peHUB Wire: Wednesday, September 22, 2010

Editor’s Note: Today’s guest column comes from Jeff Bussgang, a general partner at Flybridge Capital Partners.

Fred Wilson posted a blog last week regarding the “Two Venture Capital Industries”– observing that the Internet/software industry, where he invests, has undergone great change due to the lower-cost model (commonly known as the “lean start-up” movement) but the more capital-intensive industries, such as life sciences and cleantech, where the fundamental economic model has not been altered.

The post is a great one, and it raises something I’ve been thinking a bit about lately, which is whether the lean start-up approach to building start-ups can be applied to industries beyond Internet/software.

HBS Professor Tom Eisenmann is creating a course next spring on “Launching Technology Ventures,”where he is going to delve into lean start-ups, finding product-market fit, what are the key start-up activities before product-market fit and what are the most important activities afterwards, and other salient topics.

In my role as an EIR at HBS this year, I’m teaming with Tom on this course. The case studies will go beyond Internet/software start-ups in exploring how other sectors can apply lean start-up theory. One of the reasons I have so much personal conviction of the breadth of these theories is that there are two companies in our portfolio–one a clean tech and the other a life sciences–that have applied parts of the lean start-up methodology very effectively. Their stories help illuminate the opportunity for others.

The clean tech company is Digital Lumens, recent Innovation award winner at the World Economic Forum. We seeded the company, and founding entrepreneur Jonathan Guerster, with a mere $500,000 to explore a thesis around software-controlled, industrial LED lighting. Jonathan recruited a technical team out of Color Kinetics and built a proof-of-concept. We then raised a $5 million Series A, hired an outstanding CEO (Tom Pincine), and the company built v1.0 of the product.

With the success of v1.0 behind it, the company sought out a few customers to work through the kinks. Once that was done, and rapid product iteration cycles, the company raised a Series B and is now scaling sales operations. If you didn’t know the company was a demand-side energy technology company, you would think the above description applied to a Web 2.0 company. Digital Lumens may require 10s of millions of dollars end-to-end, but just because it’s a capital-intensive business, doesn’t mean they couldn’t apply lean start-up approaches to change the risk-reward profile for the early investors.

Similarly, Predictive Biosciences has been on a lean start-up path. That sounds odd to say for a company that has raised a total of $56 million to pursue a very big vision for urine-based biomarkers (pee in a cup and Predictive will tell you if you have cancer, and what type). But the initial investment we and Highland made was a mere $500,000 each to spin the IP out of Children’s Hospital, hire an initial technical team to build the product/prototype, and figure out which market to target and how. Only then did we raise a $10 million Series A, and even that capital was deployed in a very focused, test and learn fashion until the initial market! (bladder cancer) was identified and vetted. Again, many of the same lean start-up processes that or Xobni or others have deployed in the Web 2.0 would feel very natural to the dozen PhDs running Predictive.

So, yes, the cost revolution impact to one type of VC investing has been enormous. But the lessons, frameworks and paradigms can be applied successfully to the “other” VC type of investing as well.

Jeff Bussgang is a general partner at Flybridge Capital Partners and an Entrepreneur-in-Residence at Harvard Business School. He is the author of Mastering the VC Game, writes the blog Seeing Both Sides, and can be followed on Twitter @bussgang.

Top Three

Urban Brands Inc. filed for Chapter 11 bankruptcy protection as a result of economic conditions that led to liquidity problems. The Secaucus, N.J.-based women’s clothing company had listed estimated liabilities of $100 million to $500 million and estimated assets of $10 million to $50 million. Urban Brands said it plans to pursue a sale. Urban Brands is part of the portfolios of Trimaran Capital Partners LLC, TSG Capital Group LLC and Canada-based CIBC Capital Partners.

Clorox Co. has struck a deal to sell STP and other auto-care brands to private equity firm Avista Capital Partners for $780 million so it can focus more on lucrative businesses like hospital disinfectants and beauty products.

Thompson Publishing Holdings Co has filed for Chapter 11 bankruptcy, according to court filings. The company has assets between $10 million and $50 million and liabilities estimated between $100 million and $500 million.

