PE Week Wire, Jan. 8, 2007

Readers occasionally write in to accuse me of East Coast VC bias and, in particular, Boston bias. Specifically, they argue that I spend too much time focused on what’s happening in my backyard, while most of the most interesting/lucrative venture capital deals are happening about 3,000 miles to the West. And I plead no contest to such charges, and also plead no apology. After all, it’s best to focus on what you can see and feel (not that I feel VCs outside of handshakes, except for this one time…).

But bias does not equal blindness, and there are some major East Coast/West Coast character differences – again, really more Boston vs. Bay Area — that do not reflect terribly well on my side of the Mississippi. This is an issue that has been discussed before, but is back on my mind because of a lengthy Ideas piece in yesterday’s Boston Globe titled “Can the Bay State still make the big time?” It was written by Scott Kirsner, and argues that Massachusetts is suffering from its inability to produce “pillar companies” that “influence entire industries, attract talented people to Massachusetts, and help retain recent college grads.” He lists three in Boston — Boston Scientific, Fidelity and EMC – but argues that most big Boston businesses are better described as saplings than as oaks. This is particularly true in the case of consumer facing techno! logy companies – you know, the ones that have pushed Sequoia Capital from wildly successful to wildly successful squared.

Who does Kirsner blame? Ex-Gov. Mitt Romney, in part, but mostly the area’s venture capitalists. He writes the following:

At a panel discussion at MIT’s Venture Capital Conference in December, I asked two local venture capitalists from Atlas Venture and BCE Capital whether they’d have put money into YouTube, the Silicon Valley video-sharing site that was gobbled up by Google last year for $1.65 billion. They both admitted they’d have passed on the deal, saying the company’s revenue prospects were too uncertain. Similarly, in the 1980s, a reluctance to invest in personal computer companies left Massachusetts without its own counterpart to Apple or Dell.

Massachusetts venture capitalists have racked up a successful track record investing in areas like biotech, business software, and data networking and storage equipment. But to hit home runs, rather than singles and doubles, they need to expand their scope — perhaps by adding partners with experience in other fields, like retail, consumer electronics, renewable energy, or digital media — and make riskier plays.

To a large extent, I think Kirsner is correct in his diagnosis of the symptoms. But I also think that he has underplayed the malady of local VC conservatism, and overplayed the salve of just adding a few industry-focused partners.Since I’m running late, let’s do this in notes form:

Yankee Ingenuity Discipline vs. Bay Area Free Love

Here’s an anecdote, with the players kept anonymous to… protect their anonymity. Last year, two prospective entrepreneurs set out to launch a startup. One was based in San Francisco, the other in Boston. They each agreed to approach angels and VCs in their local communities, and both received positive responses from most everyone they met – with one major difference. The East Coast entrepreneur was asked, without exception, to provide some basic documentation (biz plan, revenue projects, etc.). The West Coast entrepreneur was not. Boston-area VCs lead with their head, while Bay Area-VCs lead with their gut. We can debate the merits of each, but Kirsner’s analysis would imply favoritism toward the gut.

Nowhere To Network

From what I’m told, Bay Area VCs and tech entrepreneurs regularly mingle at networking socials, Buck’s and in various parking lots along Sand Hill Road. Boston-area VCs and techies just go home after work. Part of this is culture, but a larger past is distance. The Boston VC/tech community is mostly located in or around Waltham – and not the recently-revived part of Waltham known as Moody Street. Instead, the VCs are mostly tucked away into non-descript office parks alongside a reservoir, with just a Bertucci’s and Westin Hotel bar at which to congregate. As I’ve written before, I’m amazed that that some young/rich VC-types haven’t yet opened a bar near their offices in Waltham. Just a little trendy place that’s open from noon-9pm Monday through Friday. Maybe it would also serve breakfast…

Not About Staffing

Kirsner suggests that East Coast VC firms suffer from a lack of consumer tech-focused partners. But I know many folks who fit that description – and they all complain about the amount of time they have to spend in California. Why? Because that’s where they find the best opportunities.

Different Pillars

There also is the possibility that Kirsner has misidentified the Boston pillars of business. Perhaps they aren’t so much Boston Scientific and Fidelity, so much as they are Harvard, MIT and the local research hospitals. Aren’t these the places where most of the local innovation, spinouts, etc. come from? I’m not so much talking about the students – who often return home with their nifty ideas – but the faculties. It’s a slightly different model, but perhaps just as workable.

Anyway, take a read both of Kirsner’s piece and also this item from Matt Marshall (who I think is off his rocker on the biotech matter). Also consider some of the recent Web 2.0 problems. And let me know your thoughts, either via email or on the website…

Top Three

Automated Trading Desk, a Mt. Pleasant, S.C.-based provider of electronic trade-execution services, has raised $60 million from Technology Crossover Ventures, in exchange for a minority ownership position.

