Stephen’s Posterous

Backing an oil and gas exploration company has turned into a costly proposition for Kleiner Perkins Caufield & Byers, Goldman Sachs Group Inc. and other investors in Terralliance Technologies Inc.

The Newport Beach, Calif., company, which recently laid off much of its staff, burned through nearly $300 million in equity and then pulled down $150 million in debt from Passport Capital, according to people familiar with Terralliance. The company has been in violation of the terms of the Passport bridge loan since last fall after a $1 billion or more investment from Singapore-based Temasek Holdings fell through, these people say.

Since then, Terralliance has closed its foreign offices and laid off all but about 45 of its more than 125 employees. The most recent layoffs were in mid-March, VentureWire reported last week. Also in March, Terralliance officially terminated the employment of its chief scientist, company founder Erlend Olson, said a person familiar with the company. Olson had previously been chief executive but left that position around September 2008.

The future of Terralliance is unclear as it seeks to prove its petroleum-mapping technology. The company’s acting chief executive and several investors either could not be reached or declined to comment. Details of its situation were pieced together from regulatory filings, a company document reviewed by VentureWire and interviews with people familiar with the company, who asked to remain anonymous.

Terralliance was founded in about 2003 by Olson and others to commercialize technology that uses satellite data to map potential oil and gas deposits.

Olson is a former executive at Pivotal Technologies Inc., which Broadcom Corp. acquired in 2000. Individual investors backed Terralliance until 2004 when it raised $11 million in Series A financing, most of it from Kleiner Perkins, a well-known technology and health-care investor that is looking to make its mark in energy and cleantech investing.

The next year, Terralliance raised a $35.3 million Series B round with Goldman and Kleiner as the main investors. In 2006, the company raised a whopping $250 million from new investors Dubai-based Ithmar Capital and Palo Alto, Calif.-based DAG Ventures with Kleiner and Goldman also participating.

It took Terralliance about a year to spend the $250 million. The company bought up oil and gas leases in places such as Mozambique and Kazakhstan. It purchased satellite data to use in analyzing potential drilling sites and dug test wells. It also bought some Russian jets for a total of more than $20 million.

Terralliance claimed that its mapping technology was more than 90% accurate. Results, however, never approached that and the company failed to find commercial quantities of petroleum. It has since developed a new version of its Direct Hydrocarbon Mapping technology, which could prove more accurate in finding petroleum as well as other natural resources. Terralliance also was developing seismic technology for use in oil and gas exploration.

Meanwhile, running short of cash, Terralliance secured bridge financing from Passport and sought to close a deal with Temasek that would have valued the company at about $3 billion. As part of its due diligence, Temasek insisted on an outside audit of Terralliance, something the company had never completed since getting its first institutional financing. Temasek declined to comment.

The audit began in December 2007 and took about 10 months to finish. When it was done, with oil prices falling, Temasek withdrew, leaving Terralliance to deal with the bridge loan from Passport. Passport, a San Francisco-based investment firm, declined to comment.

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Jim Watson, managing general partner at CMEA Capital, last week attended a Washington, D.C., meeting organized by TechNet for technology executives and White House and congressional leaders to discuss technology policy. Watson was among the few venture capitalists there, along with Kleiner Perkins Caufield & Byers’ John Doerr.

Mr. Watson, who focused his efforts on clean technology, also spent the following day meeting with about 20 different legislators, including House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, to discuss issues affecting start-ups and venture capitalists.

Dow Jones VentureWire recently spoke with Mr. Watson about his dealings with Congress specifically on the subject of clean technology.

Question: What policies were you pushing for in your meetings with Congress members and senators?

Mr. Watson: We said very directly: Put a price on carbon, and do more to change rules and get us free of foreign oil and the effects of climate change. There’s been a lot of discussions in that area.

Also specifically on the renewable side, we’re trying to encourage legislation that would provide incentives for utilities to be able make money saving electrons as well as making electrons, whether it’s more efficiencies, the smart-grid or appliances.

Utilities are now forced into a business model that says you have to make electron and sell electricity to get revenue. Let’s figure out a way of saving electricity creates opportunity for revenue. Those are two things in every single meeting we hammered home.

Is there interest and momentum for cleantech friendly legislation in Washington?

Absolutely….They’re resolved to get free of foreign oil and improve the [electric] grid. There’s very strong political will. How long all this takes and frankly where the money comes from is another question. I think you’re going to see the House work on an approach to cap and trade. That’s just starting now.

What opportunities does a cap and trade bill provide for venture investors?

As a venture capitalist, it would provide opportunities on the tech side to figure out how to “keep score” [of carbon emissions]. There’s going to have to be a marketplace created and a lot of technology will have to be invested to make this thing really work. You’ll see interesting solutions from the technology side.

