Hybrid venture deals typically include both a primary and secondary investment. The former is used for working capital and other corporate purposes, while the latter is used to provide liquidity to early company employees and/or shareholders.
Such transactions have been dubbed “DST deals,” after Digital Sky Technologies, the Russian investment house that has used the model for later-stage investments in Facebook and Zynga. Earlier practitioners included Advanced Equities and Technology Crossover Ventures, while Elevation Partners recently got in on the action with its $100 million deal for Yelp ($25m primary, $75m secondary).
David Baum, who co-founded Stage1 four years ago as an early-stage investor, says that the past year’s liquidity crunch caused his firm to become inundated with direct secondary dealflow. Its $25 million debut fund, however, had neither the capital nor strategic flexibility to pursue such deals. The result was a new barbell strategy, in which Stage1 Ventures will be complimented by the platform, called S1 Capital Partners (yes, the “S1” is supposed to reference an IPO filing).
“We’re focused on opportunities for later-stage technology companies that have significant revenue and are at last cash-flow breakeven,” Baum explains. “The secondary pieces will be for situations in which there is a highly-concentrated founder position available, or cases of venture fatigue.”
Baum and fellow Stage1 co-founder Jon Gordon will be complimented by former Lucent executive Rod Randall, who most recently had been with decaying venture firm Vesbridge Partners. Also involved are a pair of unidentified European investment pros, who are helping to raise the S1 Capital fund from overseas limited partners (the fund will be denominated in Euros, but invested in North America).
Baum says that a few cornerstone LPs already have agreed to fund a couple of deals that could close within the next several weeks. One of them will be a $30 million transaction, split 50/50 between primary and secondary capital. Baum declined to provide company specifics, except to say that it achieved $100 million in 2009 revenue, and that the deal is “valued at approximately 1x last year’s bookings.”
It’s worth noting that the S1 Capital fund is being raised with a traditional private equity fund structure. Stage1 Ventures, on the other hand, had a pair of unusual characteristics: First, the fund only collected management fees on invested capital, rather than on committed capital. Second, the fund only committed to a portfolio company’s first round of funding. If Stage1 opted to participate in follow-on funding, it did so out of a special purpose vehicle.
Expect Stage1 Ventures to begin raising its second fund later this year, again with a $25 million target.