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From:

"Dan Primack"

Name:

Dan Primack

Email Address:

Dan_Primack@fortune.chtah.com

Subject:

Term Sheet -- Friday, October 8

Date:

08-10-2010 13:45:04
Message

Fortune Finance Street Sweep Term Sheet Economics Tech Wall Street Washington

The Term Sheet by Dan Primack

Friday -- October 8, 2010
Email Dan | Follow Dan on Twitter | Subscribe

Everybody Into The Pool

Chris Sacca is one of the super-angels, having raised third-party capital to find the next Facebook or
Twitter. Not as well known, however, is that Sacca also has raised more than $30 million from outside
investors to invest in Twitter itself, even at this later stage of its life as a private company.
The money is pooled into a pair of funds called Industry LLC and Lowercase RT, and backed by a pair of
institutional investors.
So far, Sacca has put all of Industry LLC to work, and is almost done with Lowercase RT. Both vehicles are
able to buy up Twitter shares from employees and preferred stockholders, according to multiple people with
knowledge of the funds.
Sacca also considered raising a third fund called 140 - going so far as to send out offering docs to a small
circle of prospects -- but seems to have since changed his mind. He declined to comment.
As most of you know, direct secondary investing is not new. There are several firms focused on such deals
-- Saints, Industry, W Capital, Millennium, etc. -- and also the online marketplaces like SecondMarket and
SharesPost.
What Sacca and others are introducing, however, are pools of capital raised to buy existing stock in a

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specific private company (as opposed to raising capital to co-invest with VCs). Other managers have raised
vehicles to acquire shares in such companies as Facebook, eHarmony, LinkedIn and Zynga.
One of those other managers is New York-based Felix Investments, whose funds are believed to hold
approximately two million shares of Facebook stock (at least before the latest split).
Felix was launched last year by former members of Advanced Equities, the troubled Chicago firm known
for raising money to co-invest with venture capitalists in new issues. It's not exactly for the masses, but it's
as close as one can get given accredited investor requirements.
How the pool works
A typical Felix process works as follows: The firm identifies a company with a large number of buyable
shares, and designs a fund. For the sake of example, let's say the target is Zynga. Felix then goes about
identifying investors. Much of the interest is inbound -- particularly from Silicon Valley technologists -- but
Felix also pays SharesPost to blast its offerings out to select members.
Those who participate only know that they are getting a chance to buy into Zynga, the hottest social
gaming company on the planet. They are not given any non-public financial data on the company, because
Felix doesn't have any. Investors also are not told the price at which shares will be purchased. Instead,
their money is put into an escrow account while Felix goes in search of sellers. Once Felix figures out the
price, it goes back to investors and gives them a chance to fish or cut bait. Most usually keep a steady reel.
Some other fund managers are more specific, offering either an exact price or relatively narrow price range.
All of them, however, charge fees. This typically includes both a management fee and a carried interest. It's
kind of like investing in a venture capital fund -- or even a traditional direct secondary fund -- except for the
lack of transparency surrounding portfolio company financials.
So why pay 2-and-20, or some variation, to a fund manager who is more middleman than due diligencer?
Basically because such deals can be prohibitively expensive for retail investors to do solo.
For example, say I had $250,000 that I wanted to invest in Zynga. I could go to SharesPost or better-known
rival SecondMarket, and hope to find a seller match. But then there would be legal fees and other closing
costs. Plus, Zynga would probably charge me a few grand to approve the share transfer. In other words,
the bad bargain from a firm like Felix may be better than no bargain at all.
A sustainable market?
People I spoke with for this story agreed that more and more of these funds will continue to be formed and
funded. What seems more uncertain, however, is whether such a niche market can be sustained.
Most of the big funds being raised are focused on just a small handful of companies: Facebook, LinkedIn
and Zynga. Expect that Twitter will soon join that rarified air, but it's currently a difficult company to trade on
the secondary market (Sacca is one of several people who has a special agreement with Twitter
management, perhaps because he's a company advisor and was an early investor off of his own balance
sheet).
Each of those companies -- with the exception of Twitter -- would probably have gone public in most any
other era. Maybe the financial meltdown got in the way, or perhaps there are simply a few too many
iconoclasts like Mark Zuckerberg in the mix. Either way, it's not inconceivable that each one will have

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completed an IPO by this time next year.

If so, what will firms like Felix look to acquire? For that matter, what do the secondary exchanges trade? Is
there another group of multi-billion dollar start-ups that retail investors will buy without even a cursory look
under the hood?
My guess is no. This is a special purpose time. But that's okay for retail investors. After all, they can always
buy shares on the Nasdaq.

5 things you should read @Fortune.com

Pre-Marketing, including Warren Buffett's harsh words for private equity, Amazon's biggest fear,
dividend recaps keep rolling and why it's a bad time to be named Justin Bieber.

Hevesi admits guilt, so here is a comprehensive NY pay-to-play rap sheet.

SEC charges talk radio host with fraud

How IBM is using water to learn the cloud

Q&A with Blackstone's Byron Wein, on hedge fund fees, Volcker rule and the next George
Soros.

