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Term Sheet — Thursday, Sept. 4

Random Ramblings

What follows is my latest Fortune Magazine column:

Business incubators have become ubiquitous in the technology startup world. Some are generalists, some are niche. Some are thought of as kingmakers, some as bottom feeders. In almost all cases (including on the fictionalized HBO show Silicon Valley), they have the same basic value proposition: We’ll provide your startup with expert mentorship, services, and connections, and in exchange you’ll provide us with equity.

The problem, of course, is that startups must give up some of their ownership before learning whether the incubator will hold up its end of the bargain. Imagine paying for a haircut before the scissors have been pulled out, or for a restaurant meal as you’re being seated. What if you end up with an inadvertent mullet or a piece of raw chicken, without recourse?

That needs to change, and one of the nation’s largest tech incubators plans to lead the way.

Techstars, which has worked with more than 450 startups in over a dozen locations, tells Fortune that it will no longer take upfront stock in its companies, beginning next year. It has traditionally required equity stakes ranging from 7% to 10%, but going forward such contributions will come with an equity-back guarantee: After companies complete the Techstars program, they can decide for themselves if the program deserves their stock.

“Our expectation is that we’re going to earn it,” explains David Cohen, a Boulder-based entrepreneur and venture capitalist who co-founded Techstars in 2006. “We’re confident that Techstars is a very valuable product, where we feel we’re the ones who are going to help make the introduction to their next investors and customers, but if an entrepreneur ultimately has an issue, we’re not just going to make them stick to a number that they feel is unfair.”

To some extent, Techstars is just trying to better compete in a crowded incubator marketplace at a time when entrepreneurs have been conditioned to expect genuflection. But it is also responding to changing founder and startup demographics. Techstars and other incubators are beginning to see more repeat entrepreneurs express interest in their programs, often for more mature companies. A recent notable example was when Quora—a five-year-old question-and-answer site that has raised more than $160 million of VC funding—entered into the Y Combinator program. In many of these cases, the entrepreneur is even more hesitant to give up equity on day one.

“We’re definitely seeing an uptick in the number of advanced companies and advanced entrepreneurs coming to Techstars,” Cohen says. “They’re maybe saying that they have momentum and aren’t sure about the value on the front end…so we’re going to remove that roadblock.”

The big question now is whether other prominent incubators—especially Y Combinator, which incubated such startups as Airbnb, Dropbox, and Twitch—will follow suit. To be sure, there are inherent risks. Techstars spends money on services for each startup—and also invests $118,000 in seed capital (specific dollar amounts vary by program). Not only could it receive nothing in return from a disgruntled founder, but it could lose out from a selfish one as well. The bull case is that those scofflaws probably are not running anything that will create value anyway, since successful entrepreneurs wouldn’t want to anger groups whose mentor rosters are filled with potential funding sources.

So I’d expect other major incubators to let Techstars de-risk the process. If there are no major flare-ups, they’ll fall into line. The result would be more equitable deals for entrepreneurs and increased applicant pools for the incubators.

Perhaps most important, it could help founders navigate better between the contenders and pretenders. If a program is confident that it will provide demonstrable value, then it should be willing to put its money where its mouth is. If not, then that should be a giant warning sign for founders. That guidance alone might be worth a few shares.

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• Hospira (NYSE: HSP), an Illinois-based drugmaker, is in talks to acquire the medical nutrition business of France’s Danone (Paris: DANO), in a $5 billion tax inversion deal, according to Reuters. Read more.


• xAd, a San Francisco-based provider of ad-serving technology for mobile search and display, has raised $50 million in combined equity and debt financing. Institutional Venture Partners led the equity tranche, and was joined by return backers Emergence Capital Partners and Softbank Capital. Silicon Valley Bank provided the debt. Dow Jones reports that the deal was done at a valuation of approximately $250 million.

• Fractyl Laboratories Inc., a Waltham, Mass.-based developer of a device-based endoscopic procedure to treat Type 2 diabetes, has raised $40 million in Series C funding. Mithril Capital Management led the round, and was joined by return backers General Catalyst, Bessemer Venture Partners and Domain Associates.

• Continuity Control, a New Haven, Conn.-based provider of compliance management software for community financial institutions, has raised $10 million in VC funding. River Cities Capital Funds led the round, and was joined by BancVue.

• Lehigh Technologies Inc., a Tucker, Ga.-based sustainable materials company focused on transforming end-of-life tire and post-industrial rubber, has raised $8 million in new VC funding. JSR Corp. (Tokyo: 4185) led the round, and was joined by return backers Leaf Clean Energy, Kleiner, Perkins, Caufield and Byers, Index Ventures and Florida Gulfshore Capital.

• Tapdaq, a “community-driven” mobile ad platform, has raised $1.4 million in seed funding led by Balderton Capital.


 Activate Healthcare LLC, an Indianapolis–based provider of employee healthcare services, has raised an undisclosed amount of growth equity funding from Spring Mountain Capital.

