peHUB Wire: Thursday, July 1, 2010

Dan is on vacation for the rest of this week, so today’s guest column comes from Howard Lovy:

Randal Charlton, executive director of the TechTown business incubator in Detroit, is a gambling man. And, no, I am not referring to the gleaming downtown casinos that prey on Detroit’s jobless with false hopes of instant riches. I am talking about the kind of gambling that just might provide real rescue to the Motor City.

Charlton says that when TechTown takes in a would-be entrepreneur and provides office space, training, funding, and other services, he is placing a bet. Odds are, most of the 200-plus companies he’s incubating near the Detroit campus of Wayne State University will fail. But, unlike at the casinos downtown, the failures are not total losses. They are creating a culture of entrepreneurship in Detroit, something that nearly everybody agrees has been lacking in this historically one-industry town.

TechTown was originally created in 2003 by the state as a so-called “SmartZone” set aside for entrepreneurship training and company incubation. It wasn’t until May 2009, however, that TechTown truly got off the ground. That was when a Detroit philanthropic partnership called the New Economy Initiative and the Kauffman Foundation together took a gamble in the form of a $9.25 million grant to TechTown to encourage entrepreneurship and create 1,200 startup companies in three years.

The next step, say local VCs, is to get institutional investors to see the logic of taking these kinds of gambles on Detroit.

In other states, says Chris Rizik, CEO of Renaissance Venture Fund, with offices in Detroit and Ann Arbor, MI, institutions have taken more risk by investing in local funds that are still early stage. In Michigan, though, it is largely only the state government that has been willing to place that bet, via state-created funds like the $120 million Michigan 21st Century Investment Fund or the $95 million Michigan Venture Fund.

Such state programs are helping create a new generation of Michigan VC firms by funding the likes of Arboretum Ventures and RPM Ventures, both of Ann Arbor, MI. But they can only go so far. Often, they offer one-time-only deals. Venture firms prefer to have an investor base that is committed to investing in each successive fund.

“The Michigan-based funds generally do not have that,” Rizik says. “So, in a way, it’s like each time they raise they’re starting, if not from scratch, then close to scratch, and it’s tough to build up size when you don’t have that institutional investor base behind you.”

It’s easy to feel overwhelmed by such odds. But I am inspired by the investors and entrepreneurs who keep placing their bets—and occasionally see them pay off.

I especially like the story of Jake Sigal, who bootstrapped his company out of his guest bedroom in Ferndale, MI, about 2 1/2 years ago—tinkering around with the idea of a stand-alone Internet radio. Sigal’s company, Livio Radio, gained an undisclosed amount of backing from Beringea, one of Michigan’s largest venture capital firms, and aims to provide users access to Pandora, NPR, and more than 44,000 Internet radio streams.

Or take Tom Kinnear, managing director of the University of Michigan’s Wolverine Venture Fund, what he calls the country’s first student-led venture capital fund. He and his charges at U-M’s business school are not playing what he calls “theoretical golf.” They are actually taking a swing and gambling… I mean, investing… real money in real companies.

One of Wolverine’s investments is in Delphinus Medical Technologies, a medical imaging spinout of Detroit’s Karmanos Cancer Institute. It was an all-Michigan VC deal, co-led by Beringea of Farmington Hills, MI, through its InvestMichigan! Growth Capital Fund, which provides expansion capital to promising Michigan businesses. Also leading the Delphinus investment was Ann Arbor’s Arboretum Ventures. And joining them was North Coast Technology Investors, with offices in Ann Arbor and Midland, MI.

There even are some encouraging signs emerging from what on the surface looked like disastrous news when Pfizer, the world’s largest drugmaker, eliminated 2,400 jobs in 2007 when it closed its Ann Arbor research center. A group of 17 small contract research organizations (CROs) have sprouted up, many of them populated by Pfizer veterans, to provide specialized services to biotech and pharma companies in Michigan. The list we compiled of these organizations can be seen on Xconomy Detroit today.

These Detroit successs stories inspire not because of the amount of money involved—folks in Boston or Silicon Valley might scoff at the comparatively low numbers—but because they show that, despite the worst economy in generations, record numbers of jobless, factory closings, home foreclosures, and entire communities devastated by the economy, the spirit of entrepreneurship is indeed growing in Michigan.

We’re not gambling here in Michigan. We’re fighting for survival. And based on the determination I hear from VCs and see from our entrepreneurs, I think it might be worth it if more institutional investors took a gamble on Michigan. I think it will pay off.

Top Three

Providence Equity Partners has bought Study Group, a private education provider, for A$660 million (U.S. $570 million). CHAMP Private Equity and Petersen Investments were the sellers. Providence Equity, a private equity firm based in Providence, R.I., invests in media, communication, entertainment and information services.

Modcloth, an innovative online retailer, has secured $19.8 million in Series B financing led by Accel Partners. Prior investors, First Round Capital and Floodgate, also participated. News of the financing was reported by peHUB in May.

General Atlantic said Thursday that it has completed its buy of First Republic Bank. General Atlantic co-led a group of investors, which included Colony Capital, to buy First Atlantic from Bank of America. The deal was announced in late 2009. Financial terms were not announced. First Republic is a San Francisco bank and wealth management firm. General Atlantic is a private equity firm based in Greenwich, Conn.

