PE Week Wire: Mon., Nov. 26, 2007

It’s been more than a week since I attended the unmasking of founder Adeo Ressi. That also means that what follows is more than a week overdue:

Rewind to early October. I’m meeting with two partners of a VC firm out in Waltham. Just a “getting-to-know-you” sort of thing, which usually involves me asking routine questions and sharing some small talk about local sports teams and how all of us became what we are today (for better or for worse). All of that happened, but things took an unexpected left turn at about the 30-minute mark.

“What do you think of,” one of the partners asked me. “Doesn’t it offend you as a journalist?”

This question dominated the next forty minutes, and I didn’t really have an answer. The site – which allows entrepreneurs to anonymously rate and comment on venture capitalists – had generated a bunch of mainstream biz press, but I hadn’t paid enough attention to take either offense or defense (although I had requested, and received, membership to the site). Like others, I was more interested in the identity of site founder “Ted” than in the site itself. A handful of perfunctory emails between the two of us had offered no clues.

Fast-forward to November 15. I’m driving a rented Dodge Charger from San Francisco to Stanford, with VentureBeat’s Matt Marshall riding shotgun. There was some apprehensive giddiness to the excursion, like just before watching the first post-cliffhanger episode of a television serial. Most of it was about the unmasking, which would help us learn if the site was being manipulated to support/oppose VCs that had helped/hurt Ted. But we expected the event itself to be a… well, an event. Most VCs we knew had been invited, as had all of the site’s member entrepreneurs. Who would show?

It didn’t take long to realize that the event was… well, anticlimactic. We walked through a sandy courtyard and looked into a room that was anything but full. Only about 100 people had RSVP’d, and only about 70% of them showed. If you removed me, Matt and our ilk, it was probably just 50 or so people. Of those, there were just a few recognizable VCs – George Zachary of CRV, Roelof Botha of Sequoia — and most of them were friends of Ted (and they didn’t even stay through the entire presentation).

We soon took our seats (there were plenty) and “Ted” was announced to the crowd. Onto the stage walked a balding man with glasses who I had never seen before. I chalked it up to my Boston background, but most of the Valley venturati also looked vacant. He introduced himself as Adeo Ressi, and spent some time going over his background (longtime entrepreneur, member of the X Prize board, etc.).

The presentation that followed took more than an hour, and was alternatively informative and dull. It was always passionate. Ressi said that he had designed the site to help entrepreneurs raise capital faster and smarter, and that only twice had he ever erased a user comment (for what sounded like legit reasons). He also showed that users are truly anonymous, as Ressi strips out IP addresses, and does not maintain a database linking username/passwords to email addresses (which unfortunately means that I could post anonymous reviews).

Ressi clearly had some bad past experiences with VCs, and wanted to help others avoid that fate. He is clearly sincere about his efforts, even if his “no axes to grind” claim seems a bit tough to swallow given his obvious distain for VCs as a class. He believes that will become a must-use resource from entrepreneurs in search of funding, and that those with low ratings/negative comments should probably be avoided. It is incumbent on the VCs themselves to improve their ratings, he said, by providing constructive feedback and not wasting an entrepreneur’s time (i.e., if you’re not interested, say so quickly).

A lot of folks left before Ressi was done speaking, including me (I had to be up at 3am the next morning). It had gotten tedious, with Ressi expounding on a revolution that few in the audience seemed to feel. But I was there for two hours – including most of a subsequent Q&A – and have come to the following takeaway: is an idea whose time has come, but it is also fundamentally flawed.

Ressi has accurately diagnosed a lack of qualitative VC analysis, and TheFunded is an able antidote. But he has inexplicably barred any and all quantitative analysis from the equation, but makes it lacking in its own right. The site pays no attention to returns, the ability to raise new funds or partner stability – even though each of those should be of major import to an entrepreneur. It’s great to know that the Firm A is attentive during meetings while Firm B is often dismissive, but shouldn’t an entrepreneur also want to know if Firm A is batting .100 while Firm B is batting .300? Might the gruffness possibly be acceptable if the trade-off is for a more successful company?

The only quantitative piece to TheFunded is his “rankings,” which is on the homepage. It’s a horribly-deceptive gimmick. Take a look at the site right now, and you’ll notice that the top-ranked firm is Kepha Partners – a one-man shop launched last year by Jo Tango (formerly of Highland Capital Partners). Jo’s a nice guy, but Kepha has made just a small handful of investments, and doesn’t yet have any exits. Maybe it will prove to be a winner, but how can it currently be ranked above firms that have helped grow multi-billion dollar companies that produce life-changing technologies or life-saving drugs? Again, it’s the issue of track records being completely ignored.