GE Oil & Gas has agreed to acquire Vetco Gray, a division of Vetco International, for $1.9 billion from Vetco owners Candover, 3i Group and JPMorgan Partners. Vetco Gray is a Houston, Texas-based provider of drilling, completion and production equipment for on and offshore oil and gas fields.

Citigroup Private Equity has closed Citigroup Capital Partners II, a $3.297 billion direct private equity fund that will act alongside other private equity firms.

VC Deals

Calypso Medical Technologies Inc., a Seattle-based developer of medical devices for cancer therapy, has raised $42.2 million in Series D funding. Apothecary Capital, Glenview Capital Management and Pequot Capital were joined by return backers Versant Ventures, Integra Ventures, Frazier Healthcare Ventures, Kaiser Permanente Ventures, Merlin BioMed Group, RiverVest Venture Partners and UV Ventures. Calypso has raised around $123 million in total VC funding since its 1999 inception.

Amobee Media Systems Inc., an Israel-based developer of ad-serving solutions for mobile operators, has raised between $15 million and $20 million in second-round funding, according to Globes Online. Globespan Capital Partners was joined by return backers Accel Partners and Sequoia Capital.

Innov-X Systems Inc., a Woburn, Mass.-based provider of elemental analyzers to the industrial, transportation, security and energy end-markets, has raised $27 million from Summit Partners.

BioPassword Inc., a Issaquah, Wash.–based provider of authentication and anti-fraud software, has raised $11 million in Series C funding. RRE Ventures was joined by return backers Citrix Systems, Ignition Partners and OVP Venture Partners.

Proprius Pharmaceuticals Inc., a San Diego-based drug developer focused on rheumatology and autoimmune diseases, has raised $11 million in Series A funding (with an option to expand up to $17 million). Atlas Venture led the deal, and was joined by Forward Ventures, CDIB BioScience Venture Management and returns backers Fog City Fund and Windamere Venture Partners.

Hymite AS, a Denmark–based provider of silicon packages for the LED lighting market, has raised Euro 9 million in Series B funding. Backers include TVM Capital, InnovationsKapital, Dansk Kapital, Vaekstfonden and IVS.

Semafore Pharmaceuticals Inc., an Indianapolis-based, has raised $9.5 million in Series B funding led by return backer Twilight Venture Partners.

ChaCha, an Indianapolis-based search startup, has raised $6 million in first-round funding led by Bezos Expeditions, with additional participation from Rod Canion (founding CEO of Compaq) and Jack Gill (partner at Maven Ventures).

C-nario, a Tel Aviv, Israel-based provider of systems for digital signage networks, has raised $5 million in first-round funding led by Carmel Ventures.

LoadStar Sensors Inc., a Mountain View, Calif.-based maker of capacitive load sensors, has raised $5 million in its first round of institutional funding from AIG SunAmerica Ventures and Needham Capital Partners, according to VentureWire. The company is expecting to expand the round to $7 million, and previously raised $1 million in seed funding from angels like Jeff Drazen and Bill Harris.

F-star, a Vienna, Austria-based developer of antibodies, has raised Euro1.5 million in first-round funding from Atlas Venture.

Digital Media Group Company Ltd., a Shanghai, China-based operator of digital media networks inside subway systems, has raised an undisclosed amount of Series B funding. Oak Investment Partners led the deal, and was joined by Sierra Ventures and return backers NIF SMBC Ventures and Gobi Partners.

Wallstrip, a New York-based video-blog about the stock market, has raised over $500,000 in seed funding from angels like Fred Wilson, according to NewTeeVee

Impetus Trust, a UK-based venture philanthropy group, has committed Gbp450,000 in infrastructure funding to Camfed International, an organization focused on educating poor rural girls in Sub-Saharan Africa.

Buyout Deals

Welsh, Carson, Anderson & Stowe has agreed to acquire United Surgical Partners International Inc. (Nasdaq:USPI), a Dallas-based owner and operator of short-stay surgical facilities. The total transaction is valued at approximately $1.8 billion, with USPI shareholders receiving $31.05 per share.

Arsenal Capital Partners has acquired Source Refrigeration & HAVAC Inc. from Valor Equity Management and Denargo Capital. Source is an Anaheim, Calif.-based provider of commercial refrigeration services in North America, serving customers in 12 contiguous Western states. Company management will retain an ownership position, while leverage financing was provided by Dymas Capital Management and Audax Mezzanine.

