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Napster Fallout Could Affect Buyout Firms
Many VCs are troubled by Tuesday’s ruling that Universal Music Group can proceed in its Napster-related lawsuit against Hummer Winblad Venture Partners. To them, it is further confirmation that VCs eventually could be held liable for the misdeeds of their portfolio companies or, even worse, for the misdeeds of their portfolio companies’ customers. After reading over the decision, however, I think that VCs may have dodged a bullet, which now has been redirected at buyout firms.
Judge Patel’s ruling did allow the lawsuit to proceed (at least through discovery), but did not really pierce a whole in the corporate shield. She could have ruled that the suit is viable because shareholders bear a level of corporate responsibility, but instead she essentially sidestepped the issue. Instead, Patel focused on the hands-on management control that Hummer Winblad (and later Bertelsmann AG) exercised over Napster. Even though the San Francisco-based VC firm only invested $13.5 million into a round valued at $64.5 million (post-money, according to earlier court documents), it received two board seats and the right to name one of its own partners as interim CEO. Moreover, that interim CEO was a well-known media attorney, who was aware of copyright infringement charges already facing Napster from the Recording Industry Association of America (RIAA). It is this level of oversight that Patel believes is subject to discovery.
The typical VC firm is relatively passive in terms of company control. Some may be more forceful than others, but they most still are minority shareholders with board representation. For example, Angel Investors LP invested $1.5 million alongside Hummer Winblad’s $13.5 million, but basically was a silent partner and, as such, was not named as a defendant by Universal Music Group. Buyout firms, on the other hand, regularly exercise such control. After all, they are making control investments. So this case is something that buyout firms should watch closely, as a ruling against Hummer Winblad potentially could set some uncomfortable precedents for its late-stage peers.
Three related notes: (1) Despite the aforementioned citing of “precedents,” it is worth noting that this case is very specific to Hummer Winblad’s actions in regards to Napster. All investments are unique, but this one took deal differentiation to new levels. (2) On page 9 of Patel’s ruling, she writes that UMG is specifically alleging that Hummer Winblad ordered infringing activity to take place, not just that it knew of or contributed to such activity. Maybe I’m taking the judge’s words a bit too literally, but I don’t recall Hank Barry ordering me to download songs. How would he even have done so? (3) A far more detailed look at the decision and the case’s history is now online at www.PrivateEquityWeek.com.
Two unrelated notes: (1) As you’ll see below, Blackstone has postponed the IPO for its business development company (BDC). This is the second BDC to issue a postponement in the past two weeks, and certainly does little to raise the hopes of KKR, Tom Lee, etc. (2) The Stock Picking Pool is now closed to new entrants. Most of the participants are fairly bullish on the market’s prospects over the next few weeks, as 62% estimated a net gain over Wednesday’s 12,128.18 level. Good luck to all, and have a good weekend…
Blackstone Group has postponed the initial public offering of its proposed business development company (BDC), named Blackridge Investment Corp. The firm issued a short press release saying that the move was ”due to market conditions.” www.blackstone.com
Thomas H. Lee Partners has led a $1.75 billion buyout of Nortek Holdings Inc., a Providence, R.I.-based designer, manufacturer and marketer of brand-name building products. The deal is being done in concert with Nortek management, which currently owns a small company stake alongside majority shareholder Kelso & Co. Kelso acquired its position in early 2003 as part of a $1.6 public-to-private transaction. USB Investment Bank and Credit Suisse First Boston will provide financing for the Tom Lee deal, which is expected to close sometime this quarter. www.nortek-inc.com
ChipWrights Inc., a Waltham, Mass.-based provider of digital signal processing technology, has raised $13.6 million in fourth-round funding. Return backers included Rock Maple Ventures, Shiprock Capital, Adams Harkness & Hill Technology Ventures, Techfarm Capital, BancBoston Ventures, New England Partners and Band of Angels VC fund. In other ChipWrights news, the company named David Hunter, a venture partner with Advanced Technology Ventures, as its new president and chief executive. www.chipwrights.com
Full Capture Solutions Inc., an East Hartford, Conn.-based provider of predictive, analytic-driven solutions for the insurance industry, has raised $5 million in Series A funding from Ignition Partners. www.fullcapture.com
Mblox Inc., a London-based provider of mobile messaging infrastructure software, has raised $10 million in VC funding. Investors include BA Venture Partners, Norwest Venture Partners, Novus Ventures, Duff Ackerman Goodrich, Entrepreneurs Fund and Avanti Capital Ltd. The company was created in June 2003, following the merger of mBlox Ltd. with MobileSys Inc. www.mblox.com