Moreover, the rankings provide no weighting related to entrepreneur experience. For example, imagine I met with two VC firms and got term sheets from both. And even assume that I had positive reactions to both firms. I end of choosing Firm A over Firm B because its geographic location is more amenable. That was two years ago, and I’ve since raised another round of funding, staffed up and rolled out my product. Through all of that, a partner from Firm A has been on my board. A partner from Firm B has been on my Christmas card list. Shouldn’t my review of Firm A be weighted more heavily than my review of Firm B? Of course, but it isn’t.

Oh, and I also think the site can be gamed, despite some innovative security measures.

It seems that I’ve now rambled on longer than Ressi, so let me wrap up. TheFunded is a lot like the event out at Stanford. Intriguing but uncomfortable. A good idea in need of serious tweaking – and perhaps some additional executives. Worth watching, but not yet worth relying on.

Top Three

Richard Branson’s Virgin Consortium has been named preferred bidder for Northern Rock, under a plan that would see the troubled UK bank re-branded as Virgin. Members of the consortium include Virgin Group, WL Ross & Co, Toscafund Asset Management and First Eastern Investment Group. The Virgin proposal involves repaying £11 billion of debt back to the Bank of England, plus injecting £1.3 billion on new capital into the business.

GlaxoSmithKline has agreed to acquire cardiovascular drug company Reliant Pharmaceuticals for $1.65 billion in cash. Once closed, this would become the largest all-cash exit ever for a VC-backed company – topping Dell’s planned $1.4 billion acquisition of EqualLogic, which was announced earlier this month. Reliant is pretty confident that this sale will pass regulatory muster, as it already has pulled its IPO filing. The company has raised over $500 million from firms like Alkermes Inc., Bay City Capital, Invermed Associates, Morgan Stanley Private Equity, Goldman Sachs, Versant Ventures. Its final post-money VC valuation was just over $860 million, from a tranched-out Series D round that held closes between 2003 and 2005.

VanceInfo Technologies Inc., a Beijing-based provider of offshore software development, has filed for a $120 million IPO. It plans to trade on the NYSE under ticker symbol VIT, with Citi and Merrill Lynch serving as co-lead underwriters. The company has raised around $32 million in VC funding from firms like DCM, Sequoia Capital and an investment fund affiliated with the Chinese Academy of Sciences.

VC Deals

GVK Biosciences Private Ltd., an Indian pharma and biotech R&D company, has raised $25 million in VC funding from Sequoia Capital.

Redbaby Information Technology Co. Ltd., an e-commerce company focused on baby products for the China market, reportedly has raised $25 million in new VC funding.Kleiner Perkins Caufield & Byers led the deal, and was joined by return backers NEA and Northern Light Venture Capital It plans to go public next year on an overseas exchange.

Carbylan BioSurgery Inc., a Palo Alto, Calif.-based developer of bioresponsive devices for osteoarthritis and chronic rhinosinusitis, has raised $20 million in Series B funding. Vivo Ventures led the deal, and was joined by return backers Alta Partners and InterWest Partners. Carbylan raised a $7.9 million Series A round in late 2005.

Convergence Inc., a Maynard, Mass.-based provider of IP communications security, has raised $15 million in Series D funding, according to a regulatory filing. Backers include Highland Capital Partners, Globespan Capital Partners and North Bridge Venture Partners.

Yodle Inc., a New York-based provider of local online advertising and lead generation, has raised $12 million in second-round funding. Draper Fisher Jurvetson led the deal, and was joined by return backer Bessemer Venture Partners.

Mobius Microsystems Inc., a Sunnyvale, Calif.-based developer of precision-timing ICs, has raised $10.22 million in Series B funding, according to a regulatory filing. Return backers include Foundation Capital and Menlo Ventures.

Passport Systems Inc., an Acton, Mass.-based developer of a cargo screening solution for shielded or concealed materials, has secured $7.39 million of a $10 million Series C round, according to a regulatory filing. Backers include Topspin Partners and Shiprock Capital.

Vixxi Solutions Inc., an Irving, Texas-based provider of enhanced 911 solutions for VoIP carriers, has raised $4 million in Series A funding, according to a regulatory filing. Backers include ComVentures and Trident Capital.

Kior Inc., a Dutch developer of a “biomass catalytic cracking process” has raised just over $1.4 million in Series A funding from Khosla Ventures, according to a regulatory filing. The deal was announced earlier this month, but without a dollar amount.

Semplice Energy Ltd., a UK-based provider of energy saving and renewable energy systems to reduce electricity consumption and CO2 emissions, has raised $1.23 million in funding from BIP Fund I LP of the Bahamas.

