Internet Blurs Line Between VC, Buyouts –

NEW YORK/WALTHAM, Mass. – Late November brought the most recent sign that the Internet continues to blur the line between buyouts and venture capital, as well as force partners throughout private equity to reevaluate their career paths.

These trends were brought to bear when early-stage company, SupplierMarket.com, sought financing from buyout firms rather than traditional venture capitalists in its second round of funding. Long-time buyout pro Clifton Robbins of Kohlberg Kravis Roberts & Co. (KKR) participated in the financing – only to soon bolt to a traditional venture capital firm, General Atlantic Partners, to focus on technology investments.

SupplierMarket, a Waltham, Mass. player in the Web-based business-to-business market, recently raised $40 million in private equity from a syndicate of investors led by Fenway Partners of New York and executives at KKR.

KKR does not use capital from its $5.7 billion buyout fund to make venture investments; executives at the firm pool their own capital for deals. Robbins had led the venture activity, which included investments in StarMedia Network Inc., MyPoints.com Inc., PlanetRX.com Inc. and LivePerson Inc. Marc Lipschultz and Oliver Harmon were the KKR executives who worked most closely with Robbins on the VC efforts, although co-founder Henry Kravis’ support of small, New York City-focused venture efforts has been well documented. KKR did not return calls by press time.

To be sure, early-stage companies have welcomed money from buyout firms before, but the difference this time is that Asif Satchu, co-founder of SupplierMarket, eschewed venture money for access to buyout fund portfolio companies.

“The rationale is that we are not venture stage … this is a second round for infrastructure building,” Satchu said. “[Buyout] firms own our customers, and they bring a different skill set than VCs.”

Other participants in the financing included Fleet Equity Partners, Madison Dearborn Partners, Onex Investment Corp., Silicon Valley Bank and existing venture capital investors Battery Ventures and Sequoia Capital.

Sequoia and Battery teamed up to provide SupplierMarket with $8 million in its first round financing last June.

“VCs can help you go from an idea to a larger company,” Satchu said. “We have 60 people, seven regional sales offices. We are a company, and we want to lay the infrastructure for a larger company.”

Operating on Internet Time

Satchu cited the experience of buyout firms in managing infrastructure development as a major reason for pursuing this investor group, and he acknowledged that the presence of his brother, Reza, at Fenway made him more comfortable stepping off the traditional path to capital. However, Satchu hastened to add that Fenway took no part in negotiating the structure of the deal, which closed in just over two weeks.

“Their portfolio companies, coupled with their business expertise, led us to the private equity groups,” Satchu said. “Then we wanted to find a fit with the people at the firms.”

Those relationships paid immediate dividends as, prior to the investment, Peter Lamm, general partner at Fenway, introduced SupplierMarket to Simmons Co., a Fenway portfolio company. The mattress company issued a $5 million request for supplies through the SupplierMarket site that Satchu said were promptly filled, saving Simmons $450,000 in 10 business days. These opportunities are not lost on the other participants in the transaction.

“Each of our portfolio companies has to deal with the effect of the Internet on their business,” said Tom Reusche, a managing director at Madison Dearborn. “As I look at [SupplierMarket], this is something that we looked at as being the right situation, tied into some of our core investing strategies.”

SupplierMarket operates as an intermediary for buyers and sellers of simple industrial products. The company specializes in goods that require low engineering and are built to order, including simple screws, fasteners and metal stampings.

Currently, SupplierMarket’s sole revenue stream comes from a transaction fee averaging 2% upon that is imposed upon completion of a deal. Satchu declined to disclose revenue numbers or plans for adding new revenue streams, but he did say the company plans to add new sources of income over time.

“Everybody in the private equity business is kind of an entrepreneur. Clearly, this is an emerging field, but my bet is that any time there is this much opportunity, people will find themselves in new situations.”

Structured as a mezzanine round, the $40 million infusion will permit the company to expand the internal technology infrastructure as well as add personnel. Satchu said the company plans to increase to 200 employees from the current 60-person staff. He added that he intends for this to be SupplierMarket’s last private financing prior to an initial public offering.

“Buyout shops manage and help companies develop systems, processes and organizations,” Satchu said. “We are going to face problems that are not high tech, but are business problems.”

Robbins Jumps Ship

In conjunction with the November investment, SupplierMarket planned to give board seats to Robbins and Lamm.

However, Robbins announced in late November that he was leaving KKR to join Greenwich, Conn.-based General Atlantic. Satchu said Robbins will not retain the SupplierMarket board seat, and he added that Robbins had alerted the company of his potential departure during negotiations.

“Our approach was that [KKR] was not just Cliff, and for us this wasn’t a shocker,” Satchu said. “We are talking about the seat, but he can’t keep it for obvious reasons.”

Neither Robbins nor General Atlantic returned calls by press time.

The transition makes Robbins one of the latest examples of Wall Street professionals being lured into the venture capital world.

In the past several months, no fewer than four professionals have leapt to VC firms. Analysts in particular have become the apples of venture firms’ eyes. Most recently, Danny Rimer, formerly of Hambrecht & Quist, joined the Barksdale Group. Rimer follows in the footsteps of Bill Burnham, who left Credit Suisse First Boston to join SOFTBANK Capital Partners, and Keith Benjamin, who joined Highland Capital Partners after rising to senior Internet analyst and managing director at BancBoston Robertson Stephens .