Founders Collective: The Newest VC Firm in Town

I've been working this week to find out more about Founders Collective, the newest VC firm in Boston.

They don't yet have a Web site, though there is a bit about them on LinkedIn, and they've been covered lightly by Mass High Tech, PEHub, and Xconomy in June, when they filed SEC documents stating that they'd raised $24.4 million for a planned $50 million fund.

Here's what I've been able to find out so far...

- The three central founders of Founders Collective are Eric Paley, previously co-founder of Brontes Technologies; Chris Dixon, co-founder of SiteAdvisor; and David Frankel, a South African currently ensconced at the Mandarin Oriental. Frankel co-founded Internet Solutions, the biggest ISP on the African continent. There are four other founders spread across Boston, New York and California, but they haven't been named yet. They won't be working full time on the fund, but rather will help source deals.

- FC has been shacked up at the Boston offices of Flybridge Capital Partners, but will soon move out into their own digs, likely in Cambridge. Flybridge (formerly known as IDG Ventures Boston) made a ton of money when Brontes was sold to 3M, and in 2007, Paley joined IDG (now Flybridge) as a senior advisor. David Frankel, incidentally, was the very first investor in Brontes, which developed 3-D imaging technology for use in dentistry, and originally spun out of MIT research.

- What helped them raise $30 million thus far, on their way to $50 million, was a solid track record as angel investors. They've backed about 25 companies over the last five years, including TrialPay, Canopy Financial, Positive Energy, SiteAdvisor (acquired by McAfee for $70 million), Magazine Radar, Link Medicine, and Hunch.

- Chris Dixon is one of the co-founders of NYC-based Hunch, so he'll split his time between that start-up and Founders Collective. (Working alongside Dixon at Hunch is Caterina Fake, co-founder of Flickr.)

- FC has already made a few investments out of its new fund, and they're closing another next week. They'll typically invest under $1 million, and won't necessarily keep participating in later rounds. They'll aim to get enough equity with the seed investment that they won't be wiped out in later rounds.

- Michael Greeley of Flybridge has only good things to say about FC. "They'll get to $50 million quite comfortably, and that could translate into 60 or 80 companies. Our $300 million fund, in contrast, will be 20 to 24 companies. Their goal is velocity, and I think they'll be a real talent magnet." Already, he says, "they're bringing a lot of volume through the office." Greeley says that the fund will be pretty wide-ranging in its investments: "I think they'll have a highly-diversified seed fund." (Link Medicine, for instance, one of the team's investments that precedes the creation of FC, is a biotech company.) Given FC's strategy of investing early (and not necessarily paying to play in later rounds), Greeley said they will "gravitate to businesses that can get to proof points or break-even with $10 million or $15 million."

- The other VCs and entrepreneurs who provided me info with Founders Collective (and who asked not to be named) all had good things to say about the team. None of the usual VC competitiveness...

- Reached in a cab in Manhattan earlier this morning, Eric Paley didn't want to chat about what they're up to right now, at least until the Web site goes up in a month or so. All he would say was that "information technology has generally been our sweet spot" and "capital efficiency tends to be one of the core rules for us." He sees FC helping to fill the early-stage funding gap in the Boston and New York markets.

We'll keep an eye on them. And of course, do post a comment if you know more...

Five Great Ideas from Today's IT Collaborative Event

There was a whole lot of tweeting going on this morning at the Massachusetts IT Collaborative event at Microsoft's NERD Center in Kendall Square... and the energy level at the event was really high.

One thing that was kind of depressing to me was listening to people like Steven Vinter of Google, Andy Ory of Acme Packet, and Emily Green of the Yankee Group try to sum up what had been discussed over a few hours in just five minutes when Gov. Patrick showed up to "listen." Vinter also showed an egregiously bad slide that tried to, I think, illustrate all the interconnects between various IT clusters in Massachusetts -- but it was one of those slides with an encyclopedia's worth of text on it, bubbles connected to bubbles, arrows everywhere. Rube Goldberg would have been proud, and I suspect it sent the message that the IT industry isn't so sharp when it comes to simplicity or clarity of message.

But there were lots of great ideas in circulation. Here are five that really resonated with me, and a quote I liked:

1. Michael Greeley of Flybridge Capital suggested that CEOs of larger, more successful companies ought to have "office hours" for younger, up-and-coming CEOs, much like college profs do. That could be a nice, low-commitment way of mentoring ... perhaps letting them commit one or two hours a month when they wouldn't have to leave their building. Many people at today's event focused on the issue of mentorship as a key to cultivating a new crop of big, important, sustainable companies here.

2. We need to make federal visa policy an important issue that everyone here in Massachusetts is engaged with. Part of what we do in the state is to make young people smarter. Why do we then allow them to be shipped back home, especially if they'd rather be working (or starting great companies) here? Akamai CEO Paul Sagan paraphrased Thomas Friedman, who has suggested that we staple a green card to every advanced degree we give out in the US.

3. Sagan also mentioned that you can walk or drive through Kendall Square and never know it is one of our region's hubs of innovation. (Perhaps even a denser concentration of smart people, research labs, and cool companies than anywhere in Silicon Valley.) But there are no signs to let you know what's there. If you drive down Highway 101 in California, in contrast, you see all kinds of evidence of the tech economy: Oracle, Microsoft, Yahoo, eBay, etc. The photo above is the blank sign at the front door to Google's Cambridge office, which perhaps 10,000 people pass by every day.

