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    PE Week Wire -- Friday, August 12

Mayfield Takes LP Lumps

Lots of big news this morning, including the $600 million acquisition of Flarion by Qualcomm, the ValueClick/FastClick merger and changes at Lightspeed Venture Partners. But since you can read about such things elsewhere, I wanted to elaborate on something you can only find in next Monday's print edition of PE Week:

Mayfield, one of the earliest and most prestigious venture capital firms, has lost its luster among the crème de la crème of limited partners. The Sand Hill Road firm is about to close its twelfth fund, but without at least seven top-tier limited partners who had invested in prior Mayfield funds. What follows has been independently confirmed with five different sources, who agreed to speak only under the condition that neither they nor their institutions be identified. What I can share, however, is that the seven dissenting LPs are brand names – in some cases household names – from the university endowment, private foundation and fund-of-funds arenas. Also, I made multiple attemps to speak with Mayfield (and offered to hold the story until the fund closed, if Mayfield was concerned about SEC regs), but never received a response.

The roots of Mayfield’s problem lie in its eighth and ninth funds, which were closed in 1995 and 1997, respectively. Each fund featured budget-based management fees, which is an alternative to the status quo of charging LPs an annual percentage (typically 2%) of total committed capital. Budget-based fees require the firm to annually come up with an itemized expense list, and are generally considered LP-friendly measures that also are employed by firms like Greylock and New Enterprise Associates. In Mayfield’s case, the partnership agreement allowed the firm’s annual budgets to equal up to 2.5% of committed capital, but it never came close to doing so. Therefore, LPs were initially happy, particularly because both funds also happened to be wildly profitable.

One problem for firms with profitable funds, however, is that they sometimes can generate “clawback” situations (for those unfamiliar with clawbacks, I’ve posted an explanation). This happened with both Mayfield VIII and Mayfield IX, which theoretically meant that the Mayfield general partners would have to reach into their own pockets to compensate their LPs. Standard operating procedure.

What Mayfield did next, however, was stunning. Rather than taking out its collective checkbook, sources say the firm proposed a partnership amendment whereby much of the clawback would be paid by charging LPs the difference between what they had paid in management fees, and the 2.5% maximum that they could have been charged. Analogy? You buy a loaf of bread on sale at Wal-Mart for $1.50 instead of for $2.00. When you go back to the store the following week, the Wal-Mart greeter asks you for the fifty cents. Even worse, Mayfield was asking for a cumulative payment, based on the "savings" that LPs enjoyed over the life of the funds.

Most LPs, of course, balked at the proposal. It wasn’t the first time that a VC firm had proposed a fee-for-clawback exchange, but LPs tell me that Mayfield was the only one to do so without its metaphorical hat in hand: “It was like they never even considered that we might disagree,” says a fund manager whose institution chose not to re-up for Mayfield XII. “The whole thing could probably have been avoided if they had just shown a little humility and interest in working with us on something that we could all live with.”

But Mayfield refused to give up, and the discussions moved quickly through another couple of stages before Mayfield basically offered an ultimatum to the dissenters: Vote to ratify the amendment or we’ll just pay the clawback out of cash on hand (read: committed LP cash on hand, plus future management fees). Two LPs tell me that they consulted attorneys on the matter, but were told that the case was gray enough that either side could prevail in a courtroom. The result was that enough – albeit not all -- LPs bit the bullet and signed the amendment this past spring.

“They are arrogant in dealing with LPs, and I’m saying that in the context of most VCs being arrogant,” says a Mayfield investor. That characterization was used by all but one person I spoke with.

The result is that Mayfield was turned down by at least seven of the top (by reputation, at least) limited partners in the business. Most sources add that the decision was largely based on frustration and disappointment with the way Mayfield had conducted itself on the fee/clawback and other issues, but added that recent returns also played a role: “Most everyone probably would have invested in this fund if the Fund X or Fund XI returns had been better,” one source explains. According to The 2005 Private Equity Performance Monitor published by Private Equity Intelligence, both funds are underwater and fall into the bottom quartile in terms of net IRR, as of July 2004 and September 2004, respectively.

But why, you may ask, does this matter if Mayfield is closing on its fund? And if I told you that the fund is oversubscribed (which it is), you may ask the question louder. After all, isn’t everyone’s money green?

Yes and no. Mayfield got its money and some pretty decent terms -- it had been looking for a 2.5% percentage fee (no more budgets) and a 30% carried interest structure. It will be able to make deals for years to come. On the other hand, the quality of your investors matters when it comes to recruiting new talent and even sometimes when doing deals. If you don’t believe me, why is everyone so excited that PodShow got funded? Is it because of the money itself, or because the money came from Kleiner Perkins and Sequoia?



