peHUB Wire: Monday, April 13, 2009

Earlier this year, Tom Friedman got knocked around for suggesting that some of the stimulus cash be redirected to venture capital firms. Now, a quasi-manifestation of that idea is actually being discussed in the halls of power.

Innovation America, a nonprofit public/private partnership, and The National Association of Seed and Venture Funds (NASVF) are lobbying for a $2 billion fund-of-funds that would be used to shore up state investment programs and angel groups.

Richard Bendis of Innovation America says that the organizations held initial talks with the Obama transition team back in December, at which point the proposed program stood at just $1 billion. Bendis says that the government reps requested additional information, which prompted Innovation America and NAVSF to conduct a survey demonstrating the difficulties faced by young companies in search of venture capital. Even though the survey was unscientific, the federal response was that $2 billion sounded like a more appropriate figure (insert jaded sadness here).

Bendis says that the first $1 billion would come out of the stimulus package (maybe from SBA’s budget), were the program to be approved. It would then be allocated to various groups under the auspices of Innovation America, with third-party investors being asked to match the federal contributions on a dollar for dollar basis (bring us to the $2b figure). Kind of like PPIP for the entrepreneurial set. Also worth noting that around $200 million would be set aside for a technical grant program.

You can view a proposed flow chart here.

I was among those who knocked Friedman’s plan, in part because he suggested giving money to top-tier VC firms that don’t actually want for cash. That concern is certainly not operable here, as this proposal does focus on funds in need — angel funds hit by plummeting net worths, and local/regional funds hit by municipal/state budget shortfalls. But perhaps there are even larger reasons to be skeptical (sorry, it’s in my nature). Here’s a quick rundown:

1. State-run VC programs typically have lousy track records, for the very reason that they invest exclusively in their own states. It’s what Harvard Biz School’s Josh Lerner has called the “negative proximity effect,” in regards to LP commitments and direct investments by sovereign wealth funds. If there is a great opportunity across the border, you can’t invest in it. And if there isn’t a great one locally, you invest anyway.

I guess that’s why neither NASVF or Innovation America have included an expected IRR in their presentations (although they’ll need one in order to attract third-party capital).

2. So if this isn’t primarily about return on investment, then it’s about jobs. Fine from a stimulus perspective, but why direct the $2 billion to seed-stage opportunities? Wouldn’t it be better spent on slightly-older companies, which could use the capital to avoid layoffs or to commercialize products that are much further along the development runway? After all, the NASVF’s own survey said: “90% of the already-funded companies can’t obtain follow on funds to get to the next level.”

I put the question to Bendis, who said that it needn’t be an “either or.” His group and the NASVF are focusing on seed-stage opportunities because that’s what their organiations know.

3. Where would the third-party matching funds come from? Bendis seemed to indicate that it might come from the very organizations that would be funding recipients. Maybe I just misunderstood, or maybe the idea is to present this as a quasi-leverage play.

4. This may be heresy, but I’m still not convinced that the early-stage funding gap is particularly dire. As we previously reported, MoneyTree data shows that there were more seed/early stage deals done in 2008 than there were in 2001, 2002, 2003, 2004, 2005 or 2006. They might have become a smaller part of the venture whole, but why no request for this program in 2004? Moreover, the decrease in angel activity should have been partially offset by the decrease in valuations. Again, I know that plenty of entrepreneurs and VCs will read this and wonder how someone in my position can be so out of touch (paging Adeo Ressi)…

5. On the plus side, Bendis and NASVF president Jim Jaffe did suggest starting with some sort of pilot program rather than the whole shebang. The question is if such a sensible move is politically viable, in this age of “shovel-ready” myopia.

To be clear, I’m open to being persuaded that my reservations are redressable. In fact, I kind of hope that they are, because this proposal’s goals are noble (jobs, funding new businesses, etc.). I’m just not there yet… Feel encouraged to share your thoughts here.

