peHUB Wire, Monday, February 22, 2010

We’ve spent lots of time here discussing pay-to-play, in the context of public pension officials and the placement agents who bribe them. But there is percolating pay-to-play issue that we’ve only mentioned in passing: The issue of VC conference organizers who charge entrepreneurs to make elevator pitches in front of potential investors.

For the record, I agree with those who criticize such arrangements. VC conference organizers should make their profits from sponsors, not from struggling startups in need of cash. And, if sponsorship doesn’t cover it, then also charge non-presenting attendees. For more on this, you can read the vitriolic comment thread on Jason Mendelson’s Vox Populi post from last week.

But I’m not raising this to discuss the pay-to-play conference situation. Instead, I’m raising it to discuss something even more insidious: Venture capital “finders.”!

Last week, a Silicon Valley investor named Hugh Sloan III came across a startup that had received a minor award from Microsoft. He emailed the company founders, saying he had “3 ex Google angels and two Tier 1 venture funds who would be looking at this opportunity with me.”

Sounds great, except there was a giant catch: Sloan wanted $7,500 up-front, in order to set up the meetings. No refunds if the investors didn’t offer term sheets.

The startup declined, and one of its execs even wrote a blog post criticizing the approach (to put it mildly). Sloan immediately responded, threatening legal action. The startup capitulated, and pulled the post.

So I called Sloan, to get his side of the story. To give you a flavor of our conversation, it began with him saying he had no idea who I was or what I did. Fifteen minutes later, he “really respected” my work. Make your own conclusions as to his sinceri! ty.

Sloan defended his business practices, saying that he spend s more time working with “his” startups than do their own board members – adding that $7,500 is actually a bargain. He also defended his threats to sue the startup, but I couldn’t get an answer as to what his grounds would be (since the post did not seem to contain any factual inaccuracies – just some conclusions and adjectives to which Sloan objected). He hemmed and hawed, finally admitting that it would be tough for a startup to raise capital with “a legal claim hanging over its head.” Lovely.

Of equal import, Sloan had sent the startup a resume that included a few dozen VCs who “I speak with on a biweekly basis.” I reached out to some of these contacts, and they each told me the same things: It’s untrue.

One of them said he gets emails biweekly from Sloan, but has never actually spoken to him. Another said he’s spoken with him once or twice, but that it’s hardly a regular thing. A third wrote: “I’ve never spoken to the guy. Absolute liar.”

I pressed! Sloan on this issue, and he apparently believes two things: (1) Sending an email to someone – without receiving a reply – is the same thing as speaking to them. I’ll have to tell my corporate overlords that I deserve a raise, given that I speak to 57,000 people each day. (2) If Sloan is an angel in a deal later backed by a VC firm, he therefore is in regular contact with the partner on that deal (even if he isn’t).

To be clear, I am not suggesting that Sloan can’t set up the meetings he promises. In fact, one of his references vouches for him on that count (even though no deal resulted). Nor am I saying Sloan is the only one engaged in such shenanigans.

Instead, I’m pointing out that pay-to-play is not just the purview of state pension funds or mega-LBO pros. It also takes place in the startup world, where the intended prey are young entrepreneurs in search of first-time funding. And it deserves to be called out.

At least Hank Morris worked on commis! sion.

*** Got a question for David Bonderman? If so, the fine folks at UNC Kenan-Flagler are offering you an opportunity to ask it.

The school hosts its annual alternative investments conference this Thursday, featuring keynotes from Bonderman, Mark Yusko (Morgan Creek Capital) and Mark Patterson (MatlinPatterson). peHUB readers are being asked to submit questions you would like each keynote to answer during Q&A.

We’ll pick the best ones, send them over and report the answers back. Be sure to send your question via email to me today. Make ‘em count…

*** Are we about to see secondary market derivatives? That seemed to be the prognosis from SecondMarket CEO Barry Silbert, during a panel I moderated last week at the Future of Funding event in Silicon Valley. He also said that some folks were working on ETF-like structures, whereby institutional or individual buyers could scoop up diversified secondary portfolios based on things like i! ndustry sector (a social media vehicle, for example, might include Facebook and LinkedIn shares).

It’s a logical evolution for an exchange like SecondMarket, even though the headline seems more than a bit apocalyptic….

*** Publishing Note: Erin will be taking care of tomorrow’s peHUB Wire, as I’ll be flying out to Colorado for the VC in the Rockies event. She’ll also be handling Thursday and Friday’s editions, as I’ll be slacking off on the slopes. So be sure to send news and scoops her way (particularly tomorrow, since it’s her birthday). Her email is

Top Three

Providence Equity Partners plans to publicly list German cable television operator Kabel Deutschland in a €1 billion IPO, abandoning plans to sell it for up to €5.5 billion.

AMICAS Inc. (Nasdaq: AMCS), a Boston-based provider of image and information management solutions, said that it has received a $6.05 per share buyout offer from Merge Healthcare Inc. (Nasdaq: MRGE). This tops an existing $5.35 per share bid from private equity firm Thoma Bravo, which would have valued AMICAS at approximately $217 million. Raymond James & Associates is serving as financial advisor to AMICAS.