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    Top Three


Qualcomm Inc. (Nasdaq: QCOM) has agreed to acquire Flarion Technologies Inc. for approximately $600 million in cash and Qualcomm stock. Qualcomm also may pay an additional $205 million in cash and stock, if Flarion is able to meet certain milestones over the next few years. Flarion is a Bedminster, N.J.-based provider of infrastructure technology for mobile broadband Internet protocol services. It has raised approximately $75 million in total VC funding since its 2000 inception, from firms like Bessemer Venture Partners, Charles River Ventures, New Venture Partners, SK Capital, Cisco Systems, Equitek Capital, Lucent Technologies, Nassau Capital, Pequot Capital Management and T-Venture Holding.


Lightspeed Venture Partners announced that it is raising its seventh fund with a $400 million target, but that two of its general partners will spin out to launch their own fund with a separate strategy. Remaining Lightspeed GPs include Barry Eggers, Ravi Mhatre, Peter Nieh and Chris Schaep, while the departing GPs are Gill Cogan and Carl Showalter. Read more in Monday’s print edition of PE Week.

ValueClick Inc. (Nasdaq: VCLK) has agreed to acquire FastClick Inc. (Nasdaq: FSTC) in a $214 million stock swap between the two online advertising companies. FastClick raised $78 million via an IPO earlier this year, after having raised $75 million in Series A funding last September at a post-money valuation of $96.54 million. Shareholders include Highland Capital Partners, Oak Investment Partners and Disney corporate venture arm Steamboat Ventures.

    VC Deals

Mpex Pharmaceuticals Inc., a San Diego-based drug company focused on antibacterials for life-threatening infections, has raised $32 million in Series B funding. SV Life Sciences led the deal and HBM BioVentures co-led the deal, and were joined by Aberdare Ventures, Adams Street Partners and return backers Western States Inv*stment Group and Charitable Leadership Foundation. The company previously raised $3.7 million in Series A funding.

Kodiak Networks Inc., a San Ramon, Calif.-based provider of wireless voice services, has raised over $14.63 million in Series B funding, according to a regulatory filing. Company shareholders include Kleiner Perkins Caufield & Byers and Redpoint Ventures.

Alteer Corp., an Irvine, CA service company that delivers tech-enabled practice enhancement and workflow solutions to small-and mid-sized physician practices, has completed the first of two closings in a transaction that adds $16.5 Million to the capitalization of the company.MedVenture Associates and return backer Sanderling Ventures are co-leading the deal, and are joined by fellow existing shareholder Skyline Ventures.Triple Tree LLC advised Alteer on the transaction.

99Bill Corp., a Shanghai, China-based developer of an online and wireless payment platform, has raised just over $2 million in Series A funding. The deal was co-led by DCM-Doll Capital Management and Peninsula Capital.

Alder Biopharmaceuticals Inc., a Bothell, Wash.-based developer of a yeast cell-based method for producing antibodies, today will announce $11.1 million in first-round funding, according to The Seattle Times. Sevin Rosen Funds led the deal, and was joined by Ventures West and seed backer WRF Capital.

Progressive Beverages Inc., a Culver City, Calif.-based brand marketing firm specializing in contemporary premium wine and spirits imported from Asia, has raised $1.75 million in Series C funding. Tech Coast Angels led the deal, and was joined by existing backers the Pasadena Angels and Keiretsu Forum members.

Kiala SA, a Belgian provider of collection point networks in Europe that allow consumers to pick up and return parcels, has raised 10 million euros in third-round funding. HarbourVest Partners led the deal with an 8 million euros commitment.

Abound Resources Inc., an Austin, Texas-based provider of tech support solutions for community financial institutions, has raised an undisclosed amount of Series C funding. Total capital infusions now near $2 million.

Alphion Corp., a Princeton Junction, N.J.-based provider of integrated components for photonic regeneration, has raised $1.5 million in additional third-round funding. This closes out the round with $12.1 million (first close was announced in April), and brings Alphion’s total venture capitalization to $44.1 million. Tallwood Venture Capital led the third-round infusion, and was joined by Goldman Sachs, Narra Venture Capital, Axiom Venture Partners, ICCP Venture Partners and unnamed industry executives.

Dune Networks Inc., an Agoura Hills, Calif.–based provider of merchant silicon solutions for traffic management and scalable switching fabrics, has received an undisclosed amount of strategic funding from Siemens Venture Capital. The company previously had raised around $29 million in private funding from firms like Pitango Venture Capital, JVP, Elwin Capital Partners and Alta Berkeley Venture Partners.

