peHUB Wire: Friday, January 8, 2010

The snow is falling, the job numbers are disappointing and I’m upset that my Avatar 3D Imax tickets coincide with the fourth quarter’s of Sunday’s Pats-Ravens game (is it possible that no one sitting around me will spill the beans?). In other words, it’s time for some Friday Feedback…

*** First up were some emails related to column about Larry Schloss being named CIO of the New York City pension system (the news was made official yesterday):

Anon: “Please give the NYC staff a break. They are public servants and are not compensated properly for their services (in the same way that policemen, firemen, teachers, governors and judges are not compensated properly for their services). Given their limited resources, they do a tremendous job and have produced terrific results. You should be thanking them for their efforts on behalf of the public.” To be clear, I have no beef with the r! ank and file. It’s their ex-elected leader who dropped the ball.

Oliver: “Good grief. Being ‘very, very rich’ is a qualification to invest NY City pensions? I’m not sure who that says more (or less) about: You, or the corrupt system you write about.”

Also, some feedback of sorts from NYC Comptroller John Liu. In his press release yesterday announcing Schloss’ hiring, he said: “Larry Schloss is the seasoned professional whom the people of New York will be able to count on to improve the investment performance of our pension funds and to burnish the public image of our City’s pension investments, the organization of which has been characterized as a ‘cluster$&*$’.”

Now who would have uttered such an obscene characterization… Thanks for reading John.

*** Next are a couple of carried interest taxation arguments. Before continuing, a quick observation based on my inbound correspondence: VCs are still fighting to maintain the status! quo, but PE pros appear to have given up.

First is Bob , who responds to my argument that VC investment activity won’t be significantly affected by a change to carried interest tax treatment: “Why take the time and the extra risk associated seed and early-stage venture investing if there is not apparent upside differential – risk and reward are tied together. I don’t think this means that all seed and early-stage venture investing comes to a halt – but there could have a significant, material, negative impact. The seed/early-stage is where the new industries and markets are created. Seed and early-stage is also the seed corn for later stage investing.”

Next up is Bill: “One can argue whether or not preferential capital gains tax treatment, in general, is a good idea, but to split hairs and say that one set of managers (entrepreneurs) deserve it, but another set of managers (VC, PE guys) do not, evidences not just a fundamental lack of appreciation for what financial managers do within the context of a modern econom! y but also a willingness to sustain a clearly illogical and contradictory position in order to maintain some romantic, populist and dated notions about the relative social value of different kinds of labor.

Therefore I challenge you: If you truly believe that investment GPs should have their carried interest taxed, then take the next logical step and declare your opposition to the favorable tax treatment for corporate managers’ equity stakes.”

*** Bill articulates the single stickiest wicket in my argument for changing carried interest tax treatment. And it’s one I’ve wrestled with a bit this morning. Here’s what I’ve come up with so far:

VCs often argue that while they aren’t investing their own money, they are investing their time just like entrepreneurs are. Both typically receive some form of cash salary on which they pay ordinary income (management fees for VCs, payroll for entrepreneurs).

From a directional perspective, however, the VCs are investing their time on behalf of someone else’s investment. Entrepreneurs, on the other hand, are investing their time on behalf of their own investment (assuming they had to pay something, even reduced salary, to get their options). I’m not saying it’s a distinction with an ocean-length of difference, but at least a small pond.

Second, the risk taken on by an entrepreneur is usually much higher than the risk taken on by a venture capitalist. An! entrepreneur typically puts all of his or her eggs – at least from a time perspective – into a single incorporated basket. VCs, on the other hand, split their time among a variety of baskets. If a single company fails, then the entrepreneur has lost far more than has the venture capitalist (particularly since, again, the VC didn’t put in any money).

I’m not basing my argument on the relative romanticism of entrepreneurs and VCs, but rather on the relative level of risk. I’m also not basing it on the “relative social value of different kinds of labor” or on a “lack of appreciation for what financial managers do.”