The Quadrangle Group will no longer manage approximately $5 billion in personal assets of NYC Mayor ! Michael Bloomberg. Instead, the team managing Bloomberg’s monies will spin out into an independent organization, with Quadrangle refocuses on its core private equity business.

VC Deals

GreenRoad, a Redwood Shores, Calif.-based provider of driving behavior services, has raised $10 millionin new VC funding from Generation Investment Management. It previously raised around $32.5 millionfrom Benchmark Capital, DAG Ventures, Virgin Green Fund, Amadeus Capital Partners and Balderton Capital.

VMOps Inc., a Cupertino, Calif.-based developer of software that allows enterprises and service providers to build Infrastructure as a Service (IaaS) clouds, has secured $8.8 million of an $11 million Series B round, according to a regulatory filing. The company previously raised an undisclosed amount of Series A funding led by Redpoint Ventur! es.

Vook, an Alameda, Calif.-based digital publisher whose platform combines text with videoand social media, has raised $2.5 million in seed funding. Backers include Ron Conway, Kenneth Lerer, Maples Investments, Baseline Ventures and Founder Collective.

Buyouts Deals

Advent International and Bain Capital are working on a joint bid for a majority stake in financial data provider Interactive Data Corp. (IDC), which is being sold by Pearson PLC. A rival bid is expected from Hellman & Friedman and Silver Lake Partners.

The Blackstone Group has reached a debt restructuring agreement with lenders to Hilton hotels, which Blackstone acquired in July 2007 for around $26.3 billion (including $20.6b of debt). The deal would cut around $4 billion of debt off the hotel chain.

Goldman Sachs has agreed to buy Metro International Trade Services, a warehouser of non-ferrous metals for customers of the London Metal Exchange, from Monitor Clipper Partners. No financial terms were disclosed.

PE-Backed IPOs

Reply Inc., a San Ramon, Calif.-based platform to buy and sell online clicks and leads, has filed for a $60 million IPO. It plans to trade on the Nasdaq under ticker symbol RPLY, with Jefferies & Co. and Piper Jaffray serving as co-lead underwriters. The company reports around $34.3 million in 2009 revenue, compared to $23.33 million in 2008 revenue. Its 2009 net income was around $2.4 million, compared to a $3.3 million loss in 2008. Reply has raised nearly $23 million in VC funding, from firms like Scale Venture Partners (21.47% pre-IPO stake), Outlook Ventures (6.47%) and ATEL Ventures.

Financial Engines, a Palo Alto, Calif.-based provider of technology-enabled portfolio management and investment services, has set its IPO terms to 10.9 million common shares being offered at between $9 and $11 per share. It would have an initial market cap of approxim! ately $435 million, were it to price at the high end of its range. The company plans to trade on the Nasdaq under ticker symbol FNGN, with Goldman Sachs serving as lead underwriter. Shareholders include Foundation Capital (17.4% pre-IPO stake), New Enterprise Associates (14.4%) and Oak Hill Capital Partners (9.3%). Financial Engines posted revenue of $84.98 million for 2009, compared to $71.27 million in 2008.

Niska Gas Storage, a Gridley, Calif.-based owner and operator of natural gas storage assets in North America, has filed for a $402.5 million IPO. It plans to trade on the NYSE under ticker symbol NKA. No underwriters are listed. The Carlyle/Riverstone Global Power and Energy Fund acquired Niska Gas Storage in 2006 from EnCana Corp. (NYSE: ECA).

PE-Backed M&A

CollabNet, a Brisbane, Calif.-based developer of cloud-based software lifecycle management tools, has acquired Danube, provider of Scrum project management solutions. No financial terms were disclosed. CollabNet has raised around $67 million in VC funding, including from Benchmark Capital and Norwest Venture Partners.

Olympic Air, a Greek airline recently privatized by Marfin Investment Group, has agreed to merge with A! egean Airlines.

PE Exits

Motorola (NYSE: MOT) has acquired BitBand Inc., an Tel Aviv, Israel-based provider video-on-demand technology for IPTV. No financial terms were disclosed. BitBand had raised over $9 million in VC funding from Apax Partners, Sequoia Capital, Aviv Venture Capital, the Challenge Fund and Ascend Technology Ventures.

Firms & Fund

Greycroft Partners has secured $115 million for its second fund, according to a regulatory filing. The listed target is $128 million. The New York-based firm was launched in 2006 by Alan Patricof, and focuses on early-stage digital media companies. It originally raised $55 million for its debut fund, but later expanded the size to $75 million,following theadditions ofpartners Dana Settle (former venture partner with Mayfield Fund) and Drew Lipsher (former Universal Music Group exec).

New York Life Capital Partners is raising upwards of $1 billion for its third mezzanine fund, according to a regulatory filing. Southridge Investment Group is listed as a placement agent. NYLCPclosed its second mezz fund in 2006, with $800 million in capital commitments. It manages over $6.8 billion in total assets, including direct private equity, mezzanine and limited partner stakes in third-party ! PE

Human Resource

Lee Fensterstock has stepped down as CEO of Broadpoint Gleacher Securities Group Inc. (Nasdaq: BPSG), to “pursue other interests.” He also has left the company’s board of directors. Chairman Eric Gleacher has been named as successor.