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Stuart Garfield
Wednesday, February 3, 2010
Boston VCs share missed investments in startups that got away
By Galen Moore
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How do you know when a venture capitalist is telling the truth? Watch for the moment when he or she starts singing the praises of a startup from someone else’s portfolio. We asked a handful of VC investors to name the companies they hadn’t invested in but wish they had — that is, of course, if their own portfolio companies weren’t growing so fast as to preclude wasting time on idle wishes.
At least one Boston venture capital firm has been doing this for years: Bessemer Venture Partners’ anti-portfolio is a list of the companies the firm says it looked at, passed on, and came to deeply regret the missed opportunity. In most cases, like Apple Inc. (Nasdaq: AAPL), FedEx Corp. (NYSE: FDX) or Google Inc. (Nasdaq: GOOG), the reader can sympathize.
We invited VCs to pick companies whose reputations are less solidly established than the names in Bessemer’s anti-portfolio, and we eliminated the requirement that these be companies investors had looked at and passed on. The result, we think, is a short list of some of the fastest-growing and most promising companies in New England. Whatever they’re doing, they’re doing something right, and the track record of growth they’ve established is capable of turning investors and other entrepreneurs green with envy.
Larry Cheng
Managing partner, Volition Capital
Got away: Retail Convergence Inc.
Status: Sold to Pennsylvania-based GSI Commerce Inc. (Nasdaq: GSIC) in October for $350 million
Larry Cheng has a case of non-buyer’s remorse. The former Fidelity Investments VC looked at private-sale luxury goods discount site RueLaLa.com, operated by Boston company Retail Convergence Inc., in November 2008, when the company’s headquarters was just a block and a half from his office on Federal Street.
Everyone in his office had been browsing the site daily, he said, shopping for bargains. But with the econalypse looming and the world girding for a second Great Depression, it seemed the wrong time to be investing in a luxury-goods retail site. In retrospect, Rue La La had something unique.
“They really focused on the entertainment value of online shopping,” he said. And, with retailers growing desperate, its inventory at the time of its launch was excellent, he said. Now Cheng sees potential for the private-sale model, which has caught fire with sites such as Rue La La and Gilt Groupe, to take off in areas other than luxury goods such as any high-end product or service.
“Now I guess the question is, will these companies do well in a good market?” he said.
Bryan Roberts
Partner, Venrock
Got away: Agios Pharmaceuticals Inc.
Status: Has raised at least $33 million in a first round of venture capital closed in 2008.
Venrock’s Bryan Roberts passed on Agios Pharmaceuticals because of the risk of investing in cancer treatments at early phases of clinical trials. Around last May, he started to get the feeling he’d missed an opportunity, when the company hired away Genentech CEO David Schenkein for its corner office.
Often, the risk involved in cancer drug development isn’t wrung out until late in clinical trials, Roberts said. In addition, with many drugs under development, the standard of care is a moving target, he said. But Cambridge-based Agios appears to be different.
“It’s a new approach to cancer therapies that is pretty applicable across cancers, and is sort of orthogonal across therapies,” he said. “They’re looking to attach tumor cells based on cancer metabolism, rather than structural defects.” Roberts said the approach is looking much more promising than the traditional mind-set of trying to kill as many cancer cells as possible, and hoping not to kill too many healthy cells in the process.
Chatter in the physician-clinical rumorsphere, to which Roberts pays far more credence than its VC equivalent, is that the company is doing very well. “I don’t know of another company I’ve heard as good things about,” he said.
Maria Cirino
Managing director, .406 Ventures
Got away: EnerNOC Inc. (Nasdaq: ENOC)
Status: Went public in 2007, raising $91.7 million
EnerNOC has made a success out of demand-response technology that allows businesses to subscribe to variable utility rates and save money by putting electric power to use at times of low demand. It’s a business model .406 Ventures has backed in a younger startup, EnergyHub, which is providing a similar service for residences. In fact, .406 managing director Liam Donohue actually did look at EnerNOC when he was at his prior firm, and he passed on it, Maria Cirino said.
Now, Cirino is trying to get as much as she can out of EnerNOC by learning from it. “It’s instructive to observe them on the commercial side and now to be building a company on the residential side that’s doing something very similar,” she said. “You really need strong partnerships.”
She’s also benefiting in another way from Boston’s EnerNOC, which recently traded at $36.
“I tell you what, if you bought that stock a year ago at $4 a share, like I did, you’re very happy.”
Got away: HubSpot Inc.
Status: Has raised at least $33 million over three rounds of venture capital
Cirino’s other pick was HubSpot Inc. The Cambridge company provides search-engine marketing technology for small and midsize business-to-business companies. “We like automated tech-driven services with repeatable subscription revenue,” she said. Several .406 portfolio companies use HubSpot, and she thinks it has huge potential for growth in the multibillion-dollar online advertising market, where search advertising is problematic for small businesses.
Jeff Bussgang
General partner, Flybridge Capital Partners
Got away: LogMeIn Inc. (Nasdaq: LOGM)
Status: Went public in 2009, raising $122.7 million
Jeff Bussgang met with the founders at LogMeIn of Woburn in 2005, shortly after the company had closed its Series A round with Prism Venture Partners, 3TS Venture Partners in Budapest, and Integral Capital Partners in San Francisco.
Now he wishes he’d taken time to play with the product a little longer.
“Shame on me,” he said. “It just sounded too lightweight, and I just thought the consumer economics would make it hard to get large-scale customer acquisition because it was such a general, broad product category that they wouldn’t be able to target it precisely.”
Five years later, former LogMeIn vice president of marketing Sean Ellis is regarded as something of a customer-acquisition guru. As it turns out, the company had a very sophisticated early understanding of search-engine marketing, Bussgang said. “They were really able to figure out the science of (customer) acquisition.”
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