From the cleantech and company side it really depends. It could provide opportunities for how we capture and dispose of CO2. There are also others areas like solar and wind that are more indirect.

What was your impression of the general mood in Washington for getting a cap and trade or similar legislation passed?

The difference I saw versus a year ago was that back then, most of the discussions came back to, “The Democrats can’t get anything done,” or “The Republicans can’t get anything done.” There was huge animosity. This time was really quite different. It’s almost like we have a common enemy. It’s the economy, and climate change or foreign oil. Everybody seems to be searching for answers in these areas.

How cognizant are government officials of the role venture industry plays in new energy policy?

For the parts that energy innovation can play a role then absolutely, there are some folks in Washington that understand that. For example, [Senate Majority Leader] Harry Reid was so well versed in energy and cleantech and the role VCs can play in it. We’re not the whole answer for sure, but when it comes to innovation and the creation of green jobs we’ve got some cards to play there.

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Health care services company RedBrick Health Corp. has raised a $15 million Series C round as it looks to expand the reach of its health incentives program targeted at self-insured employers.

New investor Kleiner Perkins Caufield & Byers led the round, which included existing investors Fidelity Ventures, Highland Capital Partners and Versant Ventures. The valuation of the round, which closed March 20, 2009, was not disclosed.

Minneapolis-based RedBrick provides large, self-insured employers a health incentives program that determines employees' health premiums based on their behavior and works to identify ways to improve that behavior.

"We started talking to Kleiner Perkins probably in the middle of last year before we started raising money," said RedBrick co-founder and President Abir Sen. "It was a match based on their view of where health care was going and what we were doing."

Kleiner Perkins Partner Beth Seidenberg said she heard about the company from several sources, including Highland Capital General Partner Bob Higgins, before deciding to invest. Seidenberg, who has joined RedBrick's board with the round, also serves on the board of pluripotent stem cell company iZumi Bio Inc. with Higgins.

"It is remarkable to me that the current model for insurance and health care systems [is one in which] all employees pay the same amount for insurance regardless of if they're involved in healthy or unhealthy behaviors," Seidenberg said. "If you're a good driver and show that your track record's good, you pay less. Why don't we do that with health care?"

For each enrolled employee, RedBrick provides an individual health map, which shows where they currently are in their health status and what steps could be taken to improve that profile. While someone with a chronic disease may receive steps to take to actively control their disease, someone else who is already relatively healthy may receive an increased activity program, said RedBrick's Sen.

Employees may or may not need to prove that they are following their health map steps depending on their employer, Sen said. The company has found that providing technology to measure individual progress has had positive results, Sen said, including an iPhone application that can track an individual's walking exercises and subsequently send those results to the company's servers and the health map.

RedBrick is also working with other devices including pedometers, and has plans to deploy a specialized watch later this year.

RedBrick currently has nine large, self-insured employer customers nationally, including Hannaford Bros. Co., Target Corp. and Welch Allyn. With the Series C round, the company plans to expand its customer base, while also continuing to expand its service model and improve parts of its program including its patient screening and diagnostics for conditions such as diabetes. The company may also possibly look for potential acquisitions, according to Sen.

"What we look for is big trends in industries where we think innovation can have an impact, and that's how we saw this company," Seidenberg said. She added that she has a great deal of confidence in RedBrick's team.

After first investing in RedBrick's 2007 Series B round, Fidelity has seen the overall market climate for the company change, said Fidelity Partner Dave Power. While the company was mostly talking to human resources professionals a year ago about the program, it is now just as common for a chief financial officer to be interested in how the program can help reduce a company's costs.

"This year RedBrick has much more broad-based appeal to companies who are serious about managing escalating health care costs," Power said, with the company definitely seeing increased interest in its programs in the current economy. RedBrick's revenue was not disclosed.

RedBrick raised $30 million prior to this round through two $15 million Series A and Series B rounds.

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A year ago, two new venture capital funds dedicated solely to smart-phone applications were received by entrepreneurs with great fanfare.

Kleiner Perkins Caufield & Byers unveiled in April its $100 million iFund for developers working on features for Apple Inc.’s iPhone. A month later, Canadian investors JLA Ventures teamed up with the Royal Bank of Canada and Research in Motion Ltd. to gather $150 million for the BlackBerry Partners Fund.

Instantly, the two funds received hundreds of pitches from entrepreneurs; Kleiner got about 1,500 in the first month alone. As the hype grew last summer around the opening of Apple’s iPhone App Store, many industry watchers and analysts predicted an enormous wave of investments for app makers, and a glut of new companies emerging.

