Random Ramblings

I keep getting asked the same question by VCs who don’t invest in cleantech: “Do you think this is the next nanotech?” In other words: “Is an extraordinary amount of money being flushed away on a pipedream?”

Yes and no. The affirmative part is that the investment ramp-up has been too rapid to be responsible, as evidenced by the dozens of firms (not an exaggeration) that have rushed to form cleantech practices and/or funds within the past year. There will be a lot of losses in this space, particularly given the relative lack of potential acquirers (assuming the continued lack of an IPO market).

The negative part, however, is probably more important. The ultimate problem for VC-backed nanotech companies is that most of them were technologies without products. Kind of like if Google had created its breakthrough search algorithms in 1985. Cleantech companies, on the other hand, almost always have a clear vision of their products and market opportunity. Their problem is getting the technology to work. It’s obviously a more fundamental risk, but also should give VCs better guidance when it comes to follow-on financings or cutting bait.

Does that make sense?

*** We’ve talked a lot about fundraising woes in the mega-markets, including problems for such brand-names as Blackstone Group and Clayton, Dubilier & Rice. But we’ve focused the most of Madison Dearborn Capital Partners, which has been trying to secure $10 billion for its sixth effort.

Well, no longer. As LBO Wire first reported this morning, the Chicago-based firm has lowered its target to $7.5 billion. That’s still a bit higher than would be the preference of certain LPs, but is a reasonable cut given how the market has continued to deteriorate since MDCP first hit the fundraising trail last year. The firm so far has closed on just over $4 billion, including increased allocations from endowments like Yale.

So can it hit the $7.5 billion mark by early next year, as it expects to do? Probably. First, it’s gotten a boost from the recent BCE financing agreement, which virtually guaranteed the deal’s closure and reduced its EBITDA multiple from 7.5x to 6.9x. More importantly, Madison Dearborn so far this year has distributed $1.8 billion to LPs (most of which came from Intelsat) – and it may well top its own record of $2 billion set in 2005.

*** Key Venture Partners is losing one of its three managing directors, as David Dame is leaving to become an operating partner at a middle-market buyout firm to be named later. If I knew his destination, it would be a middle-market buyout firm to be named now.

The big question, of course, is what this means for KVP. The Waltham, Mass.-based firm has gradually transformed itself from a Series B/C investors, to one focused on growth financings for companies with between $5 million and $25 million in revenue ($5m-$10m checks). Not a bad risk/reward strategy – I’d rather go early or late than sit in the middle – but Dame’s departure does put the firm in a bit of a pickle.

First, its remaining two partners – Ted Mocarski and John Ward -- both focus on communication and data services companies, whereas Dame had done enterprise software. That means KVP either needs to rebrand itself around a narrower industry focus, or hire a new enterprise IT guy (or perhaps a healthcare tech guy, etc.). The problem with the last part is that KVP hasn’t raised a new fund in a while, and doesn’t have any plans to do so in the near future. There had been talk last year that it would raise more money via a stapled secondary with sole limited partner Key Corp. selling off some of its interests, but the deal fell through when Key Corp. got cold feet. And since there’s still a bunch of dry powder lying around, it could be tough to recruit a newbie.

On the upside, KVP is about to score a big exit with the pending sale of Optasite, and has nothing but well wishes for Dame. Plus, Key had pledged to anchor the next fund (whenever it comes), which should provide an additional level of comfort while managing the existing portfolio and making new deals. So it’s a big loss, but not a fatal one.

* First Read, including the SEC scrapping Edgar and digital media's slowest revenue quarter ever.

* Second Opinion, including why economic dismay is more interesting than Obama, the Olympics or porn.

* Darwin Ventures is raising $100 million for its second VC fund-of-funds. The firm is run by Frank Caufield Jr. (yes, he's junior to that Frank Caufileld) and Peter Feudenthal (co-founder of meVC).

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