Nina McLemore Inc., a New York-based provider of designer clothes for women, has raised $3.7 million in VC funding. Aperture Venture Partners led the deal, and was joined by Slater Equity, individual investors and Chazen Capital Partners (founded by Liz Claiborne Inc. co-founder Jerome Chezen). www.ninamclemore.com
GMT Communications Partners has acquired a 65% interest in Docu Group AG, a business-to-business publishing company focused on the construction market in Germany, Switzerland and Sweden. Company management will retain the other 35% position, although no financial terms were disclosed. www.docugroup.info/eng/e_group.htm
EMCORE Corp. (Nasdaq: EMKR) has acquired Corona Optical Systems Inc., a Lombard, Ill.-based maker of fiber optic components currently being deployed for use in high-density telecom switching boxes. Per terms of the transaction, EMCORE acquired all of Corona’s assets – including its physical assets and intellectual property – for just $1.2 million in cash. The company had raised over $20 million in VC funding since its 2000 inception, from investors like Intel Capital, KB Partners, Megunticook Management and Venture Investors LLC. www.coronasys.com
Collegiate Funding Services Inc., a Fredericksburg, Va.-based education finance company, will begin trading on the Nasdaq under ticker symbol CFSI. The company priced over 9.37 million shares of common stock at $16 per share (middle of its $15-$17 range), for an IPO take of approximately $150 million. Lightyear Capital is Collegiate Funding’s majority owner, while TCW/Crescent Mezzanine Partners also was listed as a significant shareholder. www.cfsloans.com
Odimo Inc., a Sunrise, Calif.-based online retailer of brand-name watches and luxury goods, has filed to raise $57.5 million via an IPO of common stock on the Nasdaq under proposed ticker symbol ODMO. The company has raised over $48 million in total VC funding since its 1999 inception as DiamondDepot, from significant shareholders like Softbank Capital Partners and STI Ventures.
PlanetOut Inc., a a San Francisco-based online media company serving for gay, lesbian, bisexual and transgender communities, has set its IPO offering price range to $12-$14 per common share, and its total number of offered shares to 4.65 million. The company has raised over $36.5 million in VC funding, with significant shareholders including JPMorgan Partners, Flatiron Partners, AOL and Mayfield. www.planetoutinc.com
Julia Pulzone has joined the Global Environment Fund (GEF) as a managing director. She previously served as senior vice president of finance at SpaceHab Inc. (Nasdaq: SPAB). www.globalenvironmentfund.com
Craig Cooper has joined Softbank Capital as a partner. He previously founded a joint venture with Nextel Communications called Boost Mobile USA, and before that served as a principal with private equity firm Mercury Capital. www.sbcap.com
Alma Poskovic has joined the private equity fund placement service at Deloitte. She most recently worked with Atlantic-Pacific Capital, and before that helped raise private equity, real estate and hedge funds for the JPMorgan Private Fund Group.
GenoMed Inc. (OTC BB: GMED), a St. Louis-based genomics company, has secured up to $21 million in PIPE financing from Swiss-based venture group Pierpoint Investissements SA.
Weil, Gotshal & Manges has opened a new law office in Shanghai, China. It will be run by new managing partner Steven Xiang, while partner Bill Sievers will relocate from Singapore to Shanghai. www.weil.com
Yale University announced that it will name its new Yale School of Forestry and Environmental Studies building for Richard Kroon, who retired last year as chief executive of VC firm Sprout Group. Kroon provided a substantial gift to help fund the building’s $27 million cost, although no specific details were disclosed. www.yale.edu
Thursday, July 15
Hummer Winblad Headed To Court
Napster may be dead, but its legal mess lives on.
OK, I know what you’re thinking: “But Dan, didn’t Roxio buy Napster and relaunch the company with a paid-subscription model?” Sure it did, but who cares now that you have to pay? Napster’s revolutionary equation was Free + Non-Centralized File-Sharing, not Non-Centralized File Sharing alone. I’m sure plenty of honest souls have agreed to shell out the cash, but the rest of us simply began using Kazaa, etc. (Note: by “rest of us”, I mean “rest of you”).
Nonetheless, lawsuits related to Napster’s glory days are still active, including one brought by several record companies against Hummer Winblad Venture Partners. The short synopsis is that Hummer Winblad invested $13.5 million into Napster in May 2000, and installed Hummer Winblad partner Hank Barry as interim CEO. Napster already was facing legal pressure from copyright-infringed record companies, but Hummer Winblad believed that the company’s potential outweighed its risks, and that Barry’s background as a media lawyer could help Napster deal with the record companies. Hummer Winblad was wrong, and Napster eventually folded. For a more detailed look at the situation, I’ve reposted an old article at www.VentureCapitalJournal.net.