FdG Associates has sold Industrial Controls Distributors LLC to AEA Investors for an undisclosed amount. ICD is a Wanamassa, N.J.-based distributor of process automation controls, commercial heating, ventilation and air conditioning controls and automated industrial valves.

Weinberg Capital Partners has agreed to acquire 60% of Sasa Industrie SA, a France-based baking equipment manufacturer, for an enterprise value of Euro 80.7 million.

Quadrangle Capital Partners and Morningstar Management have signed a letter of intent to acquire Hargray Communications Group, a Hilton Head, S.C.-based provider of telecom services in southeastern South Carolina and Georgia. No financial terms were disclosed.

Castle Creek Capital Partners has completed its acquisition of Melbourne, Fla.-based banking company The BankShares Inc. for $43.3 million.

Balmoral Advisors, a Los Angeles-based private equity firm, has acquired Interstate Southwest Ltd., the Navasota, Texas-based custom forging division of Citation Corp. No financial terms were disclosed.

Buchanan Capital Partners has sponsored a buyout of German logistics company Time:Matters from Lufthansa Cargo. No financial terms were disclosed.

Clearview Capital has recapitalized Rowmark Inc., a Findlay, Ohio–based manufacturer and marketer of specialty plastic sheet and related products for the awards/recognition, engraving and signage markets. No financial terms were disclosed.

Golden Gate Capital has completed its acquisition of Sierra Systems Group Inc. (TSX: SSG) for Cnd$9.25 per share, or approximately Cnd$93.2 million. Sierra Systems is a Vancouver–based provider of IT and business consulting services to public and private organizations in North America.

PE-Backed IPOs

Basic Care Networks Inc., a Marina Del Rey, Calif.-based healthcare services holding company, has canceled a proposed $70 million IPO. Sloan Equity Partners holds a 14.2% ownership position.

PE-Backed M&A

Tranzact, a Fort Lee, N.J.-based provider of customer acquisition solutions to the financial services and media and telecom sectors, has acquired The Credo Group, a Warminster, Pa.-based provider of e-distribution services to the insurance industry. No financial terms were disclosed. Tranzact is a portfolio company of Halyard Capital.

PE Exits

Harsco Corp. (NYSE: HSC) has agreed to acquire Excell Materials Inc., a Pittsburgh-based developer of minerals technologies for commercial applications through the reclamation and recycling of high value content from steelmaking slag, from Merit Capital Partners. No financial terms were disclosed. Excell posted 2006 sales in excess of $100 million.

North Castle Partners has completed its sale of Naked Juice Co. to PepsiCo (NYSE: PEP). No financial terms were disclosed. Naked Juice is an Azusa, Calif.-based premium juice company with annual sales in excess of $150 million.

Firms & Funds

TriLyn LLC and Investcorp have held a $100 million for close on TriLyn-Investcorp Mezzanine Partners I, a fund that will make structured mezzanine and other high-yielding debt and preferred equity deals in U.S. commercial and residential real estate. The initial $100 million came from Investcorp, its clients and the Bank of Scotland. Additional capital commitments of up to $50 million may be sought by the partners. TriLyn and Investcorp intend to leverage the fund, which will create approximately $300 million to $400 million of total capital.

Forbion Capital Partners has launched as a spinout of the life sciences VC team of ABN Amro Capital. Its initial fund is Euro 200 million, with ABN Amro holding a 25% stake and Coller Capital underwriting the remainder.

HM Capital Partners has selected JPMorgan to provide fund administration services. As part of the deal HM Capital’s existing fund administration team will become part of JPMorgan Private Equity Fund Services, and will continue to support HM Capital as a third party administrator.

Human Resources

Callan Associates has promoted Greg Allen to president, with former president Ronald Peyton to remain as CEO and COO. Peyton also has been named firm chairman, with founder Edwin Callan becoming chairman emeritus.

Split Rock Partners of Minneapolis has promoted Josh Baltzell to director, and also said that he will relocate to the firm’s office in Menlo Park, California. Baltzall focused on medical device opportunities, and sits on the boards of Split Rock portfolio companies Emphasys Medical and Entellus.

Vincent Ng has joined Atlantic-Pacific Capital as a Hong Kong-based director. He previously was a manager with the fund placement advisory group of Deloitte & Touche Corporate Finance in Hong Kong.

Quadrangle Group has made the following promotions: Jeffrey Nordhaud to managing principal; David Crosby, Andrew Frey and Henry Ormond to principal; Stacey Harris, Amanda Siegel and Chun Won Yi to vice president; and Mike Gillin to vice president of fund operations.

Tim Whitmire has joined Edgeview Partners as vice president of marketing and communications. He previously headed The Associated Press’ Charlotte, N.C. bureau.