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    PE Week Wire -- Thursday, June 29

Today’s guest columnist is Paul Kedrosky, executive director of the William J. von Liebig Center in San Diego, and a venture partner with Ventures West. He also writes the popular Infectious Greed blog.

I figured that a recent panel I moderated at a major VC conference would be the usual meandering mix of blather, bluster and well-intentioned BS, but it turned out to be useful. Just not for the intended reason.

The subject was "best practices" in venture investing. As everyone knows, the asset class is doing crummy, with lousy returns, precious few high-multiple exits and too many unrepentant investors fixated on re-enacting 1999, right down to the return of banned words like "eyeballs" and "monetizing.” My panel's task, therefore, was to distill some best practices for the wayward venture business: What can be learned from what the best partnerships do?

I started by asking my mix of LPs and VCs the venture equivalent of the Bud Light question: Is it the team or the technology? The panel came down strongly on the side of the team: We want "A" teams they said. We got, of course, the cliché about how an "A" could
save a mediocre technology, but a "B" or "C" team could screw up even the best technology.

“But what about Google,” I asked. Back in 1998 there was no business model, no team, and everyone knew that search was so … 1996. Would you have done the deal with that team, just based on the technology? Suddenly the whole team versus technology thing got messy, with people explaining that it isn't the team. Or it's mostly the team. Or maybe it's the team except when it's not the team. Or when it's Google.

Having reached consensus that there was no consensus, I moved on to another topic: thematic versus opportunistic investing. Which is best, I asked, rifles or shotguns? One-offs or spray-and-pray? It will be no surprise that I got answers of both and neither. The
posturing, waffling, and equivocation wouldn't have been out of place in a C-Span broadcast from the Senate Finance Committee. Rifles. Shotguns. Clubs. Slingshots. Next question.

This went on and on, ranging from shaping exits, to terminating CEOs, to the right experience (technical versus operational) for venture investors, to the ideal fund size. No-one could agree on what constituted "best" in anything.

I finally said that our inability to extract best practices from five decades of venture investing meant one of three things. First, maybe there are no best practices in venture capital. Second, maybe there are best practices, but no-one wants to say what they are for fear of giving away the store. In other words, maybe my panelists' non-answer answers were intentional, the equivalent of shouting "Theater!" at a crowded fire.

Finally, and this one was for the nihilists, maybe there once were best practices, but the post-bubble venture business is so bad that what once worked no longer does. What used to reliably produce twenty-baggers now delivers a twentieth of a bag.

I'm an optimist, so I'm going to dismiss the third option. While there are many problems with the venture business, there are enough portfolio-making deals out there that I have a hard time accepting that it's impossible to deliver decent performance.

I'm also going to dismiss the second option. It's possible that they were all holding their cards close to their chest, but most venture firms are like Apple Computer: They leak from the top. Partners, however closed-mouthed they pretend to be, can't wait to tell you how unbelievably smart they are. They could no more hide real best practices than they would drive a Yugo to work rather than the new Mercedes.

So that leaves us with the first possibility: there are no best practices in venture capital. For my part I think that's the real insight, however nihilistic it might first seem. And it has implications, like that venture remains a craft, a gut business where a few rare practitioners have a good instinct for the stuff. But no combination of apprenticeship, or thumb-sucking spreadsheets, is going to turn you into Mike Moritz or John Doerr. You've either got it, or you don't.

It is scant consolation, but it should also be a kind of relief. Too many funds spend too much time trying to figure out what, say, Kleiner Perkins does that they don't. The real secret is that the best venture investors have no secrets, other than a reputation that allows them to fish from a well-stocked fund, and a partner or two with an aptitude for this messy and unpredictable business. Sure, they play the odds – the race not always to the swift nor the battle to the strong, but that's the way to bet – but screenwriter William Goldman had it gnomishly right: No-one knows anything – not even wealthy venture capitalists.

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    Top Three


DFJ Element, a Draper Fisher Jurvetson fund formed to invest in clean technology, closed with $284 million. Limited partners in the fund include CalPERS, Swiss Re, Coca Cola, ITT, Robeca, LACERS, WP Global and British Airways. Lehman Brothers served as a placement agent for the fund.


Francisco Partners has closed Francisco Partners II, a $2.3 billion technology-focused fund, according to Its law firm was Cooley Godward and its placement agent was Lazard.


On its first day as a public company, shares in J.Crew surged by as much as 27% on the NYSE yesterday, giving the clothing retailer an IPO take of $376 million (above the $351.6 million that company expected to receive). The company, now 40% owned by Texas Pacific Group, sold 18.8 million shares at $20 each, substantially greater than the $15-to-$17 forecasted price range. This morning, J.Crew shares opened up at $25.05, and are currently trading at $25.55.


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    VC Deals


AppLabs Technologies, a Philadelphia-based software testing provider, raised $10 million from Sequoia Capital India. The Sequoia Capital group has invested a total of $17 million in the company. AppLabs has testing labs in Lindon, Utah and Hyderabad, India.