Near the bottom of the aforementioned article (written in late February 2004, published in April), I note that Hummer Winblad had a pair of motions outstanding. The first was to dismiss the case all together, and the other was to move the case from Los Angeles to San Francisco, so that Judge Marilyn Patel could preside. Patel had ruled on prior Napster cases, and Hummer Winblad apparently wanted her expertise this time around. The case was indeed moved to San Fran, but Patel yesterday ruled against Hummer Winblad on its motion to dismiss. In other words, the case is set to proceed (as is a similar case against Bertelsmann AG, which also provided financial support to Napster).
This is a very important case for VCs to watch, as it seems to be the first time that a VC firm and some of its individual partners have been sued for the illegal actions of their portfolio company. The National Venture Capital Association has expressed severe concern over a liable verdict, and many industry attorneys believe that it could dissuade VCs from investing in risky technologies (particularly in the biotech market). In other words, we’ve got a new Trial Watch to replace the recently departed Forstmann Little case.
No predictions yet on how this all will play out, but I’ve always believed that Hummer Winblad’s Napster investment was the single worst VC investment I’ve ever covered (and I covered CMGI @Ventures). The company already was in legal trouble from deep pockets, and had neither revenue nor plans for revenue (correct that: it had sold some hats and t-shirts). Moreover, it opened itself up to additional liability to installing one of its own as interim CEO. Bad, bad deal…
U.S. District Judge Marilyn Patel declined to dismiss a lawsuit brought by several record companies against Napster Inc. investors Hummer Winblad Venture Partners and Bertelsmann AG. The suit accuses the investors of sustaining Napster’s online file-sharing services, which in turn led to the continuation of copyright infringement.
Buyouts is reporting that 331 buyout deals were completed during Q2 2004, worth a combined $58.8 billion in disclosed values. The publication also reports that another $30 billion worth of disclosed deals already have been agreed to and are currently awaiting completion. www.buyoutsnewsletter.com
Horsley Bridge Partners is in the midst of raising its third international fund-of-funds, which will invest in VC funds based outside of the United States. The San Francisco-based firm is pitching its latest effort with a $550 million target capitalization, and already has secured approximately $365 million in limited partner commitments. Horsley Bridge raised around $520 for its second international fund-of-funds in 2001, but declined to comment on the current effort.
Magink Display Technologies Inc., a New York-based provider of full-color digital ink displays, has raised $27 million in Series C funding. VantagePoint Venture Partners led the round, and was joined by fellow new investor Formula Ventures and return backer Japan Asia Investment Co. (JAIC). www.magink.com
Vitra Bioscience Inc., a Mountain View, Calif.-based developer of technologies for parallel drug discovery, has raised $5.5 million in second-round VC funding. Alta Partners led the deal, and was joined by Sofinnova Ventures, Mediphase Venture Partners and Three Arch Partners. www.vitrabio.com
Eliyon Technologies Corp., a Cambridge, Mass.-based provider of automated content search technology, has raised $7 million in first-round VC funding from Venrock Associates. (Note: Eliyon is a content partner of Thomson Venture Economics, publisher of the PE Week Wire). The company was spun out of Corex Technologies Corp. in 1999, and counts Corex VC backers Flagship Ventures, Commonwealth Capital and Ascent Venture Partners as shareholders. www.eliyon.com
CoreStar Financial Group Inc., a Timonium, Md.-based originator, underwriter, funder and bundled seller of residential non-conforming mortgage loans, has received a $4 million investment from the Edison Venture Fund. www.corestar.com
Audax Group has acquired Dynisco LLC from Madison Capital Partners. No financial terms were disclosed. Dynisco is a Franklin, Mass.-based provider of branded test, measurement and process-control devices. Goldsmith Agio Helms advised Dynisco on the transaction. www.dynisco.com
Veritas Software Corp. (Nasdaq: VRTS) has acquired Invio Software Inc., a Los Altos, Calif.-based supplier of IT process automation technology, for $35 million in cash. Invio had raised over $22 million in VC funding from firms like Trinity Ventures and BlueStream Ventures. www.inviosoftware.com