*** VC Fundraising: Forty U.S.-based venture capital firms raised just $4.3 billion in the first quarter of 2009, according to data released this morning by Thomson Reuters and the National Venture Capital Association. The downside is that this represents the lowest number of funds to raise capital since Q3 2003. On the upside, the actual amount of capital raised was higher than the $3.5 billion raised in Q4 2008.

Just three of the funds were first-timers, while the largest raiser was August Capital ($650m for Fund V).

Top Three

Goldman Sachs has closed its fifth secondaries fund with approximately $5.5 billion in capital commitments. Its previous secondaries fund closed in 2006 with $3 billion.

Collective Media, a New York-based provider of an online advertising network, has raised $20 million in Series B funding. Accel Partners led the round, and was joined by return backer iNovia Capital. Past backer Greycroft Partners was not noted in the press release.

Current Media Inc., a San Francisco-based television news and information network for young adults, has withdrawn registration for a $100 million IPO. It cited “current market conditions.” The company had planned to trade on the Nasdaq, with JPMorgan and Lehman Brothers serving as co-lead underwriters (the last amended filing was in May 2008, before Lehman collapsed). Shareholders include Blum Capital Partners, Yucaipa Cos., DirectTV, Comcast and former Vice President Al Gore.

VC Deals

Marinus Pharmaceuticals Inc., a Branford, Conn.-based developer of neurological and psychiatric drugs, has raised $20 million in Series B funding. Return backers include Canaan Partners, Domain Associates, Sofinnova Ventures and Foundation Medical Partners. The company’s lead candidate is for adults who suffer from partial onset seizures.

Cooliris, a Palo Alto, Calif.-based provider of 3D Web navigation software, has raised $15.5 million in Series B funding. Backers include Kleiner Perkins Caufield & Byers, DAG Ventures, The Westly Group and the T-Mobile Venture Fund.

Cell Biosciences, a Palo Alto, Calif.-based provider of nanoproteomic analysis systems to life science researchers, has raised $10 million in Series C funding. The Wellcome Trust led the round, and was joined by return backers Domain Associates, Latterell Venture Partners, Novo A/S, Mitsui Ventures, Royal Bank of Canada and The Vertical Group.

Adapx, a Seattle-based maker of digital pens and paper, has raised $9 million in second-round funding. UV Partners led the round, and was joined by OVP Venture Partners and Paladin Capital Group. The company previously raised money from In-Q-Tel, the venture capital arm of the CIA.

Nirvanix, a San Diego-based developer of cloud storage platforms, has secured $5 million of a $6 million venture capital round, according to a regulatory filing. The company previously raised over $29 million from firms like Intel Capital, Valhalla Partners, European Founders Fund, Windward Ventures and Mission Ventures.

ScanScout Inc., a Cambridge, Mass.-based developer of software for inserting contextual advertising into Internet video, has raised $5.1 million of an $8.1 million third VC round, according to a regulatory filing. The company previously raised over $7 million from Catalyst Partners, First Round Capital, Time Warner and angel Ron Conway.

Piedmont Pharmaceuticals LLC, a Greensboro, N.C.-based company focused on parasitology and drug delivery systems for companion animal and human use, has raised $5 million in VC funding led by return backer CM Capital Investments (Australia).

The Rubicon Project, a Los Angeles-based Internet advertising platform, has raised $5 million in Series B funding from Clearstone Venture Partners, Mayfield Fund and IDG Ventures Asia. It also secured $8 million in venture debt from Silicon Valley Bank. The company has now raised $33 million in total equity and debt funding.

Nuventix Inc., an Austin, Texas-based developer of thermal management solutions, has raised $4 million in new Series C funding from Braemar Energy Ventures ($3m) and South Korea’s Uniquest ($1m). The round now stands at $8 million. Braemar had participated on the first close, alongside ATV, CenterPoint Ventures, InterWest Partners and Rho Ventures.

Molecular Templates Inc., an Austin, Texas-based biotech company with a protein platform for developing cancer therapeutics, has raised $2.5 million from Santé Ventures.

Phoebe’s Cupcakes LLC, a Chicago-based maker of gourmet cupcakes, has raised up to $1.5 million from Ascent Equity Capital.

