Capital Chaos

hi5 (San Francisco, CA) which is one of the most popular social networks out there (#8 Globally according to Alexa), just raised additional capital but in the form of debt. The transaction which was led by Hercules Technology Growth Capital who clearly sees value in the international application of hi5 which while it claims to have 70M + members doesnt score as high in the US market.

There are a few interesting aspects of this announcement. First, according to the press release, the transaction took place back in December, 2007 but was just released today. As well, while Hercules does specialize in venture debt financing, they also do equity financing and I am unsure why hi5 chose to take on debt. One reason may be that they are generating enough cash to pay the note on a monthly basis and are gearing up for a larger transaction (IPO) which could also mean they may be looking at acquisitions to do with the cash and not affect their existing equity structure. It is also a bit puzzling that this latest round comes just 6 months after Mohr Davidow Ventures led a $20M round. There is definitely a reason these guys are stockpiling so much cash and its just a matter of time before some announcement is made. While the press release references the $15M in venture debt to be used for “equipment financing”, seems like an awful lot of money for equipment. Many venture debt transactions are used for equipment financing as we discussed in a previous post that compared venture loans to bank loans.

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Hercules Technology Growth Capital (Palo Alto, CA) (NASDQ: HTGC) is what is known as a specialty finance company that provides both venture debt and venture equity. The firm was founded just a few years ago in 2003 but has done a number of transactions similar to that of hi5 and as we pointed out in a previous post, venture debt seems to be the next “big financing tool” to companies that are generating good cash flow and are looking for a little extra.

Typical Hercules loans range from $1 million to $30 million, and claim they also have the capability to underwrite transactions up to $40 million. They structure their financing solutions to “foster long-term growth, ensure financial stability and maximize shareholder value”.

While the firm says they provide growth capital to companies at all stages, most of Hercules financing is in the form of a loan so unless you have something to securitize the investment against (cash flow, technology, IP etc.) it is unlikely they would be an option for you. (one caveat, they do qualify as a Small Business Investment Company (SBIC) and as such are able to help support small businesses with favorable loan rates).

Some financial options the firm offers are:

Hercules has a big appetite for varied sectors that they invest in. They invest in: Technology and life sciences companies specializing in computer hardware and software, networking systems and information technology infrastructure, Internet services and telecommunications, medical devices, bio-pharmaceuticals and health care services.

Anyone interested in working with a company like Hercules needs to truly understand what it means to take on venture debt and what you as a company are giving up as a result. As debt typically ends up ahead of equity and since the employees/management will have equity and not debt, make sure you are fully aware of both the upside and downside of engaging in a venture debt transaction before you do so.

Contact:
400 Hamilton Ave, Suite 310
Palo Alto, CA 94301
Telephone: (650) 289-3060