IBM (NYSE: IBM) has agreed to acquire Alphablox Corp., a Mountain View, Calif.-based provider of analytics software. No financial terms were disclosed. Alphablox has raised over $105 million in total VC funding since its 1996 inception, from investors like Accel Partners, Bowman Capital, Burr, Egan, Deleange & Co., Deutsche Bank eVentures, Goldman Sachs, IGNITE Group, Integral Capital Partners, Merrill Lynch Capital Partners, Mohr, Davidow Ventures, Novell Technology Capital, Point Venture Partners and Polaris Venture Partners. www.alphablox.com
Phase Forward Inc., a Waltham, Mass.-based provider of integrated data management solution for clinical trials and drug safety, will begin trading on the Nasdaq under ticker symbol PFWD. The company priced 5.25 million shares of common stock at $7.50 per share (below its $8-$10 offering range), for a total IPO take of approximately $39.37 million. The company had raised around $72 million in VC funding since its 1997 inception, with significant shareholders including Atlas Venture, North Bridge Venture Partners, DLJ Merchant Banking Partners, Thomas Weisel Partners, Sprout Group, Schroder Ventures and ABS Capital. www.phaseforward.com
NanoSys Inc., a Palo Alto, Calif.-based developer of nanotechnology-enabled products, has set its IPO offering price range to $15-$17 per common share, and its total number of offered shares to 6.25 million. The company has raised nearly $55 million in total VC funding since its 1999 inception, including a $38 million infusion last year at a post-money valuation of approximately $76 million. Significant shareholders include ARCH Venture Partners, CW Group, Polaris Venture Partners and Venrock Associates. www.nanosysinc.com
Syneron Medical Inc., an Israel-based medical device company focused on non-invasive aesthetic medical treatments, has filed to raise $101.2 million via an IPO of ordinary shares on the Nasdaq under proposed ticker symbol ELOS. The company hopes to price 5.5 million ordinary shares at between $14-$16 per share. The company has raised over $2 million in VC funding, with significant shareholders including MNMM Holdings Ltd., Starlight Capital, European High-Tech Capital SA, Lintech Investments Inc. and Israel Health Care Ventures. www.syneron.com
Xenogen Corp., an Alameda, Calif.-based developer of biochemical reporters that tag genes, cells and microorganisms to monitor biological events, has reduced its IPO offering price range from $9-$11 per common share, to $8 per common share. The number of offered shares remains at 4.5 million. Xenogen has raised over $100 million in VC funding since its inception, including a $25 million infusion in 2001 at a post-money valuation of around $130 million, and a Series AA recap round in early 2003. Significant shareholders include Abingworth Management, Harvard Private Capital, MDS, Brentwood Associates, EuclidSR Partners and S.R. One Ltd. www.xenogen.com
Probitas Pharma SA, a Madrid, Spain-based developer of medicines from blood plasma, has postponed a planned €359 million IPO. The company has received VC backing from Capital Riesgo Global SCR (a VC affiliate of Santander Central Hispano SA) and Morgan Grenfell Private Equity. www.probitaspharma.com
Michael Newman has agreed to join Blackstone Crystal Holdings Capital Partners, a private equity and advisory firm, as chief financial officer. To do so, Newman has resigned his senior vice president and chief financial officer roles with RadioShack Corp. (NYSE: RADIOSHACK), effective July 23. www.radioshack.com
Michael McGrath, co-founder of management consulting firm Pittiglio Rabin Todd & McGrath, has retired as chairman and CEO of the firm’s Atlantic Region group. In the late 1990s, McGrath had initiated PRTM’s venture capital fund, named PRTM Atlantic Ventures 2000. www.prtm.com
Douglas Gessl has joined Fulcrum Pharmaceuticals Inc. as vice president of finance. He most recently served as senior vice president with Milwaukee-based I-bank Einhorn & Associates, where he worked on M&A deals and private placements (including a recently $8 million deal for Fulcrum). www.fulcrumpharmaceuticals.com
Apax Partners is raising a €4.5 billion fund (approx. $5.5 billion), according to The Financial Times. www.apax.com
The Carlyle Group has closed its sixth high yield debt fund with $400 million in limited partner commitments. www.carlyle.com
ChrysCapital, an India-based VC firm that also features a Silicon Valley office, has raised $250 million for its third fund. www.chryscapital.com
Correction: should have been listed as an investor on the $32 million Series B funding for Trubion Pharmaceuticals Inc.
