peHUB Wire: Thursday, May 21, 2009

Today’s guest column is from Joe Weisenthal, Editor at The Business Insider.

Internet Startups Will Destroy The Government

Perhaps you’ve heard? Officials in Washington, D.C. are terrified over the specter of “deflation”. While inflation is usually considered to be an evil, the government is willing to print up untold sums to avoid what it sees as the calamity of falling prices.

Why are falling prices so bad? Actually they’re not bad at all, they’re a good thing. Falling prices means things are more affordable and plentiful, which is the natural state for a growing economy. The tech industry, one of the most economically lively and societally transformative, has been in a constant state! of deflation from the very beginning. Think about Moore’s Law, falling broadband prices, cheaper computers, ubiquitous cell phones, etc. Deflation. It’s all good.

But the government hates deflation because it’s bad for borrowers. The government, with its multi-trillion annual deficits, is the biggest borrower around. As a borrower, the government would prefer inflation — essentially paying off its debt through freshly printed currency. In a state of deflation, the government’s monster debt remains the same, but the tax base shrinks as prices and wages all go lower.

Yet that’s precisely what the Internet is doing. Sure, tech has always been a deflationary force, but it’s at the point where it’s really creating hyper-efficiencies and price pressure across all industries simultaneously. It’s contributing to the collapse in real estate prices, cars sales, travel industry profits, you name it. It’s b! asically done hollowing out media industry profits, for good. And as a ny self-respecting Web 2.0 windbag can tell you, it’s creating new markets where reputation and attention serve as substitutes for money. Historically, market forces and price signals have been the primary way in which a society regulates itself, but the Internet is providing ways to replace it. And these new non-money markets can’t be taxed.

In a vacuum, this is all great stuff. It’s creative destruction, and that’s a good thing, even if the collapse of old industries is painful. But we can survive old industries collapsing. That’s progress. Yet this progress for all people comes by creating a less-monetary, cheaper economy that will provide serious tax collection headaches for the government, which took out trillions in loans, thinking that the status quo would last forever. When the government goes bust, that won’t be quite as pretty or societally comfortable as when a legacy industry goes under.

***Remember: Dan is on vacation for one more week. Email press releases, tips, or comments to

Top Three

SVG Capital, a UK private equity investment firm and one of the largest investors in Permira, appointed Lynn Fordham as CEO of SVG Capital plc and Tony Dalwood as CEO of SVG Advisers.

Apollo Alternative Assets, which invests in private equity firm Apollo Management’s funds, said the value of its investments fell by $142.8 million in the first quarter.

SumTotal has stated yesterday’s offer from its largest shareholder, Vista Equity Partners, for $4.85 per share was superior to its agreed-upon price with suitor Accel-KKR. The offer marks Vista Equity’s third bid for the company. SumTotal said it will not withdraw or change its recommendation for its deal with Accel-KKR, but will negotiate with Accel-KKR for three business days. The company’s deal with Accel-KKR carries a $6.67 million breakup fee.

VC Deals

Loop’d Network, a San Diego-based online sports network, has raised $800,000 from existing private investors and new investor Tech Coast Angels.

Pathway Medical Technologies, a developer of endovascular treatments for peripheral arterial disease received a $1.5 million investment from Washington Research Foundation, independent, nonprofit foundation, as part of the company’s Series D financing. The round totals $42.5 million with investments from Forbion Capital Partners, Giza Venture Capital, HLM Venture Partners, Latterell Venture Partners, and Oxford Bioscience Partners.

Host Analytics, an Saas corporate performance management vendor based in Redwood, Calif., completed an up-round Series B financing by existing investors Advanced Technology Ventures (ATV) and Trident Capital and new investor StarVest Partners.

Aragon Pharmaceuticals, a San Diego-based developer of small molecule therapeutics for cancer, raised $8 million in Series A financing led by The Column Group and OrbiMed Advisors.