I appreciate what financial managers do for the economy, but don’t tell me for a moment than they do more than do, say, teachers or police officers (both of whom pay ordinary income).

Every profession should begin from a place of ordinary income, and then be required to argue their way out of it. Not the other way around. I believe that entr! epreneurs can make the case, based on their level of skin in the game of economic growth (although just barely). I do not believe that venture capitalists can do the same.

Now feel free to rip apart my tortured logic.

Top Three

The Carlyle Group has acquired a 63.6% stake in CVC Tourismo, Brazil’s largest tourism agency, for an undisclosed amount.

Carbonite Inc., a Boston-based provider of online backup services for consumers and small businesses, has raised $20 million in fourth-round funding, according to a regulatory filing. The company previously raised around $50 million, from Performance Equity, Menlo Ventures, 3i and Common Angels Fund. No new board members were listed on the regulatory filing.

Lawson Software (Nasdaq: LWSN) has agreed to acquire Healthvision Solutions Inc., a Dallas-based provider of integration and application technology to hospitals and large healthcare organization! s. The deal is valued at $160 million in cash, and is expected to close later this quarter. Battery Ventures took a company called Quovadx private in 2007 for $136.7 million, and split most of it into two companies: Healthvision and Rogue Wave Software (which Battery still holds as a portfolio company).

VC Deals

Phase Bioscience Inc., a Durham, N.C.-based developer of therapeutic fusion proteins, has raised $25 million in new Series B funding. New Enterprise Associates and a unit of OSI Pharmaceuticals were joined by return backers Hatteras Venture Partners, Johnson & Johnson Development Corp. and Fletcher Spaght Ventures. The company previously raised around $6.8 million.

EyeGate Pharma, a Paris-based developer of iontophoresis technology to non-invasively deliver therapeutics for ocular indications, has raised $22.6 millionin Series D funding (including an initial $11m calldown). Natixis Private Equity and Emerging Capital were joined by return backers Ventech, Innoven Partners and Medicis Capital. The company previously raised around $31 million.

HaloSource Inc., a Bothell, Wash.-based antimicrobial technology company focusing on safe water and infection control, has secured $21.9 million of a $26.9 million Series D round, according to a regulatory filing. The company previously raisedover $31 million fromOrigo Sino-India, Origo Resource Partners, Unilever Venture Partners, Alexander Hutton Venture Partners, Britannia Holdings and WRF Capital.

MicroCHIPS Inc., a Bedford, Mass.-based provider of implant systems focused on diabetes and osteoporosis, has raised $16.5 million in seventh-round funding. InterWest Partners was joined by return backers Polaris Venture Partners, Novartis Venture Fund, Flybridge Capital Partners, Medtronic, Saints Capital, Intersouth Partners, Care Capital and CSK Venture Capital. The company previously raised around $70 million.

Discera Inc., a San Jose, Calif.-based fabless analog semiconductor company that makes miniature silicon resonators for the frequency and timing control markets, has $11 million in Series D funding. Lurie Investments was joined by return backers Scale Venture Partners, Horizon Ventures and Ardesta.The company previously had raised over $48 million from the aforementioned firms, plus from3i Group and Partech International.

Twitter, the San Francisco-based micro-messaging service, has raised $5.17 million in new common stock and Series E preferred stock, according to a regulatory filing. The company previously had raised nearly $100 million in Series E funding ($98.2m, according to filing), from Insight Venture Partners, Benchmark Capital, Institutional Venture Partners, Morgan Stanley, Spark Capital and T Rowe Price. Overall, it has now raised over $160 million.

TheraSim Inc., a Durham, N.C.-based provider of online tools to reduce performance errors in healthcare and clinical research, has raised $1.25 million in VC funding from UK-based Andromeda Capital.

Buyouts Deals

Bay Grove Capital has acquired Cityice Cold Storage, a Seattle-based provider of cold storage warehouse services. No pricing terms were disclosed for the deal, which was financed by Chase Commercial Banking. Cityice will operate under the West Coast Cold LLC holding company, which also oversees Bay Grove portfolio company Seafreeze Cold Storage.

