Array
(
    [Error] => fclose(): supplied argument is not a valid stream resource
    [File] => /home/apache/bndb06_2.23.14/classes/NewsletterProduct.class.php
    [Line] => 296
)

No justice for VCs

Sometimes life is just not fair. Everyone who works in financial markets knows that inequity can strike at any time. But current market conditions seem especially unfair for the venture capital industry. Even though VCs use none of the leverage that buyout funds employ by the bucketload, they are likely to be impacted by a looming crisis in the credit markets.

With sales of residential mortgages booming, buyout funds borrowing ever-larger amounts to fund deals and interest rates still historically low, any unforseen event could cause banks to panic and suddenly withdraw credit lines. The first signs of this are already in evidence as markets have been spooked by the collapse of two obscure hedge funds.

The hedge funds, run by Bear Stearns, were involved in trading low-grade debt instruments, the specialist activity of the US investment bank. But the funds ran into trouble earlier this year and, just a few weeks ago, admitted they had lost billions of dollars of investors’ money. The collapses have triggered a sudden change in thinking by the big banks. Fearing that some of their customers are failing to adequately manage their credit risks, many of them have rushed to renegotiate credit terms. Evidence of this change of heart has been seen in the buyout sector, where one or two deals are foundering on banks’ reluctance to provide leverage. It is also seen in a global reduction in bond issuance and a sharp fall in equity markets worldwide, based on the belief that companies are facing higher borrowing costs. There is no suggestion that a credit meltdown is underway, but there is surely some chance of a severe deterioration in conditions over the coming months.

So how might this affect the venture capital scene? On the face of it, there is little likely impact on VCs’ business models since they do not use leverage. It is more of a problem for their clients’ ability to raise funds and for their portfolio companies’ capacity to service debts. Perhaps more worryingly, if markets continue to gyrate, the prospects for successful IPOs diminish. (Investors fear market volatility as much as a pronounced downward trend). Even trade sales could be harder to pull off as buyers find it harder to raise cash for deals and generally become more cautious in their outlook.

Just as an American sneeze gives the rest of the world a cold (to paraphrase an axiom beloved of market watchers), so a hedge fund hiccup could provide VCs with a nasty dose of indigestion.

Are you worried about a coming credit crunch or are worries misguided? Let us know at: weeklyfeedback@libraryhouse.net

The Week's Deals

Aquapharm Bio-Discovery, the UK-based marine biotechnology company, has raised £4m (€6m) from Aescap Venture, Argyll and the Islands Enterprise, NESTA Ventures, Scottish Enterprise Fund and Tate & Lyle Ventures. Aquapharm develops new bioactive compounds derived from marine micro-organisms. The company has built a specialised library of more than 6,500 marine bacteria and fungi that are screened to find compounds such as new antibiotics, natural organic pigments, functional food active ingredients, and novel enzymes.

Insightix, the Israel-based network access control company, has raised $6m (€4.4m) from SoftBank Capital and private investors. Insightix has developed technologies that are designed to give companies complete control of all network devices, and ensure that only authorised devices are allowed to access and operate on the network. Insightix will use the investment to expand its product offerings, engage major channel partners and boost its sales and marketing reach across the United States, Europe and Asia.

Glasses Direct, the UK-based online retailer of spectacles, has raised £2.9m (€4.3m) from Index Ventures, Highland Capital Partners and The Accelerator Group. Glasses Direct wants to change the way consumers buy glasses through encouraging them to make multiple purchases by making spectacles more about fashion than function. The investment will be used for an extensive advertising campaign and to recruit dispensing opticians, with the intention of taking on the likes of Specsavers and Vision Express.

Curse-Gaming, the France-based online gaming site, has raised $5m (€3.6m) from AGF Private Equity and business angels. Curse was launched in 2005 as a resource for players of massively multiplayer online games (MMOGs). The Curse portal offers video and screenshot sharing, wikis, databases, add-on downloads, social bookmarking, blogging, forums, and guild website hosting. The company says that the investment provides the financial backing and creative freedom required to build a full-featured, community-driven portal.

The Week's Exits

Sonaptic, The UK-based developer of 3D positional audio technologies, has been acquired by Wolfson Microelectronics, the UK-based semiconductor supplier, for $24.8m (€18m). Wolfson says the acquisition constitutes the third part of its AudioPlus growth strategy, which is aimed at building on the group's global position in high fidelity audio semiconductors. It said the addition would benefit its consumer electronic applications, including personal media players, mobile handsets, portable gaming consoles, flat panel TVs, portable navigation devices and automotive applications.

X-Hive, the Netherlands-based XML development company, has been acquired by US-based EMC Corporation for an undisclosed amount. EMC, a provider of information infrastructure technology and products, will add X-Hive’s XML tools to its content management offering. EMC says all of X-Hive’s staff will be retained, and new employees will also be hired.

Nordic Phytopharma, the Denmark-based pharmaceutical company, has been acquired by Scandinavian Clinical Nutrition (SCN) for $9m (€6.5m). Sweden-based SCN develops and sells nutritional products that have scientifically proven effect and safety, known as nutraceuticals. SCN says the acquisition brings two new and internationally patented products: one designed to reduce symptoms of the common cold, and the other formulated to support optimal immune health.

People Moves

Xtract, the Finland-based social network analytics and mobile marketing company, has appointed co-founder and chief technology officer Kimmo Kiviluoto as interim chief executive, taking over from Paul Hedman. The board of Xtract said that the change was required to continue the company’s rapid growth.

Kapow Technologies, the Denmark-based enterprise mashup server company, has appointed John Cimral as chief executive. Previous chief executive and co-founder Stefan Andreasen will become chief technology officer. Mr Cimral is an entrepreneur with more than two decades of experience leading enterprise software businesses.

Viroblock, the Switzerland-based developer a new generation of anti-viral products, has appointed a new board of directors to coincide with its first round of funding. The board consists of Peter Pfister (chairman), former chief financial officer of Adecco; Igor Fisch, chief executive of Selexis; Daniel Fustier, former global vice president of Covance and former head of Covance CLS in Geneva; Donald Wallach, founder; and former professor at Harvard Medical School and Gian-Luigi Berini, an experienced hi-tech entrepreneur and board member of Fongit Seed Invest.

Most Accessed Companies

Iskra Wind Turbine, the UK-based wind turbine manufacturer, has attracted a lot of attention this week. Iskra’s wind turbines have been designed to have high energy capture at low wind speeds, making wind energy generation feasible on farms, campsites, homes and similar sites. The company’s client list includes local authorities, schools, developers, home builders, farmers and land owners. Investors in Iskra include Foresight Venture Partners and private investors.

Garlik, the UK-based online consumer identity specialist, has also received a lot of attention recently. Garlik is developing a range of tools that allow consumers to find, track and monitor personal information online. The company’s first product uses semantic web technology to help consumers track their personal data across web pages, public records and commercial databases as well as geo-demographic data and credit profiles. A monthly report is then prepared detailing risks and potential actions. Garlik was founded by former senior executives at the online bank Egg.

Subscribe to VenturePedia