Venture debt makes comeback

Sand Hill Capital has closed its fourth venture debt fund, according to a regulatory filing, in a move that perhaps signals the resurgence of an asset class nearly wiped out during the dot-com downturn.

General Partner William “Boots” Del Biaggio would not say how large the fund was. A regulatory filing says the firm has raised $9.8 million, but Biaggio says this amount only represents the firm’s first close. He also points out that whatever size fund the firm has raised, it can leverage the assets to lend against. The firm raised $120 million for its second venture debt fund in 1999 and raised a third fund in 2004 for an undisclosed amount.

The firm’s limited partners include the Gerald & Daphna Cramer Family Foundation, among 27 other accredited investors, according to a regulatory filing.

Venture debt is becoming an increasingly attractive funding alternative for technology companies, especially with low interest rates and an expanding exit market.

A variety of different lenders have raised funds recently. Last summer, BayStar Capital, a venture lending firm for post-IPO companies, started fund-raising for a $1 billion fund. The Larkspur, Calif.-based firm will lend $15 million to $25 million to small-cap technology companies to fund development, acquisitions, or any specific project that will quickly improve the bottom line.

In February 2006, former Comdisco CEO Jim Labe launched TriplePoint Capital and its $310 million venture lending and leasing fund. The firm had a big hit eight months later when Google bought YouTube, which had raised venture debt from TriplePoint. The Menlo Park, Calif.-based firm walked away with shares of Google stock worth $6.5 million, according to a regulatory filing.

Even hedge funds are getting in on the action as Lisle, Ill.-based Ritchie Capital launched a $200 million venture lending fund in September of 2005.

“The entrepreneurs have become more educated on how to use debt than 10 years ago,” Biaggio says. “They all have figured out that if they take that instead of equity it’s less dilutive.”

As for the many firms involved in the venture debt industry, Biaggio says: “Everyone seems to have their niche. Ours is later stage. There’s definitely enough business to go around.”

Enough business, it seems to run an equity fund next to its venture debt operations. Sand Hill Capital raised an equity fund in 2005 that has invested in 10 companies and worked through about half of its dry powder, Biaggio says. He would not disclose the size of that fund, but he says that it primarily invests in companies that have already taken venture debt from the firm.

“We’re seeing a lot of deal flow and there was a lot of success in the third fund, so the timing was right for the fourth fund,” Biaggio says.