Venture debt funds mount a comeback

Sand Hill Capital has closed its fourth venture debt fund, in a move that signals the resurgence of an asset class nearly wiped out during the dot-com downturn.

A regulatory filing says the firm has raised $9.8 million, but General Partner William “Boots” Del Biaggio says that the amount represents the firm’s first close. “We’re seeing a lot of deal flow and there was a lot of success in the third fund, so the timing was right for the fourth fund,” he says.

Biaggio declined to give the target for the fund. His firm raised $120 million for its second venture debt fund in 1999 and an undisclosed amount for a third fund in 2004.

Limited partners in the new fund include the Gerald & Daphna Cramer Family Foundation, among 27 other accredited investors, according to the regulatory filing.

Sand Hill is raising the new fund as venture debt is becoming an increasingly attractive funding alternative for tech companies, especially with low interest rates and an expanding exit market. A variety of different lenders have raised funds recently. Last summer, BayStar Capital, a venture lending firm for post-IPO companies, started fund-raising for a $1 billion fund. The Larkspur, Calif.-based firm will lend $15 million to $25 million to small-cap technology companies to fund development, acquisitions or any specific project that will quickly improve the bottom line.

In February 2006, former Comdisco CEO Jim Labe launched TriplePoint Capital and its $310 million venture lending and leasing fund. The firm had a big hit eight months later when Google bought YouTube, which had raised venture debt from TriplePoint. The Menlo Park, Calif.-based firm walked away with shares of Google stock worth $6.5 million.

Even hedge funds are getting in on the action as Lisle, Ill.-based Ritchie Capital launched a $200 million venture lending fund in September of 2005.

“The entrepreneurs have become more educated on how to use debt than 10 years ago,” Biaggio says. “They all have figured out that if they take that instead of equity it’s less dilutive.”

As for the many firms involved in the venture debt industry, Biaggio says: “Everyone seems to have their niche. Ours is later stage. There’s definitely enough business to go around.”

Sand Hill raised an equity fund in 2005 that has invested in 10 companies and worked through about half of its dry powder, Biaggio says. He would not disclose the size of that fund, but he says that it primarily invests in companies that have already taken venture debt from the firm.

—Alexander Haislip