Venture buzz: The biggest fund ever

-- The public markets remain tumultuous, but private equity keeps building up in hopes of better days. Boston's Thomas H. Lee Partners, a buyout specialist, announced a massive US$6.1 billion private equity fund, the largest in history. The company, which has some $12 billion under management, has been involved in transactions ranging from Fisher Scientific to Snapple.

-- In further consolidating its strategic interests with Japan's Softbank Corp., networking giant Cisco Systems Inc. announced that it will invest $1.05 billion in a new private equity fund run by Softbank. The Softbank Asia Infrastructure Fund will target companies in broadband, optical, wireless and Internet-based technologies and services.

-- TL Ventures announced the close of a $675 million fund, TL V. The early stage fund will target about 50 or 60 companies in information technology, communications and life sciences. The firm will invest between $1 million and $7 million in each company. Next week Bay Partners will announce Bay Partners X. The $475 million fund will focus on networking, wireless and software infrastructure companies.

-- Some Internet sectors have gone cold, but semiconductors, software and storage firms are getting sexy once again. Communications chipmaker Layer N raised a $11.5 million first round led by Austin Ventures and Granite Ventures. EndPoints, a chipmaker for digital cameras and other video products, raised a $7 million second round from London-based investment bank Beeson Gregory International, among other European firms.

NextNine, a developer of remote technology support software, raised $20 million in its second round. Morgan Stanley Dean Witter Private Equity led the round, which included Redwood Venture Partners. Storage technology firm Raidtec had a $16 million second round. StoreAge Networking, an Israeli company that provides storage area management and resources, closed a $25 million second round. IIS Intelligent Information Systems led the round. Cisco Systems, Morgan Keegan and Genesis Partners also participated.

--Benchmark Capital announced a new partner: Mike Farmwald, who co-founded the scalable chip technology firm Rambus. Farmwald has founded six companies so far, five of which were partially financed by Benchmark. Weston Presidio named Theresa Mrozek general partner and COO. Mrozek is a former partner of the tech law firm Broveck, Phleger & Harrison.

-- Author Michael Lewis has an interesting theory about the evolution of the venture capital industry. Though venture capital is as old as capitalism, Lewis says, it rode to prominence on the tail of a new instrument and mentality created in the 1980s. Inadvertently, Michael Milken, who created the junk bond market on Wall Street, is the father of today's venture capital industry. "Milken saw that there was an irrational prejudice against high-risk investments in financial circles," says Lewis. "Essentially, Wall Street lacked a loan shark until Milken got there."

Milken was the first to discover the principle that would became the crucial philosophy behind venture capital, the high-risk capital that would fuel the Internet revolution. High-risk investments were systematically undervalued by financiers. This occurred, simply enough, because it seemed imprudent to make those investments. But Milken realized that a diversified portfolio filled with individual high-risk investments was, at the end, generally a solid investment. Even if some of the investments failed, the others would more than make up for it. "That sort of [high risk] lending was considered disreputable," Lewis says. "What Milken did was violate the code of the money men and create loans for risky companies."

And what junk bonds are for debt, venture capital is for equity. "The same thing happens in venture capital in the 1990s," Lewis says. But as with the junk bond market, perhaps the problem with the effects of venture capital was its enormous success. "At first, only rich people and sophisticated investors are a part of it. When word gets out about the enormous success of the investment philosophy, the public markets start turning into late-stage venture capital," he says. As more investors came to see the enormous potential for high-risk equity, companies began to go public at increasingly early stages. Investors, till then on the sideline, were more than willing to pony up cash for the high rewards. "But," says Lewis, "the average investor is no good at trying to tell whether a company will turn a profit in three years from now."

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