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Sequoia, Francisco partner again

Last week, Sequoia Capital and Francisco Partners teamed up again to buy a swath of Data Connection Ltd., a London-based telecommunications networking company. Details of the deal are scant as none of the parties disclosed how much the firms paid or what percent of the company they bought. The 26-year-old Data Connection recently reported more than $100-million in annual revenue, and the 400-person company is expected to continue with its existing management team.

Neither Francisco Partners nor Sequoia responded to requests for comment.

But it’s worth taking notice whenever Sequoia Capital and Francisco Partners get together to do a deal. After all, the two titans of tech finance are establishing quite a track record of co-investing, having partnered on five previous deals.

The firms more than doubled their $42 million investment they made in publicly held Blue Coat Systems (Nasdaq:BCSI) in June 2006. They bought in at $17.5 per share and liquidated the position during September 2007 when the stock was trading at or above $40 per share.

Another example is Magnachip Semiconductor, which has registered to go public in a $575 million offering. Sequoia and Francisco spun the company out of Hynix Semiconductor with help from CitiCorp Venture Capital and CVC Capital Partners Asia in October 2004. The investment group put up $828 million in debt and equity financing for the deal. Sequoia Capital is not listed in the company’s S-1, but it does list the company on its website as an investment by Partner Mark Stevens.

Venture capitalists are starting to see more deals like this as mezzanine private equity and boutique buyout shops move “upstream” to hunt for bigger deals.

“We are starting to see more and more of these opportunities,” says Redpoint Ventures Founding Partner Tom Dyal. That’s one of the reasons his firm launched a new $250 million fund to invest in spinouts, carve-outs, roll-ups and large boot-strapped companies. He points specifically to his firm’s investment in MySpace, which was spun out of Intermix.

“These were different kinds of deals than what we do in the early stage,” he says.

“The traditional players that would have mined these deals have gone upstream,” Dyal adds. “In the Internet area, for example, the cost of getting these businesses off the ground is much smaller than it used to be. We’re seeing more deals that reach critical mass without much money or the traditional early stage venture capital syndicate.” —Alexander Haislip