The Biggest Player You Don’t Know

The SEC doesn’t like it when the wealthy are steered to IPO shares before the rest of the hoi polloi. Yet so long as someone is an accredited investor with net assets of more than $1 million, it’s not illegal.

Which explains why Chicago-based investment bank and broker-dealer Advanced Equities Financial has been ushering a ballooning number of wealthy individuals into late-stage venture deals — and it’s about to usher in a lot more.

A couple of weeks ago, as VentureWire first reported, Advanced Equities launched an online portal called Venture Gateway that will seamlessly connect about 5,000 accredited investors to the deals of its venture capital clients, including Benchmark Capital, Kleiner Perkins Caufield & Byers, ComVentures and a long list of others. That’s not small news. The firm is on track to sink around $1 billion in venture deals this year, and it’s aiming to invest five times as much once Venture Gateway takes off. (For some perspective, VCs invested $29.4 billion altogether last year, the highest yearly investment total since 2001, according to the National Venture Capital Association.)
Perhaps because the company is based in the Midwest, it hasn’t yet garnered the mindshare it would were it located in Silicon Valley, where top VCs know it well. Indeed, the firm has been going gangbusters since its 1999 founding, thanks to some auspicious timing and shrewd decision-making.

Though Advanced Equities originally intended to compete with early-stage VCs, CEO Keith Dwight Badger and his cofounder, chairman Keith Daubenspeck, quickly became mindful of two developments. The first was the 2002 passage of Sarbanes-Oxley, which made it tough for a company with less than $100 million in revenue to go public. The second development was that the banks that’d been providing late-stage funding to venture firms (Hambrecht & Quist, etc.) were disappearing. Suddenly, there was a big gap in the market, and Advanced Equities seized on that.

It has been aggressively filling the void ever since, in fact, much to the delight of both its venture capital clients — who have plenty of aging portfolio companies on their hands — and the rich investors who are getting into deals they otherwise could not. (One example: Advanced Equities recently committed $18.3 million to MarketTools of San Francisco, which sells on-demand research services. Eleven-year-old MarketTools previously raised more than $80 million.)

It looks like Advanced Equities is returning some money to its investors. It invested in semiconductor maker Infinera before it went public last July. (Infinera’s stock has mostly held up, too, rising from around $17 to a peak of $32 and down to a current $14.25.)

Advanced Equities also bought shares in Zantaz, which was founded in 1996 and developed email messaging and retrieval services. Zantaz raised $91.5 million through the years, but it did finally sell last year, for $375 million, to Autonomy Corp.

Advanced Equities’ investors probably didn’t do as well with Good Technology, which sold to Motorola for an undisclosed amount after raising a stunning $250 million. But that’s the risk investors are taking. (Most of Advanced Equities investments have gone nowhere thus far.)

Advanced Equities looks poised to make some serious money for its VC pals, too. This year, the firm began the ball rolling on an IPO it’s anticipating will take place either next year or in 2010. It has already hired a top gun from Citigroup to create a family office for those who buy its private-equity offerings. More, according to a recent story in Crain’s Chicago Business, it’s soaking up capital from the same firms whose late-stage companies it has been helping, including Sequoia Capital and Kleiner Perkins.

Whether the firm successfully goes public remains to be seen. But if it does and Sequoia and Kleiner make a bundle, won’t that be ironic? Or is there another word for it?