Since that time, consumer spending has slowed as the world’s economy reels from a severe downturn. As a result, both JLA and Kleiner say their investment pace has slowed down considerably. “We tell developers, we’re not interested in funding lifestyle apps, or a garage business of one or two people,” said Matt Murphy, the Kleiner partner who oversees the iFund, which has so far backed five application companies. “We’re looking for apps with proven traction….This is not a grant fund.”

The sentiment is similar at BlackBerry Partners, which just closed its fifth app-company investment. “We’ve raised the quality bar higher than it was six months ago,” said Kevin Talbot, vice president of the Royal Bank of Canada and managing director of its venture division. “We’re more selective. The pace has slowed a little bit, but it’s just a pause. We’re not sitting on the sidelines. There’s no competition for deals, so we’re just taking things slower.”

Despite receiving thousands of pitches, the iFund has invested in just five developers to date: mobile social network Pelago Inc., home-security app iControl Networks Inc., mobile games publisher Ngmoco Inc., lifestyle-and-motivation app Booyah Inc. and marketing platform Gogii Inc. While the value of some of those deals weren’t disclosed, it’s clear much of the capital allocated to the iFund is still available.

BlackBerry Partners, which launched in May, announced its first three investments in October after looking at more than 3,000 companies. Including two other investments since then, BlackBerry Partners’ portfolio includes location-based city guide Buzzd Inc., mobile payment app Digby Inc., travel-management app MobiMate Inc. and analytics company Neuralitic Systems Inc. The fifth deal has been finalized but not yet disclosed, Talbot said. The lion’s share of the $150 million fund is still waiting to be put into play.

The slow evolution has been punctuated by sudden developments, however, like the $3.9 million investment last month in app maker SonicMule Inc., a company that, by its own admission, does not have a solid plan to monetize its popular apps.

New investor Granite Ventures led the round, joined by previous backers Bessemer Venture Partners, Maples Investments and company executives. David Cowan, a partner at Bessemer, said at the time, “I don’t even know what an exit looks like here.”

Smule makes, among other things, an app that enables users to blow into the iPhone and play it like a primitive flute. While a year ago that might have seemed like a risky bet, investors can now see exactly what kind of traction such an app has, and make a more informed decision.

“Smule is really smart about users, and how to engage them, and sell them their other products,” Murphy said. “They came out with a simple, lightweight, easy-to-understand [app], and they added a small, subtle social element. It was nice learning they did.”

Both firms said they are still overwhelmed with pitches from entrepreneurs, and that they will likely make app investments in 2009 at roughly the same pace they did in 2008, with four or five new investments each. The developers’ enthusiasm should only grow when Research in Motion opens its own storefront for BlackBerry applications later this month.

Google Inc. recently opened up an app store for Android-enabled phones while handset maker Palm Inc. did the same for its own smart phones. 

“We’re still bullish,” said Talbot of BlackBerry Partners. “The question remains, how do they monetize?”

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Amid a tough fund-raising environment for venture capital firms, Kleiner Perkins Caufield & Byers has rounded up a portion of the $1.25 billion pool it’s raising to support four recent funds.

As reported in January 2009, the Menlo Park-based venture firm has returned to investors in two of its older funds, one raised in 2004 and the other raised in 2006, seeking additional capital for annex funds to support future rounds for the funds’ portfolio companies.

The firm has also re-opened two more recent funds to take on additional money: the $700 million Kleiner Perkins Caufield & Byers XIII LP and the $500 million Kleiner Perkins Green Growth Fund LP, both of which closed last year.

According to regulatory filings, Kleiner has raised an extra $264 million for the Green Growth Fund which is now targeting $1 billion. For Fund XIII, it is raising an additional $250 million to give it $950 million. Kleiner has also raised $280.5 million for a $350 million annex to Fund XII, and is raising a $150 million annex to Fund XI.

According to people familiar with the fund-raising activity, the firm wants additional capital for the older funds because it is concerned that its portfolio companies are going to have a tougher time rounding up capital for later financing founds from other co-investors.  Historically, Kleiner Perkins has been known to invest heavily in the earliest rounds of a company’s life, scaling its stake back as other firms come in to support later financing rounds.

Kleiner, one of the most respected firms in Silicon Valley, and famously earlier backers of such industry stalwarts as Amazon.com Inc., Genentech Inc., Google Inc. and Sun Microsystems Inc., shouldn’t have too much of a problem rounding up the capital it needs. The question is whether Kleiner will be able to get all of the capital from existing investors, who are said to be ponying up most of the commitments. Kleiner’s limited partner base is rich with endowments, which have seen their wealth dwindle in the wake of the economic downturn.