BookTour Inc., an online directory of author events, has raised $350,000 in Series A funding, according to a regulatory filing. Backers include The company’s chairman is Christopher Anderson, editor-in-chief of Wired and author of The Long Tail.

NeoStem Inc. (Amex: NBS), operator of adult stem cell collection centers in U.S. metropolitan areas, has raised $11 million via a private placement. Among the investors was existing shareholder RimAsia Capital Partners.

Buyout Deals

Colony Capital has broken off talks about a potential investment in struggling casino company MGM Mirage (NYSE: MGM).

Quarry Capital has acquired Royal Pet Supplies Inc., a pet supplies distributor founded more than 60 years ago. No financial terms were disclosed.

Swander Pace Capital has invested an undisclosed amount in Applegate Farms LLC, a brand of organic and antibiotic-free natural deli meats, hot dogs, sausage and bacon. The company was founded in 1987 by its current CEO, Stephen McDonnell.

Thoma Bravo has agreed to acquire Entrust (Nasdaq: ENTU), a Dallas–based company that secures digital identities and information for consumers, enterprises and governments. The deal’s total equity value is $114 million, with Entrust stockholders to receive $1.85 per share. Barclays Capital is advising Entrust, which may solicit alternative offers over the next 30 days.

Wind Point Partners has acquired Hearthside Food Solutions, a Grand Rapids, Mich.-based contract manufacturer of specialty food products. No financial terms were disclosed.

Each week, peHUB posts a roundup of recent PE-backed downgrades. Here’s the latest.

PE-Backed IPOs

Fabrinet Inc., a Thailand-based provider of foundry services to optical component, module/subsystem and optics OEMs, has canceled a proposed $250 million IPO, due to “market conditions.” The company had planned to trade on the NYSE, with Morgan Stanley and Deutsche Bank Securities serving as co-lead underwriters. Shareholders include H&Q Asia Pacific (60.4% pre-IPO stake), JDS Uniphase Corp. (6.7%) and J.F. Shea Co. (6.7%).

PE-Backed M&A

Multi Packaging Solutions, a portfolio company of Irving Place Capital, has acquired certain assets of Ivy Hills Corp., a New York-based supplier of packaging solutions to the multi-media and consumer markets. No financial terms were disclosed. Innovative Folding Carton from ICV Capital Partners and the 21st Century Group. No financial terms were disclosed.

PE Exits

Cisco has agreed to buy Tidal Software Inc., a Palo Alto, Calif.-based maker of intelligent application management and automation solutions. The deal is valued at approximately $105 million in cash and retention-based incentives. Tidal Software raised around $18 million in VC funding between 1998 and 2001, from firms like Novus Ventures, JPMorgan Partners (now managed by Panorama Capital) and VantagePoint Venture Partners.

Firms & Funds

Dominus Capital, a firm formed last year by former members of Quad-C Management, has held a $102.6 million first close on its debut fund, according to a regulatory filing. peHUB had previously reported that the firm is targeting $375 million, with a $500 million hard cap. Probitas Partners is serving as placement agent.

ING plans to sell up to €8 billion worth of operations, in order to reduce risk and refocus its bank on Europe.

Michael Gollner, a former partner of Court Square Capital Partners, has formed a new UK-based firm called Olmeto Capital Partners, according to Dow Jones. No additional information was disclosed.

Numoda Corp., a Philadelphia-based product development company, is raising $150 million in third-party capital for its debut venture capital fund, according to VentureWire. It previously had made small investments off of its balance sheet.

Tiger Global has offered to cut the size of its fifth private equity fund by up to 25 percent. The $1.24 billion fund closed early last year.

Human Resources

Don Basile has joined Iron Capital Partners as a managing director. He most recently served as CEO of Fusion-io, an Iron Capital portfolio company.

Burrill & Co. has made three promotions: Garrett Vygantas to director of venture capital, Tiba Aynechi to director of merchant banking and Neel Patel to senior associate of merchant banking.