• Industrial Opportunity Partners has acquired the multiwall packaging division of Grief (NYSE: GEF), for an undisclosed amount. The business operates facilities in Rosemount, Minn. and Omaha, Nebraska.

• Vision Source, a Kingwood, Texas-based network of independent optometrists that is backed by Brazos Private Equity Partners, has completed a dividend recap. Golub Capital provided the financing via a uni-tranche term loan facility and revolver. No specific financial information was disclosed.

• Partners Group has acquired a 30% stake in Turkish natural gas distributor Enerya from Turkish industrial conglomerate STFA Group, which will retain the remaining equity. No financial terms were disclosed.

• Vice Media has raised $250 million in new funding from Technology Crossover Ventures, in exchange for a 10% equity stake. This comes on top of a previously-disclosed $250 million investment from A&E Networks, which the NY Times reports came at similar terms. Read more.


• Foamix Ltd., an Israeli developer of a minocycline foam for the treatment of acne and other skin conditions, has set its IPO terms to around 5.9 million shares being offered at between $10 and $12 per share. It would have an initial market cap of around $219 million, were it to price in the middle of its range. The company plans to trade on the Nasdaq under ticker symbol FOMX, with Barclays and Cowen & Co. serving as lead underwriters. Shareholders include Tamarkin Medical Innovation (21.1% pre-IPO stake).

 Neff Corp., a Miami, Fla.-based construction equipment rental company focused on the U.S. Sunbelt region, has filed for a $100 million IPO. It plans to trade under ticker symbol NEFF, with Morgan Stanley serving as left lead underwriter. The company had filed for bankruptcy in 2010, after which it was acquired by Wayzata Investment Partners. It reports $10 million in net income on $347 million in revenue for the year ending June 30, 2014.


• Bridgepoint has been receiving buyside interest in portfolio company Infront Sports & Media AG, a Swiss sports marketing group, according to Reuters. Bridgepoint bought the business in 2011 for €550 million. Read more

• CapMan has sold its stake in Global Intelligence Alliance Group Oy, a Finland-based international strategic market intelligence and advisory group, to M-Brain Oy for an undisclosed amount. GIAG reports annual revenue of around €14.2 million.

• Hearst Corp. has acquired an 80% stake in Kubra Data Transfer Ltd., an Ontario–based provider of digital bill delivery and payment services, from shareholders like Clairvue Capital. No financial terms were disclosed.

• Palladium Equity Partners has completed its previously-announced sale of Sahale Snacks Inc., a Seattle–based maker of branded nut and fruit snacks, to The J.M. Smucker Co. (NYSE: SJM). Sahale is expected to generate around $50 million in net sales for

• Prestige Brands Holdings has completed its previously-announced $750 million acquisition of Insight Pharmaceuticals, a Trevose, Penn.-based maker of OTC non-prescription medications and personal care products, from Swander Pace Capital and Ontario Teachers’ Pension

• Providence Equity Partners reportedly is planning to sell 25% of its stake in listed Indian mobile services provider Idea Cellular Ltd., which represents a 2.4% position in the company. The deal could be valued at upwards of $242 million. Read more

• Teradata Corp. (NYSE: TDC) has acquired Think Big Analytics Inc., a Mountain View, Calif.-based consulting and company focused on Hadoop and big data solutions. No financial terms were disclosed. Sellers include WI Harper Group and Signatures Capital.



• Balfour Beatty (LSE: BBY), a London-based infrastructure construction and services company, has agreed to sell its Parsons Brinckerhoff consulting unit to WSP Global (TSX: WSP) for $1.35 billion.

• Key Tronic Corp. (Nasdaq: KTCC) has acquired CDR Manufacturing Inc., a Somerset, Ky.-based maker of printed circuit board assemblies, for $47.9 million in cash.

• Pioneer Corp. (Tokyo: 6773) is in “the final stakes” of selling its DJ equipment business for upwards of $570 million, according to Reuters. BofA Merrill Lynch is managing the process, which includes several private equity suitors. Read more

• Tibco Software Inc. (Nasdaq: TIBX), a Palo Alto, Calif.-based provider of enterprise infrastructure and business intelligence software, is reviewing strategic options that could include a sale to private equity, according to Bloomberg. The company has a current market cap of nearly $3.5 billion. Read more


• ECI Partners, a UK-based buyout firm, has closed its tenth fund with £500 million in capital commitments.

• Solace Capital Partners, a special situations group launched last year by a group of ex-Oaktree Capital execs, is targeting $500 million for its debut fund, according to peHUB. Read more.


• Stefan Green has joined Perella Weinberg Partners as a San Francisco-based partner focused on tech, media and telecom companies. He previously spent 19 years with Goldman Sachs, including as head of EMEA financial sponsors. Read more

• Scale Venture Partners has promoted Ariel Tseitlin from venture partner to partner. He had joined the firm last year from Netflix, where he served as director of cloud solutions. The firm also has hired Cack Wilhem (ex-Cloudera) as a principal and Rose Yuan (ex-JPMorgan analyst) as an associate.

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