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Claremont Creek Ventures recently had to decide which of its young to forsake. The venture-capital firm had invested in such companies as online travel site cFares Inc. and genetic-technology start-up Gene Security Network Inc., with cash from a $130 million venture fund it launched in 2005.

Amid the financial crisis and the plunging stock market, Claremont Creek decided to focus on the fund's best investments and stop backing the less-promising start-ups. It wanted to be sure it had enough cash for the next few years for the winners. The venture firm ranked the start-ups in the fund's 16-company portfolio with an A, B or C grade.

"We're doubling down on the As and likely won't invest any more capital in the C companies," says John Steuart, a Claremont Creek managing director. "The portfolio is competing against itself and it's survival of the fittest. It's brutal."

Employees work at Gene Security, a maker of genetic tests to identify potential embryo abnormalities. The company got high marks from backers and will continue to receive funding. Other start-ups aren't so lucky. Gene Security, a fast-growing maker of genetic tests to identify potential abnormalities in embryos, got an A. Last month, Claremont Creek poured $3 million into the company on top of $2.7 million it has already invested.

CFares, which Claremont Creek says hasn't performed as strongly, got a C. The venture firm says it will give the Web site the $3.2 million it has already committed, but won't fund the start-up further unless it hits aggressive milestones. CFares Chief Executive Tom Kalinske says his company likely will be profitable by year end, based on the funding that already has been committed. Gene Security CEO Matthew Rabinowitz says his venture capitalists "are bringing out the best in us."

Many venture-capital firms, which put money into start-ups with the aim of profiting when those firms go public or are sold, are going through a similar Darwinian exercise of sorting through their potential winners and losers. While the venture business enjoyed something of a revival in the past few years, the financial crisis has slowed the spigots of cash going into the sector. It also has crimped returns by damping the market for initial public offerings of stock and for mergers. Meanwhile, many venture-backed start-ups are getting hurt as demand for their products shrinks.

As venture firms save their cash for their most promising start-ups, it often means pulling the plug on weaker companies. "Ultimately, there's some fallout," says Theresia Gouw Ranzetta, a venture capitalist at Accel Partners. "For companies that can't weather this storm, [there] may be a smaller asset combination to achieve scale and last longer."

Claremont Creek passed on putting more money into two start-ups in addition to cFares. Meanwhile, it lined up bridge financings for three others to get them through most of 2009. Since October, the firm raised new money for two of its start-ups at a higher valuation than in the past, though it accepted a lower valuation for a financing round for a third start-up.

Pressure is on young venture-capital firms like Claremont Creek, which have a shorter track record than older, better-known firms such as Sequoia Capital and Kleiner Perkins Caufield & Byers. There were 741 venture-capital firms in the U.S. as of 2007, the most recent data available, according to the National Venture Capital Association. Many expect that number to drop as the financial crisis plays out.

Claremont Creek finished raising a new $175 million fund in September and then laid off two members of its 10-person team in December. The stress sometimes led to arguments between Mr. Steuart and his two main partners, Randy Hawks and Nat Goldhaber. Last month, they brought in someone Mr. Steuart calls "a corporate shrink" to facilitate internal communication.

"We're burning the candle on both ends," says Mr. Hawks, who co-founded Claremont Creek in 2005. "Partnerships have to work hard to keep it on a calm and smooth trajectory."

As of last October, Claremont Creek had deployed $44.3 million of the $130 million fund it launched in 2005. After an analysis showed its 16 portfolio companies were burning through more than $30 million a year, it quickly pushed some start-ups to cut costs.

CFares laid off four employees, reducing its work force to 18 people. Mr. Kalinske, the CEO, says he wasn't surprised when Claremont Creek said it didn't plan to give cFares more new money. Given the tough economy and the relatively small size of Claremont Creek's fund, "that's business."

At the same time, Claremont Creek persuaded some of its A-graded companies to raise more funds to survive the downturn. Gene Security CEO Mr. Rabinowitz wasn't planning to look for new money last year. In October, Mr. Steuart, who is on the start-up's board, helped convince him to speed up fund raising and raise more than enough cash for the company to beef up product development and weather the recession.

Mr. Rabinowitz worked with Mr. Steuart to find new investors. Venture-capital firm Alafi Capital last month participated in a new $6 million funding round for Gene Security at more than twice the valuation of the startup's previous financing.

Overall, Claremont Creek has trimmed $10 million a year in expenses from its start-ups since October. While the firm once planned to invest in 20 companies with its 2005 fund, it now plans no new investments so it has more cash for existing start-ups. It has set aside $40 million for companies it will keep funding, up from less than $30 million previously. Mr. Steuart says Claremont Creek has now made enough changes for many of its start-ups to live to see 2011. Source.