    Buyout Deals

Accel-KKR has acquired a majority equity position in Systems & Software Inc., a Colchester, Va.-based provider of integrated software solutions for the utility industry. No financial terms were disclosed.

Cerberus is in advanced talks to acquire German insurer Gerling Allgemeine Versicherung AG, according to a German newspaper report. The deal could be valued at more than 1 billion euros.

Gores Technology Group has acquired the assets of Somero Enterprises LLC from Dover Corp. (NYSE: DOV). No financial terms were disclosed. Somero Enterprises is a Jaffrey, N.H.–based maker of concrete construction tools.

    PE-Backed IPOs

Refco Inc., a New York-based provider of execution and clearing services for exchange-traded derivatives, priced 25 million common shares at $22 per share (above its $19-$21 range), for an IPO take of approximately $583 million. It plans to trade on the NYSE under ticker symbol RFX, while CSFB, Goldman Sachs and Banc of America Securities served as lead underwriters. Thomas H. Lee Partners led a buyout of Refco last August.

Cynosure Inc., a Westford, Mass.-based developer of non-invasive aesthetic treatment systems to do such things as remove hair or treat vascular lesions, has filed to raise $75 million via an IPO of common stock. It plans to trade on the Nasdaq under ticker symbol CYNO, with Citigroup serving as lead underwriter. Cynosure is majority-owned by Italy-based El.En SpA, and also received under $1 million in VC funding in 1998 from the Boston University Community Technology Fund and Venham Ventures.

    PE-Backed M&A

Manhattan Associates Inc. (Nasdaq: MANH) has agreed to acquire Evant Inc., a San Francisco-based provider of supply chain planning and replenishment solutions. The deal is valued at approximately $50 million in cash. Evant has raised over $110 million in total VC funding since its 1994 inception, including a 2000 infusion that valued the company at around $200 million. The company was recapped in late 2002, with current shareholders including 3i Group, Altos Ventures, Crosslink Capital, Kleiner Perkins Caufield & Byers and Global Retail Partners.

Proxicom Inc., a portfolio company of Gores Technology Group LLC, has agreed to acquire all capital stock of healthcare industry consultant Daou Systems Inc. (OTC BB: DAOU) for approximately $21.6 million.

NAL Worldwide LLC, a Westmont, Ill.-based affiliate of Lake Capital Partners, has acquired the SIRVA Logistics assets of North American Van Lines Inc., a subsidiary of SIRVA Inc. (NYSE: SIR). No financial terms were disclosed.

    Firm & Fund News

Hidden Creek Partners, a group formed in 1989 to lead industrial buyouts financed by Onex Corp., has been integrated into Thayer Capital Partners. The move is effective immediately, and results in HCP pros Judy Vijjums, Carl Nelson, Dan Moorse and Kurt Rasmussen all being named managing directors with Thayer. HCP has been assisting Thayer on certain deal opportunities since January 2004, in part due to the relationship formed when HCP co-founder and CEO Scott Reud joined Thayer as a managing partner. In other Thayer personnel news, the firm has promoted Doug McCormick from managing director to managing partner. He joined the firm in 1999, and will continue to lead its aerospace, defense and federal services group.

NeoMed Management of Norway has held a second closing on its fourth venture capital fund focused on the healthcare and life sciences markets. Total capital commitments now total 70 million euros.

    Human Resources

Zhou Hongyi, outgoing CEO of Yahoo China, reportedly has agreed to joined China-focused IDG Technology Venture Inv*stment Inc., effective September 1.

Jennifer Tedesko has joined private equity placement agent Atlantic-Pacific Capital as a vice president. She previously worked at Probitas Partners.

Jeffrey Walker, managing partner of JPMorgan Partners, has left the board of AXIS Capital Holdings Ltd. (NYSE: AXS). The resignation coincides with JPMorgan Partners’ bulk sale of 7.8 million shares of AXIS Capital common stock.

    In Memoriam

Stanley F. Alfeld, founder and former chairman of Landmark Partners, has passed away, following a brief illness. He leaves behind wife Marilyn, two sons, a daughter, a daughter-in-law and five grandchildren. A memorial service was held on August 1, and the familay requests that any memorial donations be made to: Saint Francis/Mount Sinai Regional Cancer Center, 114 Woodland Street, Hartford, CT 06105; Attn: Dr. Peter Tutschka.,


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August 12, 2005


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