VC Deals

Aryaka, a California-based producer cloud-computing applications, has raised $14 million in Series A funding. The funding came from Trinity Ventures, Mohr Davidow Ventures, Nexus Venture Partners and Stanford University. Aryaka was founded in November 2008.

Rocket Fuel Inc., a display advertising company, has raised $10 million in a Series B round. The bulk of the funding came from first-time investors Nokia Growth Partners, while other new investors included Northgate Capital. Mohr Davidow Ventures and Labrador Venture were return investors.

Ubiquisys, a communications technology company, has raised $5 million from three first-time investors and a number of return investors in the second close of a funding round announced in July. SerComm Corp., UMC Capital Corp. and Pacific Venture Partners have invested for the first time, while Advent Venture Partners, Accel Partners and Atlas Venture have reinvested.

Warburg Pincus has led an investment of R$350m ($201m) in Omega Energia, a Brazilian energy firm. Omega, whic! h was formed in 2008, is involved in buying small hydro power plants. Warburg worked in conjunction with Tarpon Investimentos, the current controlling shareholder of the company.

Buyout Deals

Françoise Saget Linvosges, a French mail-order company specializing in household linens, has been acquired by Alpha Private Equity Funds, which specializes in family-owned businesses and corporate spin-outs.

L.A.-based Marlin Equity Partners has acquired Hospedia, whose bedside hospital terminals are used to provide access to entertainment and the Internet for roughly 10 million patients per year. Terms of the acquisition were not disclosed.

Private equity firms TPG Capital LP and Silver Lake Partners held early stage talks about buying Seagate Technology plc, but it is unlikely that it will result in a deal, a source familiar with the situation said on Tuesday.

Sharp Corp. is buying Recurrent Energy, a portfolio company of Hudson Clean Energy Partners. Other shareholders include Mohr Davidow Ventures. Sharp has agreed to pay $305 million in cash. Recurrent Energy is solar project developer and generating company with a 2 GW pipeline. Sharp, of Japan, designs and m akes electronic products like LCD TVs.

PE-backed M&A

Quad-C Management, a Charlottesville, Va., private investment firm, has bought Durcon, a supplier of work surfaces, from Stonebridge Part ners, a private equity firm based in White Plains, N.Y. Durcon was advised by Harris Williams & Co.


Restoration Hardware plans to raise as much as $300 million in an initial public offering that would allow its private equity backers to cash in on part of their investment in the U.S. furniture retailer, a source familiar with the situation told Reuters.

PE Exits

Private equity firm TPG is selling its 9.3 percent stake in Parkway Life REIT in a deal that could raise as much as S$91.1 million ($69 million), IFR Asia reported on Wednesday.

Firms & Funds

Private equity firm Partners Group has raised EUR650m ($853m) for its Partners Group Direct Investments 2009 direct investment program. The fund has previously invested in Grupo Santillana, a Spanish-language educational book p! ublisher, and Kaffee Partner, a German coffee company.

Singapore Telecommunications plans to create a new S$200 million ($150 million) venture capital subsidiary. The unit, Innov8, will invest in new technologies and solutions that lead to quantum changes in network capabilities, next generation devices and digital content services.

Quantum Energy Partners has formed Quantum Utility Generation, which will buy and develop conventional and al! ternative energy projects in North America. The Houston company will be capitalized with $1 billion of equity, $500 million of which has been committed by Quantum. Another $500 million in equity will come from other co-investing financial and strategic partners. Quantum is a buyout shop with more than $5.7 billion of assets under management.

CapMan, a leading alternative asset manager in the Nordic countries and Russia, has set up its fifth mezzanine fund, to be called CapMan Mezzanine V, which will invest in mid-market Nordic companies. The fund will be worth EUR60 million ($78.7 million).

Human Resources

LNK Partners, a private equity firm focused on the consumer/retail sector, has promoted Kayvan Heravi from the post of principal to managing director. Heravi joined the firm at its inception in 2005.

Eric Keen has left left the Riverside Company, where he was VP, to join DW Healthcare Partners as a VP.

Laurence Garrett has joined venture capital firm Highland Capital Partners as a general partner, the company announced. Garrett will work in the area of technology and Internet companies. Garrett is a former partner of 3i Ventures.