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Debt is not always a burden

Venture debt is becoming increasingly important in the funding jigsaw. But how is it viewed by VCs and in what situations are debt providers welcome to join the party? Before we answer these questions, it is worth reminding ourselves just what venture debt is. Used extensively for the first time in the US in the 1990s, it now features in about three-quarters of all venture deals in North America. Firms such as SVB Financial Group, Lighthouse Capital Partners, Hercules Technology Growth Capital and Pinnacle Ventures lent nearly $2bn to US venture-backed companies last year, up from $434m in 2002. In total, debt formed seven per cent of the money invested in US venture-backed companies in 2006. Europe, of course, is taking its time to catch up. But it is gaining fast. Kreos, probably the European market leader in venture debt, closed its third fund at the end of last year and had already committed more than €100m of it by May. The rationale for venture debt is clear: where banks won’t lend, venture debt steps in. Charging interest at twice bank rates, venture debt firms typically lend $3m-$5m to sustain a company in a marketing drive or in its efforts to perfect, or seek a licence for, a technology. The concept is similar to the mezzanine tranche in a leveraged buyout – not quite equity and not quite debt. An advantage for the companies and their equity backers is that venture debt firms are far more flexible in their terms than banks. Miss an interest payment and you won’t suddenly find your hardware has been dispossessed. For VCs, this is clearly reassuring since debt restructurings are not usually very favourable for holders of equity. And they don’t have to worry so much about dilution. Okay, venture debt providers receive warrants worth 10-15 per cent of the amount lent, but this is far less expensive for companies than a full equity funding round. What’s more, the equity kicker encourages fuller alignment of the venture debt firm to the company’s fortunes. At the same time, there are obvious conflicts with the model. Although the venture debt firm is a warrant-holder, its primary concern is not to lose the capital it has lent. In other words, at times of stress, dialogue between VCs and VDs may be un-PC. In boom times the relationship can be just as strained. Venture debt is highly dependent on VCs for dealflow, but when a deal looks really hot VCs may not wish to share the good news. This is understandable, but does not necessarily create goodwill between the parties. The fact is, venture debt plays a useful role and is probably here to stay. VCs and VDs, in their own best interests, need to play nice. Let us know your thoughts on venture debt, or other issues you want to get off your chest, at: weeklyfeedback@libraryhouse.net

The Week's Deals

DiBcom, the France-based fabless semiconductor company targeting the mobile television industry, has raised €20m in fifth round funding from Natixis Investissement, 3i Group, Cipio Partners, Convergent Capital, Crédit Agricole Private Equity, Intel Capital, Partech International, Societe Generale Asset Management, UMC and WI Harper. DiBcom designs high-performance chipsets that allow low-power mobile and portable TV reception on mobile devices, including in moving vehicles travelling at up to 130 mph. OxThera, the Sweden-based biotechnology company, has raised €16.2m from Industrifonden, Odlander, Fredrikson & Co AB (HealthCap Venture Capital), Q-Med, [[Scandinavian Life Science Venture (SLS Ventures)]] and an undisclosed private investor. OxThera develops products for metabolic disorders based on excess oxalate, a chemical primarily derived from the diet. Oxalate in combination with calcium is the most common component of kidney stones. The funding will primarily be used to finance clinical trials. Diatos, the France-based bio-pharmaceutical company, has raised €9.4m in series D funding from Crédit Agricole Private Equity, GIMV, Innoven Partenaires, InterWest Partners, NIF SMBC Ventures, Societe Generale Asset Management, Sofinnova Partners and Sopartec. Diatos is focused on the research, development and marketing of new versions of existing anti-cancer chemotherapeutic drugs with enhanced tumour targeting or improved biodistribution. The funding will be used to further develop the company’s leading clinical products. Mirics Semiconductor, the UK-based fabless semiconductor company, has raised $10m (€7.4m) from Intel Capital and Pond Venture Partners. Mirics has developed a radio-frequency chip technology that enables mobile devices and PCs to receive content based on any number of technical standards currently in use. The company says it does this with a much smaller chip-size and lower energy consumption than has previously been available. As part of the deal Intel Capital will provide Mirics with management and technical input, as well as new commercial opportunities based upon Intel's global capabilities and relationships. See below for a complete list of deal headlines. Did we miss anything? If you think we have missed a deal or know of a deal that is about to close then send us your deal news.

The Week's Exits

PacketExchange, the UK-based company that allows website owners to bypass the overloaded “public” internet, is considering an IPO that could value it at up to £250m (€370m), according to The Times. The company recently added Piczo, a social network that boasts 25 million users, to a client list that already includes the likes of Google, Yahoo! and Microsoft. Navicore, the Finland-based provider of interactive on-board navigation products for smart phones and Nokia internet tablets, has been acquired by Sweden-based mobile navigation company Wayfinder. Financial terms of the deal were not disclosed. Navicore’s products are sold in 30 countries across Europe, North America, Middle East, South Africa and Australia.

People Moves

[[Openads]], the UK-based provider of open source advertising software, has appointed James Bilefield as chief executive. Mr Bilefield was one of the early team members at Skype where, as the company's first vice president, he led the global business development team. Prior to Skype, Mr Bilefield spent five years at Yahoo!, where he served as managing director of both consumer and network services across Europe. NovaThera, the UK-based regenerative medicine company has appointed Dr John Beadle as chief executive. Dr Beadle was a co-founder and chief medical officer at PowderMed which was sold to Pfizer late in 2006. Former NovaThera chief executive, Dr Gareth Roberts will remain with the company as chief scientific officer. Affibody, the Sweden-based biotechnology company, has appointed Erik Walldén as chief executive. Mr Walldén has extensive experience from the biotechnology supply industry, most recently as president and chief executive of Biacore. He replaces Ulf Boberg, who assumes the new position of senior vice president of clinical development and business development.

Most Accessed Companies

[[InFone Tech]], the Israel-based developer of technology for cellular communications, has attracted a lot of attention recently. InFone was set up at the beginning of this year by Dov Moran, founder of flash memory company Msystems, which was sold to SanDisk Corporation at the end of 2006 for $1.55bn (€1.21bn). InFone, which is still in stealth mode, is currently revealing little about its business other than its ambition to be larger than Msystems. The company is backed by SanDisk as well as Gemini Israel Funds and Genesis Partners. [[Extate]], the UK-based property search engine, has also attracted a lot of attention. Extate indexes the websites of thousands of estate agencies across multiple countries using its data-mining technologies. The company says that its search engine is more relevant than generalist web search engines and more complete and up-to-date than classified directories. Extate is backed by Arts Alliance, Samos Investment and private investors. Other companies generating interest recently include ReVolt Technology, Wilocity, and Colibria.

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