Avid Radiopharmaceuticals Inc., a developer of molecular imaging products, completed the first closing of a $34.5 million Series D financing led by Alta Partners. Existing investors AllianceBernstein, Safeguard Scientifics, Pfizer Venture Investments, Lilly Ventures, RK Ventures Group, LLC and BioAdvance.

Kleiner Perkins Caufield & Byers, has invested $15 million in Jinsite Science and Technology Co Ltd, biotechnology subsidiary of U.S.-based GenScript Corporation, Reuters reported.

Trusera, an online health community that received $2 million in angel funding, has announced it will cease operations.

Buyout Deals

Lombard Investments, a buyout firm based in Bangkok, has purchased a stake in Thai retail operator Robinson Department Store Public Company Limited.

Fiat SpA said it had more than a 50 percent chance of succeeding in its bid for Opel, adding that the other contenders did not have the expertise to save the struggling car maker, according to a Reuters.

PNC Equity Partners has completed a dividend recapitalization of portfolio company Griffith Energy Inc., a New York-based propane and heating oil distributer. The deal realized a return of 1.5x on the firm’s invested equity; Manufacturers and Traders Trust Company, JPMorgan, HSBC and TriState Capital provided debt financing.

Emerisque, a London private equity firm, has submitted a sweetened bid to purchase Hartmarx Corp., a bankrupt Chicago-based suitmaker, Crain’s reported. Buyout firm Mistral Equity and Yucaipa Corp. were also reported to be interested in making a joint bid for separate parts of the company.

JLL Partners has extended its unsolicted offer to Patheon Inc., a Canadian pharmaceutical company, for the price of $2 per share. The offer, which has been recommended against by the company’s independent committee, has been extended to June 1.

Veronis Suhler Stevenson, a New York buyout fund, has with its portfolio company Access Intelligence, purchased a minority stake in RETECH, a exhibition and conference event. Deal terms were not disclosed.

American International Group Inc is in exclusive talks with a bidding group including Franklin Resources Inc and Crestview Partners LP for its asset management business, Reuters reported.

PE-Backed IPOs

SolarWinds Inc stock closed up 10 percent in its trading debut on Wednesday, making it the sixth consecutive IPO in the United States to record gains on the first day of trading. The company has raised around $48.5 million in VC funding from Bain Capital Ventures (31.6% pre-IPO stake), Insight Venture Partners (31.6%) and Austin Ventures (3.4%). .

PE-Backed M&A

US Investigations Services, Inc., a Falls Church, Va.-based government security investigation services business backed by Providence Equity Partners, acquired Labat-Anderson, a government litigation support business. Terms of the transaction were not announced.

Anglo-Norwegian diagnostics company Axis Shield Plc has sold its subsidiary Plasmatec Laboratory Products to Cambridge-based Lab21 for an undisclosed amount, the company said on Wednesday. Lab21 has received funding from Merlin Biosciences and Nexus Medical Partners.

Firms & Funds

Kamada, a bio-pharmaceutical company based in Israel, has seen investor Hercules Technology Growth Capital, Inc. exercise an option to participate in an exchange of US$0.5 million debt for common stock and warrants. Kamada also announced that it has completed the private allocation of common stock and warrants to a small group of new investors, resulting in gross proceeds to Kamada of approximately US$1.6 million.

Versa Capital, based in Philadelphia, has reportedly closed its second buyout fund with $650 million in commitments, topping its $600 million target. The firm, which invests in distressed companies, began fundraising in January 2008. Versa invested $15 million in the debt of now-bankrupt Chrysler. The company also saw portfolio company American Restaurant Group go bankrupt this year. Versa web site

Human Resources

Perella Weinberg Partners, ad advisory firm based in London and New York, today has added Richard J. Shinder and Agnes K. Tang to its restructuring group as Managing Director and Director, respectively. Shinder joins from Goldman Sachs; Tang from Houlihan Lokey.