Biocrates, an Austrian biomarker discovery firm, said it raised EUR5 million ($6.3 million) from German corporate investor MIG.


Cleartrip, an online travel services provider, has received venture backing from Kleiner Perkins Caufield & Byers and Sherpalo Ventures, according to Business Standard.


Daylight Solutions, a Poway, Calif.-based molecular detection and imaging instruments developer, raised $7.5 million in Series A financing. HamiltonTech Capital Partners led the financing, which included Masters Capital Nanotechnology and Magnecomp International.


Dune Medical Services, a Ceasarea, Israel-based medical device company, raised $12.5 million in Series B funding. Apax Partners led the round with an $11.5 million investment. The funding will be used to complete U.S. clinical studies, further product development and infrastructure expansion.


IBloks, a San Francisco-based digital media software developer, said it raised $3 million in Series B funding from Maveron. The company says it will use the funding to further develop its consumer software application. Maveron is the investment company created by Starbucks Chairman Howard Schultz and former Schroder Wertheim & Co. executive Dan Levitan.


Identec Solutions, an Austria-based provider of RFID-based tracking services, received $15 million in backing from lead investor RFID Invest AG, according to Austria Today.


V.i. Laboratories, a Waltham, Mass.-based developer of software protection technology, said it raised a first round of venture funding from Rockford Capital. The company will use the funding to hire staff and market its application security technology. 


Comcast has bought thePlatform, a provider of video and audio distribution software, for more than $100 million, according to the Seattle Post-Intelligencer. Spark Capital led an $8 million investment in the company.


Walgreen Co. (NYSE, Nasdaq: WAG) has purchased Medmark, a specialty pharmaceutical services provider. Medmark was backed by LLR Partners and Quaker BioVentures.


    Buyout Deals


As Ford Motor’s stock continues to sink and it’s debt endures further downgrades, the company’s chairman and CEO, Bill Ford, is holding his stance that a private equity bailout is not an option, according to The Wall Street Journal. The company head also reportedly said that bankruptcy is still “not an option” for the struggling automaker.


GED Group and EBN Capital SGECR, both based in Spain, have acquired Artes Gráficas Nekar’s Griñon subsidiary, according to The Deal. The pair reportedly paid €28 million for the graphic arts business, which is also headquartered in Spain.


Behrman Capital has executed a $410 million recapitalization of ILC Industries, marking the second recap for the defense and industrial products maker in the past twelve months. (In September Behrman completed a $337.5 million recap). In the most recent move, UBS and GE Capital provided a first-lien loan, while GSO Capital Partners led the second-lien facility. Behrman originally acquired ILC in April of 2003.


J.C. Flowers completed its acquisition of Fox-Pitt, Kelton – the former financial services specialist broker of Swiss Reinsurance. According to Reuters, J.C. Flowers intends to broaden the firm's reach into private equity and fixed income.


Vector Capital has reportedly reduced its offer to take Internet security outfit WatchGuard Technologies private, trimming its proposal from $5.10 a share to $4.65. The firm, which already controls 9.4% of WatchGuard's shares, had originally expressed interest in the company in February.



    PE-Backed IPOs

Aventine Renewable Energy Holdings Inc., largely controlled by Metalmark Capital, raised the planned per-share price for its initial public offering, according to Dow Jones Business News. The ethanol producer now plans to offer its IPO at $40 to $43 a share, as opposed to its earlier range of $37 to $41 a share. The size of the offering, however, remains the same at 8.06 million shares. Bank of America is underwriting the deal. Aventine was acquired by Morgan Stanley’s private equity unit mid May 2003. In 2004, Morgan Stanley spun off its PE unit, which became Metalmark.


Bulgarian private equity fund Advance Equity Holding has gotten permission from the country’s Financial Supervision Commission to proceed with its planned IPO, which is expected to generate BGN10 million ($6.4 million), according to SeeNews.  


    Firm & Fund News

As first reported on, The Carlyle Group has closed its Europe Technology Fund, with $278 million in capital commitments, surpassing its target of $250 million. Debevoise & Plimpton provided legal counsel, and the firm did not use a placement agent in the fundraising.



    Human Resources

ATA Ventures, a Redwood City venture capital firm focusing on early-stage private equity investments, appointed Mike Hodges as Venture Partner of the firm. 


Avidia, a biopharmaceutical company backed by Skyline Ventures, HealthCare Ventures, Alloy Ventures, Amgen Ventures, MedImmune Ventures, Morgenthaler Ventures and TPG Ventures, has appointed Paulette Dillon as senior vice president and chief business officer and Charles Sholtz vice president of intellectual property and legal affairs.


S.A.C. Capital Advisors has expanded its Private Debt Capital team formed by former Blackstone Managing Director, Mark Gudis. Petr Marousek, a Vice President from Credit Suisse Financial Sponsors Group, and Sarah Jacoby, a Vice President from private equity group First Atlantic Capital, have both joined the group as Principals. 

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June 29, 2006

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