PE Week Wire: Wednesday, August 20, 2008

I keep getting asked the same question by VCs who don’t invest in cleantech: “Do you think this is the next nanotech?” In other words: “Is an extraordinary amount of money being flushed away on a pipedream?”

Yes and no. The affirmative part is that the investment ramp-up has been too rapid to be responsible, as evidenced by the dozens of firms (not an exaggeration) that have rushed to form cleantech practices and/or funds within the past year. There will be a lot of losses in this space, particularly given the relative lack of potential acquirers (assuming the continued lack of an IPO market).

The negative part, however, is probably more important. The ultimate problem for VC-backed nanotech companies is that most of them were technologies without products. Kind of like if Google had created its breakthrough search algorithms in 1985. Cleantech companies, on the other hand, almost always have a clear vision of their products and market opportunity. Their problem is getting the technology to work. It’s obviously a more fundamental risk, but also should give VCs better guidance when it comes to follow-on financings or cutting bait.

Does that make sense?

*** We’ve talked a lot about fundraising woes in the mega-markets, including problems for such brand-names as Blackstone Group and Clayton, Dubilier & Rice. But we’ve focused the most of Madison Dearborn Capital Partners, which has been trying to secure $10 billion for its sixth effort.

Well, no longer. As LBO Wire first reported this morning, the Chicago-based firm has lowered its target to $7.5 billion. That’s still a bit higher than would be the preference of certain LPs, but is a reasonable cut given how the market has continued to deteriorate since MDCP first hit the fundraising trail last year. The firm so far has closed on just over $4 billion, including increased allocations from endowments like Yale.

So can it hit the $7.5 billion mark by early next year, as it expects to do? Probably. First, it’s gotten a boost from the recent BCE financing agreement, which virtually guaranteed the deal’s closure and reduced its EBITDA multiple from 7.5x to 6.9x. More importantly, Madison Dearborn so far this year has distributed $1.8 billion to LPs (most of which came from Intelsat) – and it may well top its own record of $2 billion set in 2005.

*** Key Venture Partners is losing one of its three managing directors, as David Dame is leaving to become an operating partner at a middle-market buyout firm to be named later. If I knew his destination, it would be a middle-market buyout firm to be named now.

The big question, of course, is what this means for KVP. The Waltham, Mass.-based firm has gradually transformed itself from a Series B/C investors, to one focused on growth financings for companies with between $5 million and $25 million in revenue ($5m-$10m checks). Not a bad risk/reward strategy – I’d rather go early or late than sit in the middle – but Dame’s departure does put the firm in a bit of a pickle.

First, its remaining two partners – Ted Mocarski and John Ward — both focus on communication and data services companies, whereas Dame had done enterprise software. That means KVP either needs to rebrand itself around a narrower industry focus, or hire a new enterprise IT guy (or perhaps a healthcare tech guy, etc.). The problem with the last part is that KVP hasn’t raised a new fund in a while, and doesn’t have any plans to do so in the near future. There had been talk last year that it would raise more money via a stapled secondary with sole limited partner Key Corp. selling off some of its interests, but the deal fell through when Key Corp. got cold feet. And since there’s still a bunch of dry powder lying around, it could be tough to recruit a newbie.

On the upside, KVP is about to score a big exit with the pending sale of Optasite, and has nothing but well wishes for Dame. Plus, Key had pledged to anchor the next fund (whenever it comes), which should provide an additional level of comfort while managing the existing portfolio and making new deals. So it’s a big loss, but not a fatal one.

Top Three

Verified Identity, a New York-based operator of the “Clear” system that allows members to pass quickly through airport security, has raised $44.4 million. Spark Capital led the round, and was joined by Syncom Venture Partners and return backers Lockheed Martin, GE Security, Baker Capital, Lehman Brothers and CEO Steven Brill. peHUB had previously reported that the company was looking to raise $30 million at a $90 million pre-money valuation.

AltaRock Energy Inc., a Sausalito, Calif.-based developer of engineered geothermal systems, has raised $26.25 million in Series B funding. Khosla Ventures and Kleiner Perkins Caufield & Byers co-led the round, and were joined by, Advanced Technology Ventures and Vulcan Capital.

Versa Capital Management and Crystal Capital have acquired retailer Bob’s Stores from TJX Cos. (NYSE: TJX) for an undisclosed amount.

VC Deals

Proto Labs Inc., a Maple Plain, Minn.–based provider of rapid injection molding and subtractive rapid prototyping, has raised $52 million from North Bridge Growth Equity. North Bridge receives a minority equity stake, and partner Doug Kingsley will join the Proto Labs board of directors.

Trilliant Inc., a Redwood City, Calif.-based smart grid startup, has raised $40 million from MissionPoint Capital Partners and Zouk Ventures.

