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    PE Week Wire -- Friday, May 20

Is This Goodbye?

When Howard Anderson speaks, people listen. Then they rip him apart.

Anderson is a living business legend here in BankBoston, Fleet, Hancock, Gillette, Citizen’s Bank country, thanks to his founding of the Yankee Group, and his co-founding of Battery Ventures. In 1999, Anderson launched YankeeTek Ventures, as an early-stage IT feeder firm for local later-stage firms that also would serve as its limited partners (e.g., Bain Capital, Boston Millennia Partners). He raised $60 million for YankeeTek’s inaugural fund in 2000, and then headed out into the heart of the bubble. Not surprisingly, the fund didn’t fare too well, including the recent $3.5 million sale of Altaworks Corp., which had raised around $45 million in VC. It also is involved with the giant question mark that is Egenera Inc.

Rather than packing it in, however, Anderson and YankeeTek last year began marketing a second fund with a $150 million cover price. He also had informal talks about adding additional investment pros. Then, Anderson surprised just about everyone by pulling the plug last December. In a subsequent conversation, Anderson said that prospective LPs had largely soured on the early-stage space, and that he sort of had as well. The firm would wind down, he said, while he would move on to launch a consultancy for non-profit organizations.

There were a few more assorted news stories here and there about YankeeTek’s demise, but it had mostly faded into the background… until this past week, when the MIT Technology Review published an article by Anderson titled “Good-Bye To Venture Capital.”

Rather than serving as a fond farewell to his former life – or as well wishes to his former peers -- Anderson basically says he closed YankeeTek because the VC business model no longer works, at least for early-stage technology investors (he doesn’t touch on life sciences). His four basic points are: (1) There is an oversupply of new technology, and demand will be low for at least five more years; (2) One reason demand will be low is that corporations no longer like to increase spending; (3) The financial markets are no longer irrational, which portends poorly for homerun-requiring VCs; and (4) The aforementioned changes are structural, not cyclical. He concludes:

Ever wonder what we did for a living in early-stage venture funding? I bet you think we spent the day searching for the next insanely great company. But we spent most of our lives in endless meetings with people who were lying to us: scientists who swore that their patents were solid and entrepreneurs who insisted that they had no competition. We lied right back at them: said our money was different.

That was the old way, and it was tons of fun, and we all made too much money. I'll miss it. But now the markets are too rational, and the returns are too small and uncertain. So, time to leave.

Not surprisingly, a number of VC bloggers (those who still invest for a living) have eviscerated Anderson for his views. Fred Wilson of Union Square Ventures, for example, writes on his blog: “This goodbye note from Howard is so off base that I can only think Howard feels the need to justify his retirement. He can't feel good leaving the greatest job on planet earth unless he says the good times are over.” And it’s not constrained to Typepad folks, as a similar sentiment has been expressed to me a number of times in conversations since the piece was first posted.

So I guess it’s my turn to have at it. First, I think it’s important to note that there is a giant fallacy floating about: That Anderson is bitter because he couldn’t raise YankeeTek's second fund. This is simply not true, from what numerous people have told me. The fund had a sizable number of commitments before Anderson called it quits. Maybe not $150 million, but close enough to make another go of it.

Second, much of what Anderson says is accurate, to a point. VC returns were lousy for 2000-2001 vintage funds, demand for innovation in certain IT sectors has slowed and corporate CFOs are paying far more attention to the bottom line than they have in past years. Where Anderson crosses the line, however, is in his assertion that such changes are structural, rather than cyclical. In fact, the one flaming piece of information gleamed from the bubble inflation and collapse was that cycles are an ingrained part of capitalistic economics (at least the American version). Don’t you remember all of those “There are no more economic cycles” conversations (I had one with my grandfather, who looked at me with a pity-laden glare that reminded me of Warren Buffet).

