired Sendori, a Sunnyvale, Calif.-based company that drives online traffic from generic domains to specific Web advertisers. No financial terms were disclosed. Sendori had raised over $2 million in VC funding from firms like First Round Capital, Baseline Ventures, Maples Investments and Felices Ventures.

Omniflight Helicopters Inc., an Addison, Texas–based provider of air medical services, has agreed to sell its its Rescue Air 1 operations in the Atlanta area to Air Methods Corp. (Nasdaq: AIRM). No financial terms were disclosed. Omniflight is a portfolio company of Wind Point Partners.

PE-Backed M&A

Accelerated Rehabilitation Centers, an outpatient physical therapy platform sponsored by Gryphon Investors, has recapitalized two physical therapy clinic groups: St. Louis-based PRORehab PC and Des Moines-based Therapy Services of Iowa. No financial terms were disclosed.

Nuprecon/CST, a West Coast demolition contractor owned by Evergreen Pacific Partners, has acquired Marcor Remediation Inc., a Maryland-based environmental remediation contracting company. No financial terms were disclosed, except that the combined entity will generate approximately $250 million in annual revenue.

Xactly Corp., a San Jose, Calif.-based provider of sales compensation and performance management software, has acquired Lowell, Mass.-based rival Centive Inc.. No pricing terms of the all-stock transaction were disclosed. Xactly has raised nearly $60 million in total VC funding since 2005, from firms like Alloy Ventures, Bay Partners, Cheyenne Ventures, Glynn Capital Management, Rembrandt Ventures, Outlook Ventures and Spinner Asset Management. Centive had raised over $96 million since 1998, from firms like Key Venture Partners, Growth Alley, Polaris Venture Partners, Tailwind Capital Partners and VSP Capital.

Firms & Funds

Apollo Management has held a $14.9 billion final close on its seventh fund, according to LBO Wire. The firm had been targeting $15 billion, and had been in market for 16 months.

Prime Technology Ventures has hit the €150 million target for its third fund, and says it is headed toward an undisclosed hard cap. The European venture firm also named two new partners: Jelto Kromwijk Smits, former CEO of Philips Incubator, and Joost Holleman, formerly with AlpInvest Partners.

Wynnchurch Capital, a Chicago-based middle-market private equity firm, has opened an office in Toronto. It will be run by new managing director Morty White, who previously wan his own consulting practice and, before that, worked for GE Capital.

Human Resources

Ahmed Badreldin has joined Abraaj Capital as an executive director. He previously was a senior director of leveraged finance with Barclays Capital in London. In other Abraaj news, the firm has promoted Narayanan Rajagopalan from senior VP to executive director.

John Thain, former CEO of Merrill Lynch, has been ousted from Bank of America, just three weeks after the two companies merged.