BioImagene Inc., a Cupertino, Calif.-based provider of digital pathology solutions for cancer diagnosis and preclinical research, has raised $26 million in Series D funding. Burrill & Co. led the round, and was joined by Ascension Health Ventures, National Healthcare Services and return backers Artiman Ventures and ICCP Ventures. The company had previously raised around $10 million.

DeviceVM, a San Jose, Calif.-based developer of rapid-start computing technologies, has raised $15 million in Series C funding. New Enterprise Associates led the round, and was joined by return backers Storm Ventures, DFJ Dragon, Tim Draper and Larry Augustin. The company has now raised over $35 million in total VC funding.

F2G Ltd., a Manchester, UK-based developer of anti-fungal compounds, has raised £6.3 million in new VC funding. BankInvest Group led the round, and was joined by Astellas Venture Management, K Nominees and Merifin Capital.

NitroSecurity Inc., a Portsmouth, N.H.-based provider of unified information security solutions, has raised $10 million in new VC funding. NewSpring Capital led the round with a $7 million investment, while return backers First Analysis and Brookline Venture Partners also participated. The company has now raised over $23 million. It had filed for an IPO last year, but pulled the offering this past May due to “difficult market conditions.”

Aposense Ltd. (f.k.a. NST NeuroSurvival Technologies), an Israel-based developer of agents that target apoptosis for both molecular imaging and therapy, has raised $7.3 million in the second tranche of a $13.3 million round. Backers include Zeigler Meditech Equity Partners, Pontifax, Docor International, Federman Holdings, Technorov, Bargal R&D Investment, Phoenix Insurance Co., Polar Investments and Clal Biotechnology Industries. The company has now raised more than $40 million in total VC funding.

SailPoint Technologies Inc., an Austin, Texas–based provider of enterprise security and compliance software, has raised $6.5 million in Series C funding. Return backers include Lightspeed Venture Partners, Austin Ventures, Origin Partners and Silverton Partners. The company has now raised $20.5 million in total VC funding.

Environmental Operating Solutions Inc., a Bourne, Mass.-based water purification company, has closed its final tranche of its Series A round. No financial terms were disclosed, although VentureWire pegs the deal at $2.5 million. Stuart Mill Venture Partners led the round, with the Wolverine Venture Fund also participating.

XCOR Aerospace, a Mojave, Calif.-based private space flight startup, has raised an undisclosed amount of VC funding from Desert Sky Holdings. The company had previously raised seed capital from Boston Harbor Angels and individuals like Esther Dyson.

Buyout Deals

Endless LLP has sponsored a £70 million management buyout of Crown Paints, the UK’s second-largest paint maker, from Azko Nobel. Greenhill & Co. managed the auction process.

Lime Rock Partners and Thompson Street Capital Partners have agreed to acquire Industrial Rubber Products Inc. (OTC BB: INRB), a Hibbing, Minn.-based maker of protective coatings for the pipeline and industrial markets. IRP stockholders would receive $16.50 per share, which is a 49% premium to the average 20-day closing price. Stifel, Nicolaus & Co. is managing the sell-side process.

Linsalata Capital Partners has acquired Hospitality Mints Inc. from American Capital Ltd. No financial terms were disclosed. Hospitality Mints is a Boone, N.C.-based maker of customized, individually-wrapped promotional mints and candies.

TowerBrook Capital Partners has completed its acquisition of a majority interest in Broadlane Inc., a Dallas, Texas–based provider of supply chain management and clinical workforce management services to the U.S. healthcare industry. No financial terms were disclosed. Broadlane had raised around $34 million in VC funding since 2001, from firms like Kaiser Permanente Ventures, Tenet Healthcare Corp., Falcon Investment Advisors, AlpInvest and GM Investment Management.

PE Exits

CME Group Inc. yesterday received approval for its $7.6 billion acquisition of Nymex Holdings Inc. The deal will represent an exit for General Atlantic, which bought a 10% stake in Nymex two years ago for $160 million. Nymex went public soon after, but General Atlantic still held a 6.7% stake through the end of March 2008. has acquired InStranet Inc., a Chicago-based provider of software for enterprise information exchange applications, for $31.5 million. InstraNet had raised over $30 million in VC funding since 2000, from firms like Add Partners, Business Objects, Benchmark Capital, Galileo Partners and RSA Capital.

PE-Backed M&A

Kryptiq Corp., a Hillsboro, Ore.-based provider of healthcare connectivity solutions, has acquired Secure Network Solutions, a Portland, Ore.–based provider of healthcare administrative workflow solutions. Kryptiq has raised over $20 million in VC funding from firms like BCM Technologies, Voyager Capital, SmartForest Ventures and Shelter Capital Partners.

Human Resources

Lou Gerstner is stepping down as chairman of The Carlyle Group, a post he has held since 2003. He will become a senior advisor. Gerstner is the former CEO of both IBM and RJR Nabisco. No successor has been named.