Wednesday, July 14
My computer is getting fixed tomorrow, so let’s start the new PE Week Wire contest today. This is a two-part contest, with the winner receiving a complimentary one-year subscription to the print/online version of PE Week, plus the chance to write this column for a day. Part 1 is open to all Wire readers, and the Top 10 finalists will then get a chance to play Part 2 for the prize (and, of course, the recognition). Here goes…
Part 1: What will be the combined market value of the DJIA and Nasdaq at market close Wednesday, August 4? For reference, it was 12,128.18 at the time I wrote this. To play, just send me an email, with the combined total in the subject line. For tiebreakers, you also are being asked to include which market value you feel will have a higher percentage increase between market close today and market close August 4 (three weeks from today). So, please send an email with a subject line looking like: “Contest: 12,128.18 – Nasdaq” or “Contest: 12,532.21 – DJIA”. Emails must be submitted before the markets open tomorrow morning, or else they will not be included. (Update: Game is now closed to new players)
Part 2: Those who submit the ten closest guesses will get to play Part 2, which will be a one-month stock-picking contest. In order to avoid conflicts of interest, you will be given a choice of several pre-determined portfolios, and select the one that you feel will perform the best. For now, however, let’s stick with Part 1.
Trubion Pharmaceuticals Inc., a Seattle-based drug company focused on inflammatory diseases and cancer, has raised $32 million in Series B funding. Prospect Venture Partners and Venrock Associates co-led the deal, and were joined by return backers Arch Venture Partners, Frazier Healthcare Ventures, Oxford Bioscience Partners and ATP Capital. The company previously had raised a $13.6 million Series A deal in 2002. www.trubion.com
Icera Inc., a Bristol, UK-based fabless semiconductor company, has raised $22.5 million in Series B funding. Accel Partners led the deal, and was joined by return backers Benchmark Capital and Atlas Venture. The company now has raised around $33 million in total VC funding since its 2002 inception. www.icerasemi.com
The IVC Research Center said today that 91 Israel-based technology companies raised $338 million from VC investors during Q2 2004. This is up 5% from the $323 million raised by 111 such companies the previous quarter, and 25% higher than the $271 million raised by 86 such companies in Q2 2003. www.ivc-online.com
SkinMedica Inc., a Carlsbad, Calif.-based drug company focused on the dermatology market, has raised $30 million in additional Series D funding. The company had announced a $25.8 million first close on the deal in March, bringing the round total up to nearly $56 million. Perseus-Soros BioPharmaceutical Fund led the latest tranche, and was joined by fellow new investors HealthCare Ventures and Montreaux Equity Partners. Return backers included St. Paul Venture Capital, Apax Partners and Domain Associates. In connection with the Series D round, SkinMedica has completed its $36.6 million acquisition of all U.S. and certain international rights to VANIQA Cream, which is an FDA-approved treatment for slowing the growth of unwanted facial hair in women. www.skinmedica.com
Pacific Edge Software Inc., a Bellevue, Wash.-based provider of enterprise portfolio management solutions for managing tech investments, has raised $12 million in Series C funding. Newbury Ventures led the deal, and was joined by return backers Foundation Capital, Sequoia Capital and Northwest Venture Associates. The company now has raised over $46 million in total VC funding since its 1998 inception, including a $26.4 million Series B deal in 2000 at a post-money valuation of approximately $110 million. www.pacificedge.com
IntraPace Inc., a Menlo Park, Calif.-based medical device company developing an implantable gastric pacemaker for the treatment of obesity, has raised $14.6 million in Series C funding. Toucan Capital and Oxford Bioscience Partners co-led the round, and were joined by fellow new investors Guidant Corp., Johnson & Johnson Development Corp., CB Health Ventures and the Halo Fund. Return backer DFJ ePlanet also participated. www.intrapace.com
Nexx Systems Inc., a Billerica, Mass.-based provider of processing equipment for wafer-level packaging applications, has raised around $10.15 million in Series B funding. Enterprise Partners Venture Capital led the deal with an $8 million investment. www.nexxsystems.com
Application Security Inc., a New York-based provider of proactive database security solutions, has raised $7 million in new VC funding. Thomas Weisel Venture Partners led the deal, and was joined by return backers Kodiak Venture Partners and Early Stage Enterprises. www.appsecinc.com
Madison Dearborn Partners has acquired Pierre Foods Inc., a Cincinnati-based provider of meat and bakery products. Bank of America and Wachovia Bank provided debt financing as part of the transaction, although no financial terms were disclosed. www.pierrefoods.com
Dow Jones is reporting that Apax Partners and Soros Private Equity have teamed up to bid €600 million on a joint cable venture of France Telecom and Canal Plus.The report also says that alternate bids have come from Providence Equity Partners (which previously had been allied on the deal with the Carlyle Group) a