peHUB Wire: Thursday, April 30, 2009

Chrysler is filing for Chapter 11 bankruptcy protection. Moving on…

*** The National Venture Capital Association yesterday released a four-point plan to revive the slumped market for VC-backed IPOs. Two of the pillars are aimed at public authorities (tax incentives & SOX/RegD reform), while the other two are aimed at the private sector (ecosystem enhancements like helping form more boutique I-banks & creating new liquidity paths via secondary direct markets).

What’s important to realize about NVCA’s presentation (posted here) is that claims VC-backed problems are systemic, rather than recessionary. For example, the Spitzer-prompted separation of research and investment banking has caused massive drainage of the analyst pond, thus making it far more difficult for VC-backed companies to obtain coverage. And as much as I hate relaxing regs that were designed to protect investors, I’ll concede that small-cap companies should not be under the exact same rules a large-cap companies. Or at least they should have a more streamlined process (particularly vis-a-vis SOX compliance).

But let me also make some additional points:

1. One of the biggest problems for VC-backed IPOs is that the public markets require actual cash-flow. Often it even wants profitability (gasp). Venture capitalists may find such requirements short-sighted — after all, an unprofitable company can still become a great investment — but they were largely borne of VCs pushing an abundance of garbage into market during the dotcom boom.

2. Speaking of those “glory days,” they were the exception when it comes to VC-backed IPO volume. Just take a look at Page 6 of the NVCA presentation. What you’ll notice is that VC-backed IPO volume for most of this decade has mirrored VC-backed IPO volume during much of the 1980s (when companies like Dell went public). Sure there have been fewer than 10 VC-backed IPOs since the beginning of 2008, but that’s obviously more recessionary than systemic (IPOs on the whole have been shut out – which arguably has hurt mega-buyout firms more than VC firms).

3. One more note on the late 1990s: Capital gains rates were higher than they are today. As such, I simply don’t buy NVCA’s argument that the “carried interest as ordinary income” proposal will have much impact on the VC-backed IPO market. But feel free to discount this point, given my long-held (long-winded?) views on the matter.

4. The NVCA is trying to make both a macro-economic case (most VC-backed company job growth comes post-IPO) and a VC industry case (IPOs produce best returns for investors). And both should be seriously considered. That said, most VCs I know have given up on making investments with an IPO in mind. Instead, they want to help their companies build with an eye toward eventual trade sale. Not that an IPO is ruled out, but it’s more a dream than anything else.

Let me use a tortured baseball analogy: A general manager tries to get a guy who hits lots of homeruns to bat cleanup. The hope is that he’ll end of hitting grandslams, but you don’t sign a guy who “hits grandslams” — because that’s mostly a question of circumstance. Same goes for VCs, with trade sales as homeruns and IPOs as grandslams.

5. I am extremely interested in an NVCA proposal called InsideVenture, which basically is a halfway house for pre-IPO companies. The simplified idea is that a company would enter into a private shell, with inside investors buying/holding 30% of its stock, and the remainder being sold to qualified investors (NVCA is already reaching out to relevant institutions).

This would provide a bit of liquidity but, more importantly, would help the company go public without actually having to sell shares via an actual IPO. Kind of like KKR’s plan to list on the NYSE, or how a VC-backed company can go public via a reverse merger with a SPAC.

There are very serious VCs working on this plan, and they expect to get at least one company into the program by year-end. It will obviously have to be a company whose board and CEO have a good deal of courage, or at least a passion for guinea pigs. The plan also may require a continued shutdown of the IPO market – particularly given the initial discount participants are likely to take – but I don’t know of any VC who could complain that InsideVenture failed because the VC-backed IPO market came roaring back…

*** Quote of the Day: It’s not often that a conference panel is remembered for something said by a member of the audience, let alone by someone sitting in the second-to-last row. But that was the case during a cleantech panel at the NVCA Annual Meeting, when someone on stage asked for some insights of Broadview chairman Paul Deninger – in regards to the gap between early-stage cleantech funding and project finance. Here is what Paul said:

“The problem for cleantech VCs is that they don’t understand debt. When Broadview was bought by Jefferies, it took me three years to understand debt… No [debt investor] gives a rat’s ass about the upside of our investment opportunity, because they can’t participate in the upside. They can only participate in the downside.”