VC Deals

Burrill & Co.’s venture capital group has agreed to provide up to $10 million in debt financing to Acusphere Inc. Acusphere, of Cambridge, Mass. is a specialty pharmaceutical company that develops new drugs and improved formulations of existing drugs. Burrill & Co. is a life sciences company. Burrill’s venture capital funds have more than $950 million under management.

Symform has closed a $4 million financing round led by Longworth Venture Partners. OVP, Symform’s original venture investor, also participated. As part of the financing, Longworth’s Nilanjana Bhowmik will join Symform’s board. Symform, of Seattle, provides backup and disaster recovery services.

Zenprise Inc. announced Wednesday a $9 million round of financing. Rembrandt Venture Partners led the round, which also included Ignition Partners, Bay Partners, Mayfield and Shasta Ventures. Zenprise, of Fremont, Calif., provides enterprise mobile management and device management software.

Aepona, which announced a $10 million C round of investment in May, said Wednesday that SAP Ventures has agreed to join the round. SAP joins Amadeus Capital Partners, which is Aepona’s lead investor, along with other existing investors, including Polaris Ventures, Innovacom, Nordic Venture Partners and Sutter Hill Ventures. Aepona provides software and services to Telcos.

Move Networks said late Wednesday that it has retained a financial advisor to evaluate strategic alternatives, including a possible sale. Roxanne Austin, Move’s president and CEO, is also stepping down. Move, a video streaming technology provider, has received funding from Steamboat Ventures, Hummer Winblad Venture Partners, Benchmark Capital, Microsoft, Cisco, Comcast and Televisa.

McPhy Energy has received a second round of funding worth EUR 13.7 million. Sofinnova Partners was lead investor with participation from Gimv and Amundi Private Equity Funds. McPhy Energy, of France, is involved in the solid storage of hydrogen in the form of magnesium hydride. Sofinnova Partners is a venture capital firm based in Paris. Corp. (NASDAQ:LOCM) said Thursday that it has agreed to buy the assets of OCTANE360, a provider of domain-based local advertising services to small businesses. is paying $5 million in cash and stock with an earnout of up to $5.9 million if certain performance criteria are met in the two-year period following the closing. At the same time, said it had closed a $30 million revolving credit facility with Silicon Valley Bank., of Irvine, Calif., operates a local search site and network.

Buyouts Deals

Friedman Fleischer & Lowe LLC, Harvest Partners LP and Pine Brook Road Partners LLC have invested $100 million in Green Bancorp., which owns Green Bank N.A. of Houston. No investor owns more than 24.9% of company. Friedman Fleischer is a San Francisco private equity firm with about $2.5 billion in assets under management. New York-based Harvest Partners is a $1.3 billion private investment firm. Pine Brook Road Partners, of New York, invests in energy and financial services.

Affiliated Managers Group (NYSE: AMG) said Wednesday that it has completed its buy of Pantheon from Russell Investments (a subsidiary of Northwestern Mutual Life). The deal was valued at roughly $775 million. Pantheon is a fund-of-funds and secondary fund manager. AMG is an asset manager.

Munsters said Wednesday that it has agreed to sell MCS. Triton, a private equity firm based in Frankfurt, is the buyer. MCS, a unit of Munsters, provides damage restoration services and had net sales of SEK 2,768 M and 1,805 employees in 18 countries. The deal value is roughly SEK 1,300. Munsters, of Kista, Sweden, said its remaining businesses will be focused on air treatment solutions.

OpenGate Capital closed its buy of the Kotka Mills division of Stora Enso, a Finnish corporation. The deal also includes Stora Enso’s laminating paper operations in Malaysia and Stora’s related business operations in Tainionkoski, Finland. Financial terms were not disclosed. Los Angeles-based OpenGate is an opportunistic private equity firm.

Aptuit has bought GlaxoSmithKline’s Medicines Research Center in Verona, Italy. The arrangement is effective July 1. Financial terms were not disclosed. Aptuit, a pharmaceutical services company, is a portfolio company of Welsh, Carson, Anderson & Stowe. GSK is a research-based pharmaceutical and healthcare company.

GE Capital said Thursday that it has completed its acquisition of the factoring business of Royal Bank of Scotland Group Plc. Financial terms were not announced. RBS, a UK bank, is disposing of non-core assets.

Brinker International Inc. has closed its sale of On the Border Mexican Grill & Cantina to OTB Acquisition LLC, an affiliate of Golden Gate Capital. Gross proceeds for the deal were $180 million. Brinker, of Dallas, is a casual dining restaurant company. Golden Gate is a San Francisco private equity firm.

Firms & Funds

Brooks Private Equity Associates has changed its name from Brooks Private Equity Advisors. Brooks, of Boston, is a manager of niche private equity funds-of-funds and customized programs. The change is effective June 30.

The SEC voted unanimously Wednesday to rein in “pay to play” practices and put restrictions on investment advisors. The rule bars an investment adviser for two years from providing services to a pension fund when the adviser makes a political contribution to an elected official who can influence the selection of advisers. The rule also sets limits on political contributions by an adviser, and bans advisers from paying third parties, such as placement agents or family members, to make contributions to seek business.