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Term Sheet — Monday, July 6

Random Ramblings

PayPal last Wednesday announced plans to acquire Xoom Corp., a San Francisco-based digital money transfer services, for approximately $890 million. The $25 per share deal represented nearly a 21% premium over where Xoom stock closed trading last Tuesday, and a 56.25% premium over where Xoom priced its initial public offering back in early 2013.

Xoom is not one of the so-called unicorns, but its experience may be instructive when thinking about the idea of a tech startup bubble, particularly in terms of investor risk and reward.

VC firm Andreessen Horowitz recently published a data-driven refutation of the bubble-mongers, with a heavy emphasis on differences between today’s environment and the dotcom bubble. As I wrote previously, a lot of it is persuasive.

But for the purposes of this post, I want to focus on a particular slide about how the increase in later-stage private funding (“quasi-IPOs”) has allegedly shifted value appreciation from the public to private markets. Here it is (yeah, you’ve got to turn images on):


I understand the argument, and even made a similar one in a magazine column last summer. In short: The longer a growing company remains private, the more wealth is created for a small number of investors. Historically that would be VCs and company employees, but the “quasi IPO” has slightly expanded that pot to also include hedge funds, mutual funds and sovereign wealth funds. By going public, you allow a much broader group of investors to benefit from the company’s growth. That’s why my magazine column was titled: “Dear tech CEOs, go public for the good of the country.”

My quibble with Andreessen Horowitz’s slide, however, is that VCs don’t usually sell their shares at IPO. Instead, they typically hold on for at least the first 90 days (per lock-up agreements), and often for a significant amount of time after that (in the case of small biotech floats, the VCs often buy more shares at the IPO price). As such, the “public” value creation cited by Andreessen Horowitz for a company like Google, for example, is belied by the fact that Google’s venture capital backers — namely, Kleiner Perkins and Sequoia Capital — held onto most of their shares for years after its IPO.

“We made a lot of money during the dotcom bubble once VC portfolio companies went public, because they were often small floats and the VCs held onto the stock as the prices soared” explains a longtime investor in venture capital funds. “We’re seeing similar valuation increases today but, because the companies haven’t gone public, VCs are basically taking on extra risk for the same reward.”

All of which brings us back to Xoom. Among the company’s current shareholders is Sequoia Capital, which last reported a 14.72% ownership stake. Had Sequoia cashed out all of its Xoom shares at IPO, it would have returned nearly $52 million fewer dollars. That difference is not accounted for in the Andreessen Horowitz slide. It’s also worth noting that Sequoia would have received around the same value appreciation had it sold just after its post-IPO lockup expired (it peaked in July 2013).

For an even more stark example, take a look at Palo Alto Networks, where the value of Sequoia’s remaining stock today is around $734 million higher than it was at the time of IPO.

To be clear, none of this is arguing for or against a tech bubble. It’s only to point out that the advent of unicorns does not necessarily mean that the private markets are going to be better off for their existence.

• Thank you: We got three dozen nominations for our final startup pitch slot at Fortune Brainstorm Tech, which begins a week from today (full agenda here — recent additions include Dow Chemical CEO Andrew Liveris and Sprinklr CEO Ragy Thomas). In the midst of finalizing our pick, and I’ll be in touch with everyone who replied by end of today.


• Aetna Inc. (NYSE: AET) has agreed to acquire Humana Inc. (NYSE: HUM) in a $37 billion deal that would create the second-largest managed healthcare company in the U.S. Read more.


• 23andMe, a Mountain View, Calif.–based DNA testing and genome sequencing, has raised $80 million in new equity funding, according to a regulatory filing that suggests the round total could eventually hit $150 million. It had previously raised over $110 million from investors like NEA, Google Ventures and Yuri Milner. Read more.

• Zound Industries, a Sweden-based music hardware company, has raised €10 million from Time for Growth (France).

• Gozoomo, a Bangalore-based P2P platform for used car transactions, has raised $5 million in VC funding from SAIF Partners.