Diamond Castle Holdings is in discussions to acquire Suture Express Holdings from Linden LLC and Code Hennessy & Simmons. The transaction was recently granted early termination of the HSR waiting period by the FTC. Suture Express is a Lexena, Kansas-baseddistributor ofsutures, endo-mechanical products and other disposable medical/surgical products.

H.I.G. Capital has acquired a majority stake in Surg! ery Partners Holdings LLC, a Tampa, Fla.-based operator of ambulatory surgical centers. No financial terms were disclosed.

The Jordan Co. announced that it has acquired a 75% stake in Zest Anchors, an Escondido, Calif.-based manufacturer of dental attachments. No financial terms were disclosed. peHUB previously reported on the deal.

Rockbridge Growth Equity has acquired Protect America Inc., a Texas-based provider of self-installed monitored alarm systems. No pricing terms were disclosed. Falcon Investments provided an equity co-inves! tment, while CapitalSource led the senior financing that also included of America Merrill Lynch and Goldman Sachs. Imperial Capital and Rooney & Associates represented Protect America on the sale.

PE-Backed M&A

Iron Data, an Atlanta-based portfolio company of Thompson Street Capital Partners, has acquired Versa Systems, a Toronto-based provider of regulatory software for North American government agencies. No financial terms were disclosed.

Jive Software Inc., a Portland, Ore.-based maker of social business collaboration software, has acquired Filtrbox, a Boulder, Colo.-based provider of social media monitoring solutions. No financial terms were disclosed. Jive Software has raised over $27 million from Sequoia Capital, while Filtrbox has raised seed funding from Flywheel Ventures and True Ventures.

Local Media of America, a portfolio company of Thoma Bravo, has acquired Finest City Broadca! sting, operator of three radio stations in the San Diego market. No financial terms were disclosed.

Predictive Biosciences, a Lexington, Mass.-based developer of intervention diagnostic assays for cancer management, has acquired OncoDiagnostic Laboratory, an anatomic pathology and molecular diagnostics lab. No financial terms were disclosed. Predictive Biosciences has raised around $32 million in VC funding from New Enterprise Associates, Kaiser Permanente Ventures, Flybridge Capital Partners and Highland Capital Partners.

PE Exits

BMC Software (Nasdaq: BMC) has acquired Phurnace Software Inc., an Austin, Texas-based Java application deployment company. No financial terms were disclosed. Phurnace raised raised around $6 million in VC funding from S3 Ventures and DFJ Mercury.

Cisco Systems has acquired Rohati Systems Inc., a Sunnyvale, Calif.-based provider of network-based entitlement control solutions. No financial terms were disclosed. Rohati has raised over $22 million in VC funding since late 2006, from firms like Matrix Partnersand Foundation Capital.

Eisai Co. Ltd. has acquired AkaRx Inc., a Paramus, N.J.-based drug company focused on thrombocytopenia, for $255 million. AkaRx had raised over $16 million in VC funding, from InterWest Partners, Astellas Venture Capital and Sutter! Hill Ventures.

Motorola has agreed to acquire the assets of SecureMedia, a provider of software-based digital rights management (DRM) and security systems for IP video distribution and management. No financial terms were disclosed. SecureMedia had raised over $4 million in VC funding from M/C Venture Partners.

Firms & Funds

Persistence Capital Partners, a Canadian private equity firm focused on the healthcare services sector, has held a second close on more than C$65 million for its debut fund.

Human Resources

George Dunbar has joined Ann Arbor, Mich.-based Arboretum Ventures as a venture partner. Last month he stepped down as president and CEO of stem cell company Aastrom Biosciences Inc. (Nasdaq: ASTM). Prior CEO jobs have been with Quantum Dot (bought by Invitrogen) and Epic Therapeutics (Baxter).

Alan Spurgin has joined Square 1 Bank as an executive vice president of technology banking.