I obviously have not covered this market for as long as Anderson was involved in it, but every time I think I've uncovered some sort of structural shift, it shifts back (or to something new). How about LPs having power over GPs in terms of fund sizes/terms, or pharma companies being undervalued, then overvalued, then undervalued again? Or, “We were done investing in Internet companies, until Google came along.” Or “I’m glad the IPO market returned, because there are no strategic buyers,” to “Thank God the strategics are back, because the IPO window is slamming shut again.” In short, structural change lasts in the VC world only so long as there is a buck to be made from it. Anderson may be gone, but the VC market will continue to cycle/evolve/shift without him...



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    Top Three


Maytag Corp. (NYSE: NYSE), a Newton, Iowa-based home and commercial appliance maker, has agreed to be acquired for $14 per share, or approximately $2.1 billion (including $975 million in assumed debt). Private equity firm Ripplewood Holdings is leading the buyout, with other equity participants including RHJ International, GS Capital Partners and the J. Rothschild Group of Cos. Leverage will come from Citigroup, JP Morgan and Deutsche Bank. The Maytag board of directors has approved the agreement, and will recommend its adoption by company shareholders. Maytag common stock finished trading yesterday at $11.56 per share.

Adrian Rawcliffe has been appointed managing partner and president of SR One Ltd., the venture capital arm of GlaxoSmithKline PLC (NYSE: GSK). The move becomes effective on June 1, with Rawcliffe succeeding Maxine Gowen, who was named senior vice president for a new GSK effort called the Centre of Excellence for External Drug Discovery. Rawcliffe has served in various positions with GSK, and has been in the company’s Transactions & Ventures group since 2003.

Blurb Inc., a San Rafael, Calif.-based provider of self-publishing software and services, has raised $2.05 million in Series A funding, according to a regulatory filing. Participants include Canaan Partners and Anthem Capital Management. Blurb is currently in stealth-mode, according to its website.

    VC Deals

Aspen Aerogels Inc., a Northborough, Mass.-based provider of thermal and acoustical insulation performance products, has raised $30 million in Series D funding, plus another $20 million in private debt financing. Equity backers included Rockport Capital Partners, Reservoir Capital Group, Lehman Brothers and LG Venture Inv*stment. The deal was first reported by the Boston Business Journal.

Nexxar Group Inc. (f.k.a. Tri-Axxa), a Paramus, N.J.-based money transmitter company, has raised $8.5 million in Series C funding, according to a regulatory filing. Participants included Key Venture Partners and FT Ventures.

Screen Pages Financial Solutions Ltd., a UK-based provider of employee benefit management software, has raised Gbp1 million in funding from Herald Ventures and an unnamed individual.

Dermacia Inc., a Newport Beach, Calif.-based cosmetics company, has raised $10 million in first-round funding.

Bee Ware, a Paris, France-based provider of IT security solutions, has raised 3 million euros in first-round funding from Sofinnova Partners.

ISD Corp., a Holland, Mich.-based provider of payment management software for merchants, has raised an undisclosed amount of second-round funding. River Cities Capital led the deal, and was joined by Nationwide Mutual Capital and return backers Prism Opportunity Fund and Odin Capital Group.

    Buyout Deals

Enterprise Partners Venture Capital has acquired Muze Inc., a New York-based digital content management company. No financial terms were disclosed.

Barclays Private Equity France and Cobalt Capital have completed their acquisition of an 81.5% interest in Medi-Partenaires from Universal Health Services Inc. (NYSE: UHS) for approximately $100 million. Medi-Partenaires operates acute-care and behavioral health hospitals in Puerto Rico and France.

PAI Partners has received European Commission approval for its 370 million euros acquisition of Germany-based FTE Automotive GmbH from HgCapital.

    PE-Backed IPOs

EpiCept Corp., an Englewood Cliffs, N.J.-based drug company focused on pain management, has withdrawn registration for its proposed $75 million IPO, citing current market conditions and “strategic reasons.” It had planned to trade on the Nasdaq, with Wachovia Securities serving as lead underwriter. EpiCept has raised over $32 million in VC funding since its 1993 inception, with significant shareholders including TVM Techno Venture Management, Merlin Biosciences and GZ Paul Partners.