 Apax Partners is nearing a €450 million agreement to acquire Dutch online retailer RFS Holland Holding from IK Investment Partners, according to a local media report. Read more.

• Harvest Partners has acquired Dental Care Alliance, a Sarasota, Fla.-based dental-practice management company, from Quad-C Management. No financial terms were disclosed.

• Laboratoires Anios, a French provider of disinfection of hospital and clinical environments, has acquired an 80% stake in Endoclear, a Brazilian provider of automatic endoscope disinfection processes. Laboratoires Anios is a portfolio company of Ardian.

• LSQ Funding Group, an Orlando, Fla.-based provider of receivables financing for small and midsized businesses, has raised $40 million in financing from Ares Capital Corp. LSQ is a portfolio company of Lovell Minnick Partners.

• Morgan Stanley Global Private Equity and Far EasTone Telecommunications (TSEC: 4904) are nearing a $2.3 billion deal to acquire Taiwanese cable television operator China Network Systems from MBK Partners, according to the WSJ. Read more.

• Palladium Equity Partners has acquired TransForce Inc., an Alexandria, Va.-based provider of commercial truck drivers to third-party logistics companies. No financial terms were disclosed. Sellers include Merion Investment Partners and The Argentum Group.

• Survey Sampling International, a Shelton, Conn.-based provider of corporate surveys, has completed its previously-announced acquisitions of MyOpinions Ltd. (Australia) and SmileCity Ltd. (New Zealand). No financial terms were disclosed for either deal. SSI was acquired last year by HGGC, with sellers Providence Equity Partners and Sterling Investment Partners retaining minority ownership stakes.

• Tata’s Natural Alchemy, a Whiting, Vermont–based natural skincare brand, has raised an undisclosed amount of minority equity funding from Alliance Consumer Growth.

• Worldwide Facilities LLC, a Los Angeles-based–based wholesale insurance broker and managing general agent, has raised an undisclosed amount of minority equity funding from Lovell Minnick Partners. The company will continue to be majority owned by its employees.


• BioCardia Inc., a San Carlos, Calif.-based regenerative medicine company focused on developing therapeutics for cardiovascular diseases, has set its IPO terms to around 3.85 million shares being offered at between $12 and $14 per share. It would have an initial market cap of approximately $146 million, were it to price in the middle of its range. The company plans to trade on the Nasdaq under ticker symbol BCDA, with Cantor Fizgerald serving as lead underwriter.

• Conifer Holdings Inc., a Birmingham, Mich.-based insurance holding company, has filed for a $55 million IPO. It plans to trade on the Nasdaq under ticker symbol CNFR, with BMO Capital Markets and Raymond James serving as lead underwriters. Strength Capital Partners holds a 21.9% pre-IPO stake.

• Manulife Asset Management, the asset management group of Canadian insurer Manulife Financial Corp. (TSX: MFC), has delayed plans for a Singapore IPO for its U.S. office property portfolio, which had been intended to raise upwards of $450 million. Read more.

• Natera Inc., a San Carlos, Calif.-based provider of non-invasive genetic testing solutions, raised $180 million in its IPO. The company priced 10 million shares at $18 per share (high end of upwardly-revised range), and closed its first day of trading up at $22.74 per share ($1.1 billion market cap). It is trading on the Nasdaq under ticker symbol NTRA, while Morgan Stanley, Piper Jaffray and Cowen & Co. served as lead IPO underwriters. The company reports a $5 million net loss for 2014 on around $159 million in revenue. Natera has raised over $150 million in VC funding, from firms like Sequoia Capital (20.2% pre-IPO stake), Claremont Creek Capital (19.3%), Lightspeed Venture Partners (10.4%), Sofinnova Ventures (6.1%), Capital Research and Management, Franklin Templeton Investments, Jennison Associates, RA Capital Management, Healthcor Partners and OrbiMed Advisors.