*** Publishing Note: I’m off to Nantucket this evening, to moderate a VC panel there tomorrow (I know, this job is a killer). Given my lack of faith in working broadband where I’ll be staying, Erin will be pinch-hitting on tomorrow’s Wire.

Top Three

Workday, a Pleasanton, Calif.-based provider of online software for enterprise resource management, has raised $75 million in Series E funding. New Enterprise Associates led the round, and was joined by return backer Greylock Partners and company CEO Dave Duffield.

Arcapita has put fast-food chain Church’s Chicken on the auction block, with Bank of America running the process.

American Capital reportedly is sounding out buyers for its European portfolio, in a deal that could be worth upwards of $2 billion. Citigroup is managing the process.

VC Deals

Likewise Software, a Bellevue, Wash.-based provider of open-source identity management solutions, has raised $10 million in third-round funding. Return backers include Ignition Partners, Intel Capital and Trinity Ventures. It has now raised $27.5 million since 2006.

Arkadin SA, a Paris, France-based provider of audio and data conferencing services, has raised €5 million in new VC funding led by UFG Private Equity. Other company backers include Apax Partners and CDC Innovation. Arkadin also secured €15 million in senior debt from a banking syndicate.

IMShopping, a Santa Clara, Calif.-based developer of a Twitter-based online shopping service, has raised $4.7 million in Series A funding from SK Telecom.

Stageline Group, a Canadian maker of hydraulic covered mobile stages, has raised C$4 million in VC funding from the Caisse de dépôt et placement du Québec.

Everbridge (f.k.a. 3n Global), a Los Angeles-based provider of incident notification systems, has raised $2 million in additional Series A funding from return backer ABS Ventures. The round total is now $9 million, including a $7 million first tranche from May 2008.

Buyout Deals

LLR Partners has agreed to acquire I-many (Nasdaq: IMNY), an Edison, N.J.-based provider of enterprise contract management software and services. Under terms of the agreement, I-many stockholders would receive $0.43 per share in cash, for a transaction value of approximately $36 million (or $23.3 million net of I-many’s debt and transaction-related expenses). I-many is being advised by Montgomery & Co.

PE-Backed IPOs

DigitalGlobe Inc., a Longmont, Colo.-based provider of commercial high-res earth imagery solutions, has set its proposed IPO terms to 14.7 million common shares being offered at between $16 and $18 per share. The company would be valued at approximately $807 million, were it to price at the high end of its range. filed for a $250 million IPO. It plans to trade on the NYSE under ticker symbol DGI, with Morgan Stanley and J.P. Morgan serving as co-lead underwriters. Investors include Ball Aerospace & Technologies Corp., Hitachi Ltd., Morgan Stanley and Telespazio SpA/Euimage Investment.

PE Exits

Trend Micro Inc. (TSE: 4704) has agreed to acquire Third Brigade, an Ottawa-based maker of security and compliance software. No financial terms were disclosed for the deal, which is expected to close later this quarter. Third Brigade has raised over $16 million in VC funding from firms like Summerhill Venture Partners, Celtic House Venture Partners and BDC Venture Capital.

Firms & Funds

Wilshire Private Markets, the private equity fund-of-funds business of Wilshire Associates, has raised $615 million fo! r its eighth fund.

Human Resources

Dayna Grayson, a principal with North Bridge Venture Partners, reportedly has been named acting CEO of Viximo, a Cambridge, Mass.-based provider of virtual goods solutions for social netw! orks, online dating and social gaming sites. Viximo is a portfolio company of both North Bridge and Sigma Partners.

Stephan Kruemmer is leaving 3i Group, where he has led the firm’s German business since 2005.

Anthony Martino and Gregg Newman have joined Sagent Advisors as co-heads of the firm’s Alternative Capital Markets business. They previously ran the same business for UBS.