The Big Deal

DeNA, a Japanese gaming company, is considering an acquisition of San Francisco-based Ngmoco,
according to TechCrunch. The deal could be valued at more than $400 million. Ngmoco has raised over
$40 million from Institutional Venture Partners, Kleiner Perkins Caufield & Byers, Norwest Venture Partners
and Maples Investments. www.ngmoco.com

VC Deals

Aspen Aerogels Inc., a Northborough, Mass.-based developer of flexible insulation products, has raised
$21.5 million in new VC funding. BASF Venture Capital led the round, and was joined by return backers
RockPort Capital, Tenaya Capital, Reservoir Capital Group, Arcapita Ventures and Argonaut Private
Equity. www.aerogel.com
AlertMe, a UK-based provider of online residential energy management solutions, has raised 15 million in
second-round funding. Return backers include Good Energies, Index Ventures, SET Venture Partners and
VantagePoint Venture Partners. AlertMe also announced a 20 million commercial agreement with British
Gas. www.alertme.com
Celon Labs, an Indian developer of injectable pharmaceuticals, has raised just under $16 million from
Sequoia Capital India. www.celonlabs.com
Bit.ly, a New York-based URL shortener, has raised $10 million in Series B funding. RRE Ventures led the
round, and was joined by AOL Ventures and return backers like OATV, Betaworks, SV Angel and Founders
Fund. www.bit.ly
Sun Catalytix Corp., a Cambridge, Mass.-based energy storage and renewable fuels startup, has raised
$9.5 million in Series B funding. Tata Ltd. led the round, and was joined by return backer Polaris Venture
Partners. www.suncatalytix.com
Halfpenny Technologies Inc., a Blue Bell, Penn.-based provider of clinical data integration solutions, has

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raised $2.6 million in VC funding. Osage Venture Partners and Milestone Venture Partners co-led the
round, and were joined by LORE Associates. www.halfpenny.com

Private Equity Deals

The Blackstone Group is nearing a deal to acquire a $1 billion portfolio of 180 warehouse properties from
ProLogis (NYSE: PLD), according to The Wall Street Journal. www.blackstone.com
KKR and Germany's Bankhaus Lampe are in talks for a joint bid to acquire private bank BHF, according
to Reuters. BHF owner Deutsche Bank is seeking around 650 million. www.kkr.com
Leonard Green & Partners is in talks to acquire the M Resort Spa Casino in Las Vegas, according to
Bloomberg. The private equity firm has teamed with the property's founding Mamell family, and will
compete against a rival bid from Penn National Gaming. www.themresort.com
PAS Technologies Inc., a Kansas City-based provider of repair and overhaul solutions for the aerospace
and industrial markets, has raised an undisclosed amount of private equity funding from KRG Capital
Partners. www.pas-technologies.com
Summit Medical Group, a platform sponsored by The Riverside Company, has acquired Orthomed SA,
a French developer of medical devices for orthopedic surgery. No financial terms were disclosed.
www.riversidecompany.com
Vestar Capital Partners has completed its tender offer for Health Grades Inc. (Nasdaq: HGRD), a
Golden, Colo.-based healthcare ratings organization. The offer was at $8.20 per share, valuing Health
Grades at approximately $294 million. www.healthgrades.com

PE-backed IPOs
Everbank Financial Corp., a Jacksonville, Fla.-based financial services firm, has filed for a $200 million
IPO. Goldman Sachs is serving as lead underwriter. The company raised $100 million in 2008 from
Sageview Capital. It later acquired Tygris Financial, which was sponsored by Aquiline Capital Partners,
New Mountain Capital, TPG Capital, Diamond Castle Holdings and Hamilton Lane. www.everbank.com
Bravo Brio Restaurant Group Inc., a Columbus, Ohio-based owner and operator of Italian restaurant
brands Cucina Italiana and BRIO Tuscan Grille, has set its IPO terms to 8.33 million shares being offered
at between $14 and $16 per share. It plans to trade on the Nasdaq under ticker symbol BBRG, with
Jefferies & Co., Piper Jaffray and Wells Fargo serving as co-lead underwriters. Shareholders include
Bruckmann, Rosser, Sherrill & Co., Castle Harlan and Golub Capital.

Exits
MorphoSys AG has acquired Sloning BioTechnology GmbH, a German synthetic biotech company. The
deal was valued at 19 million in cash. Sloning had raised around $13 million in VC funding from firms like
KfW, 3i Group, LBBW Venture Capital and Bayern Kapital. www.sloning.com
Sofinnova Partners has sold PregLem, a Swiss biotech focused on women's reproductive medicine, to
Gedeon Richter, a drug company listed on the Budapest Stock Exchange. The deal was valued at 337
million, including a 114 million up-front cash payment and up to 223 million in milestone-based earnouts.
www.sofinnova.fr

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Other Deals
Barclays PLC has acquired a 12.75% stake in SKR BPO Services, an Indian provider of outsourced
back-office services. The seller was Blackstone Group, which will retain a 66.25% stake. No financial terms
were disclosed.
Genzyme's board formally rejected the $69 per share takeover bid from Sanofi-Aventis. The two sides
then engaged in he-said, he-said: Genzyme claimed that Sanofi's CEO had suggested that his company
might bid $80 per share, prior to engaging in the hostile bid. Sanofi dismissed the allegation.
Sinochem will not bid for Potash Corp., without an indication that the bid would be approved by the
Canaidan government, according to the Globe and Mail.

Firms & Funds

MPM Capital, a Boston-based venture capital firm focused on life sciences, has opened a new office in
Kansas City. www.mpmcapital.com

Moving In, Up and On

Josh Silverman has joined Greylock Partners as an entrepreneur-in-residence. Silverman most recently
served as CEO of Skype, and also was co-founding CEO of former Greylock portfolio company Evite.
www.greylock.com

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