• Ollie‘s Bargain Basement Holdings, a Harrisburg, Penn.-based extreme value retailer owned by CCMP Capital, has set its IPO terms to around 8.93 million shares being offered at between $13 and $15 per share. It would have an initial market cap of approximately $800 million, were it to price in the middle of its range. The company plans to trade on the Nasdaq under ticker symbol OLLI, with JPMorgan, Jefferies and BofA Merrill Lynch serving as lead underwriters. Ollie’s reports nearly $30 million in net income on $638 million in revenue for 2014.

• ProNAi Therapeutics Inc., a Plymouth, Minn.-based developer of nucleic acidtherapeutics, has set its IPO terms to 6.7 million shares being offered at between $14 and $16 per share. It would have an initial market cap of approximately $410 million, were it to price in the middle of its range. The pre-revenue company plans to trade on the Nasdaq under ticker symbol DNAI, with Jefferies and BofA Merrill Lynch serving as lead underwriters. ProNAi has raised around $80 million in VC funding, from firms like Vivo Ventures (11% pre-IPO stake), Frazier Healthcare Ventures (9.8%), Orbimed Advisors (9%), Adams Street Partners (5.8%), RA Capital Management, Caxton Alternative Management, Hopen Life Science Ventures, Sectoral Asset Management, Janus Capital Management, Capital Midwest Fund, Apjohn Ventures Fund, Amherst Fund and Grand Angels.

• Univision, a New York-based Spanish language broadcaster, has filed for a $100 million IPO. It plans to trade under ticker symbol UVN, with Morgan Stanley, Goldman Sachs and Deutsche Bank serving as lead underwriters. The company reports just under $1 million of net income on around $2.9 billion in revenue for 2014, compared to $216 million of net income on $2.6 billion in revenue for the prior year. Univision was acquired in early 2007 by a private equity consortium that included Madison Dearborn Partners, Providence Equity Partners, TPG Capital and Thomas H. Lee Partners. Also participating were the Canada Pension Plan Investment Board and AlpInvest. Read more.


• The Abraaj Group has sold its 13.6% stake in UAP Holdings Ltd., a pan-African insurance holding company, to Old Mutual PLC (LSE: OML) for an undisclosed amount. UAP is traded OTC in Nairobi.

• Allergan PLC (NYSE: AGN) has agreed to acquire Oculeve, a South San Francisco–based developer of treatments for dry eye disease, in an all-cash transaction that includes a $125 million up-front payment. Oculeve raised a $7.5 million Series A round in late 2012 from Kleiner Perkins Caufield & Byers, New Enterprise Associates and Versant Ventures.

• TSG Consumer Partners has hired Houlihan Lokey to find a buyer for ThinkThin Products LLC, a Ventura, Calif.–based maker of oatmeal and protein bars, according to LBO Wire.


• Modern Times Group has acquired a 74% stake in Turtle Entertainment, the holding company for e-sports company Electronic Sports League, for $87 million. Read more.

• Philip Morris International (NYSE: PM) is prepping the sale of more than $1 billion worth of shares in its Indonesian operation, according to the WSJ. Read more.


 Adams Street Partners is seeking to form a private debt investment group, according to an interview partner David Arcauz gave to eFinancial News. Read more.


• Simon Fulbrook has joined law firm Goodwin Procter as a London-based partner focused on leveraged finance transactions. He previously was with Kong & Wood Mallesons. Read more.

• Dominique Lafont, former president and CEO of Bolloré Africa Logistics, has joined KKR as a senior advisor.

• Tadataka Yamada has rejoined Frazier Healthcare as a venture partner with the life sciences group, and also as a senior advisor to the growth buyout team. He previously served as chief medical and scientific officer with Takeda Pharmaceuticals (Tokyo: 4502) and, before that, was president of the Bill & Melinda Gates Foundation Global Health Program.

• Liping Zhang has joined The Blackstone Group as a senior managing director and chairman for Greater China. He previously was with Credit Suisse as co-CEO of Greater China and vice chairman of global investment banking.

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