Inmarsat, a UK-based satellite operator, has selected underwriters for a possible IPO on the LSE, which would be designed to raise between $700 million and $750 million, according to Reuters. They are JP Morgan Cazenove, Morgan Stanley, Lehman Brothers and Merrill Lynch. Inmarsat has been controlled since 2003 by Apax Partners and Permira.

    PE-Backed M&A

SAI Holdings Inc., a subsidiary of Penson Worldwide Inc., has agreed to acquire Computer Clearing Services, a Glendale, Calif.-based clearing firm focused on the active/online trading market. No financial terms were disclosed. Penson Worldwide is a Dallas-based provider of execution, clearing, custody and tech infrastructure products and services to the securities market. It has raised VC funding from Technology Crossover Ventures.

Novoste Corp. (Nasdaq: NOVT) and Wilmington, Mass.-based MRI systems maker ONI Medical Systems Inc. have agreed to merge. The deal is technically a reverse merger that brings ONI into the public markets, after a private life that has seen it raise around $15 million from firms like Galen Associates and Sage Hill Partners.

Khimetrics Inc., a Scottsdale, Ariz.-based provider of customer demand solutions, has acquired layout and execution software assets from Flow Systems, a division of Mediagrif Interactive Technologies Inc. (TSX: MDF). No financial terms were disclosed. Khimetrics has raised around $16 million in VC funding from firms like Boston Capital Advisors, RWI Group, Koch Ventures, Crown Advisors International, Telos Venture Partners and Oracle Venture Fund.

    Firm & Fund News

Escalate Capital has held a first close on its $200 million-targeted debut fund. The later-stage structured finance/venture debt firm was launched last year by: Ross Cockerell, a former partner with Austin Ventures; Tony Schell, former head of Comerica's technology and life sciences lending office in Austin; and Jim Ellison, formerly of Silicon Valley Bank. Limited partners on the first close include GM Pension Plan, The Meadows Foundation, Portfolio Advisors, Teachers' Private Capital, UTIMCO and Verizon.

    Human Resources

Dana Mead has joined Kleiner Perkins Caufield & Byers as a partner focused on the life sciences sector. Mead most recently served as president of Guidant Vascular Intervention, and has served in various positions with Guidant since joining the company in 1992.

Michael Darby has joined Paul Capital Partners as a San Francisco-based principal. He had served as a general partner of Battery Ventures until late 2002.

Gary Glazer and Andrew Rasdal have joined the advisory board of venture capital firm RWI Group. Glazer is a Stanford University School of Medicine professor and chairman of the department of radiology. Rasdal is president and CEO of DexCom Inc. (Nasdaq: DXCM).

Stephen Bochner has joined executive recruiter Sextant Search Partners to launch a healthcare practice. He previously served as global practice leader at fellow search firms Highland Partners and TMP Worldwide Executive Search. Before that, he was a vice president in Robertson Stephens’ venture capital group.

Steven Napolitano has joined Chicago-based Winston & Strawn LLP as co-chair of the firm’s private equity practice. He previously was with Katten Muchin Zavis Rosenman. Also coming over with Napolitano are fellow partners Richard Ginsberg (private equity transactions) and Margaret Lomenzo (private equity and fund formation).

David Wilhelm, president of Woodland Venture Management, has resigned from the board of Bally Total Fitness Holding Corp. (NYSE: BFT). The decision was made after it was realized that a Woodland-related fund inv*sted in a company founded by another board member. He had joined the board just two days ago.

Kurt Berney has joined O’Melveny & Myers LLP as a partner in the firm’s Asia practice. He most recently was with Wilson Sonsini Goodrich & Rosati, where he represented technology companies in M&A, private, VC and public financings.


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May 20, 2005


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