Buyout Deals

Angelo, Gordon & Co. has completed its take-private buyout of National Home Health Care Corp., a Scarsdale, N.Y.-based provider of home healthcare and staffing services in the Northeast. NHHC stockholders received $12.75 per share in cash, while Angelo Gordon was joined on the deal by Eureka Capital Partners. Get more info.

TPG plans to acquire between a 30% and 40% stake in listed Japanese lender NIS Group Co. for more than $277 million, according to the Nikkei business daily. NIS had announced earlier this month that it would issue new shares and bonds to a private equity firm. An official announcement is expected in early December.

Sears said in a regulatory filing that it is interested in acquiring Restoration Hardware Inc. (Nasdaq: RSTO) for $6.75 per share. The move comes just days after Sears disclosed that it had acquired a 13.9% stake in the retailer, and several weeks after Catterton Partners agreed to take Restoration private for $6.70 per share (total equity value of $267 million).

Wingate Partners and Venquest Capital Management have acquired Marlin Showcase for $30 million. Marlin is a Medley, Fla.-based manufacturer of customer retail store fixtures and display cases. It was advised on the sale by Allegiance Capital.

PE-Backed IPOs

CGEN Digital Media Network Co. Ltd., a Shanghai-based operator of China’s largest in-store television advertising network, has set its IPO terms to around 9.17 million American depository shares being offered at between $13 and $15 per share. It plans to trade on the Nasdaq under ticker symbol ADTV, with Piper Jaffray serving as lead underwriter. The company has raised nearly $28 million in VC funding from firms like TDF Capital (12.2% pre-IPO stake), Redpoint Ventures (11.9%), Jafco (10.9%), Sumitomo Corp. (5.7%) and Hotung Investments (5.4%).

PE Exits

Arcapita Inc. is in the early stages of exploring strategic options for Falcon Gas Storage Co., according to LBO Wire. Falcon is a Houston, Texas-based operator of natural gas storage facilities that was acquired by Arcapita from Energy Spectrum Capital for around $100 million in 2005.

Comscore Inc. (Nasdaq: SCOR), a Reston, Va.-based provider of online consumer behavior analysis, has withdrawn registration for a secondary public offering of 6.13 million common shares. The company’s stock was valued at $36.52 per share when it originally filed for the offering in late October, but closed this past Wednesday at just $27.01 per share. Selling shareholders were to have included: Institutional Venture Partners (835,431 shares offering), JPMorgan Partners (919,731), Lehman Brothers (731,548), Adams Street Partners (714,486), Topspin Partners (250,000), Flatiron Partners (246,669) and vSpring (348,717).

Orexo AB (STO: ORX) has completed its acquisition of Biolipox AB, a Swedish drug company focused on therapies for inflammatory diseases, including pain management and respiratory diseases like asthma and chronic obstructive pulmonary disease. Biolipox had raised around $60 million in VC funding from firms like HealthCap (24.4% ownership), Apax Partners (21.2%), Sofinnova Partners (19.9%), Scandinavian Life Science Venture (9.8%), Credit Agricole Private Equity (8.4%) and Auriga (6%).

PE-Backed M&A

Ipreo, a New York-based portfolio company of Veronis Suhler Stevenson, has acquired NSight Enterprise Software, a New York–based provider of IT solutions to the institutional finance community. No financial terms were disclosed.

ReAble Therapeutics (f.k.a. Encore Medical), an Austin, Texas–based orthopedic medical device company controlled by The Blackstone Group, has completed its take-private acquisition of DJO Inc., a San Diego-based provider of products and services that promote musculoskeletal and vascular health. The total deal was valued at approximately $1.6 billion, including the assumption of debt – with DJO stockholders receiving $50.25 per share. Wachovia Securities served as financial advisor to DJO, while Credit Suisse did the same for ReAble. DJO had been listed on the NYSE.

Reinhold Industries, a portfolio company of The Jordan Co., has agreed to acquire Ultracore Inc., a Livermore, Calif.–based manufacturer of specialty core materials. No financial terms were disclosed for the deal, which is expected to close in Q1 2008.

Firms & Funds

Canaan Partners is raising up to $650 million for its eighth venture capital fund, according to a regulatory filing. Its seventh fund closed on $450 million in 2005.

Human Resources

Martin Bolland has decided to leave UK buyout firm Alchemy Partners, where he was an original partner, according to Dow Jones. Bolland’s future plans were not reported.

Robert Palmisano has joined SV Life Sciences as a venture partner. He most recently served as CEO of IntraLase, which was acquired by Advanced Medical Optics earlier this year for over $800 million.