Hedge funds taking over Silicon Valley startups?

Not long ago, I wrote a piece about hedge funds grabbing a piece of the pie that used to belong almost solely to venture capitalists. I used as my key example the now embattled Pay by Touch, which makes digital signature equipment to be used at grocery store checkouts.

Now, it looks as if the hedge funds that built Pay by Touch may be taking it down. In 2005, the company was backed to the tune of $130 million by Och Ziff Capital Management, Farallon Capital Management (a San Francisco fund), and Plainfield Asset Management. But this wasn't anything like getting financed by venture capitalists. It was in the form of a senior secured note--in other words, a loan. The remainder of that round, $55 million, was also in the form of debt instruments, known as convertible promissory notes.

This means, in essence, that's it not hard for hedge funds to take complete control of a company when it starts to stumble. For Pay By Touch, this may not be such a bad thing, but plenty of other tech start-ups have gone to hedge funds for their backing. Could this be the beginning of a crisis?