4. Connecting with students is a big challenge. Let's say you run a trade group and you want to make your annual conference open to students... or you want to organize an open house at your company to attract great students for a summer internship. There's no easy way to communicate with the student bodies of the hundreds of great schools around Massachusetts. I wonder how tough it would be to create a wiki that lists the contacts at every school's career office, and perhaps the e-mail addresses of the students who run the entrepreneurship/tech/business club on campus, and a few profs interested in helping be liaisons to industry. This wiki might also list tech companies willing to send speakers onto campuses for classes or club meetings, along with the relevant contact.

5. Tod Loofbourrow, founder of Authoria, had a great take during the session on communication... something that came up in last month's brainstorming session on how we can better communicate the innovative stuff that happens in our corner of the world. He said that pioneering work is being done here on healthcare IT, and making the healthcare more efficient, and that we should commit to saving the U.S. X number of dollars and X number of lives with our innovations. That got us all talking about how Massachusetts is focused not on tech-for-the-sake-of-tech, but technology that solves real problems... whether in healthcare, energy, business, or other spheres. That strikes me as really good positioning.

Finally, I liked Andy Ory's comment that we're still haunted by the ghost of Rout 128 past...and the ghost of California present...but what we really should be focused on is the ghost of Massachusetts' future.

What'd you hear that you liked? Did you post about the event? Feel free to add something in the comments...

Entra: The Stealthy New Start-Up from Yet-Ming Chiang and Michael Cima

I kept hearing that A123 Systems founder Yet-Ming Chiang was up to something new, so I've spent a few days putting together the pieces.

Turns out he has launched a new company, Entra Pharmaceuticals, to commercialize some drug delivery technology that he and fellow MIT prof Michael Cima cooked up a couple years ago. But they're not just creating an inexpensive, disposable new device that Cima refers to as a "patch pump" -- they're also working on a new drug, too. "The strategy is to make a product with the drug on board," Cima says. "Instead of a $5000 pump, this is a transformational technology that's less expensive, smaller, and less complex."

Unlike a passive nicotine patch, Chiang says their device does involve electronics. "A good way to describe it is 'smart' and 'active,'" he said during our game of Twenty Questions this afternoon. Neither founder wants to be specific about the disease they're addressing, though Cima says it won't be diabetes.

Both Chiang and Cima are board members and consultants to Entra, visiting the company one day a week for a technology update. They've hired Frank Bobe as chief executive, who was formerly chief business officer at Alseres Pharmaceuticals. (Alseres is a 17-year old company that has yet to get a drug approved, and was [updated] just de-listed from Nasdaq.) Heading up business development is Shobana Albrecht, previously at BG Medicine and Baxter. Rick Gyory is VP of product design and development; he earlier worked at Transform Pharmaceuticals and ALZA Corp.

Interestingly, Entra is now located at the BU Photonics Center near Kenmore Square -- the very same building where A123, Chiang's last company, was hatched. (Battery-maker A123 raised $69 million earlier this year, as it remains in a holding pattern waiting to go public.)

Here's the key patent MIT has licensed to Entra, which seems like a hybrid of a transdermal skin patch and a wearable infusion pump.

"Many new drugs have short half-lives," Cima explains. "They're metabolized quickly. So to get the right exposure, you have to hook yourself up to an IV for continuous administration, or if you do a bolus dose, you have to go really high, and a lot of the time the side effects you get are associated with that high concentration. With a device you can wear, you can achieve a long half life" without having to do either of those things, and without having to redesign the molecular structure of the drug itself. "That's the value that we bring, at a high level," Cima says.

This is the first life sciences start-up for Chiang. He told me that the science behind Entra was initially funded by a DARPA grant, and then by MIT's Deshpande Center. "The idea behind Deshpande is to help new technologies get through the 'valley of death,'" Chiang said, when they're not raw research any more, but they're also not yet a commercializable product. "That really worked in this case."

Up to now, the only real known info on Entra was a PEHub report last December noting that Flybridge Capital Partners and North Bridge Venture Partners had put $4.2 million into the company in an A round -- and will increase that amount to $12.5 million if the company hits certain milestones this year. The board member representing Flybridge is Michael Greeley; Jeffrey McCarthy represents North Bridge. This is the fourth Cima-related start-up that Greeley has been involved with.

(Another recent collaboration between Cima and Greeley is Certus Biomedical, which will soon change its name because of some trademark conflicts. Very little is known about that company, either, although its backers are Flybridge, Ed Kania at Flagship Ventures, and Kevin Bitterman at Polaris Venture Partners.)

How the VC Scene in Boston is Changing

Sunday's Globe column dealt with the shrinkage of Boston's VC universe. Column got snipped quite a bit, so I'm publishing the full version below, along with the video.



Venture capital sector makes adjustments

For Boston’s venture capital community, headquartered on the placid plateau of Mount Money in Waltham, 2009 will be a year of wrenching change. The stream of capital flowing to venture capital firms, who invest it in innovative-but-risky private companies, is turning to a rivulet – and that means the firms themselves will have to get smaller.

“Last year, our industry raised about $28 billion in new investment capital,” says Michael Greeley, chairman of the New England Venture Capital Association and managing director of Flybridge Capital Partners in Boston. “I think we’ll raise between $8 billion and $12 billion this year, nationally. That’s a dramatic reduction. My sense is that the average fund size will be cut in half, and they’ll have to cut the number of partners who work for them as a result.”

The shrinkage of Boston’s VC sector will be tough for the VCs, obviously, and also for entrepreneurs who ascend Mount Money with their PowerPoint presentations, looking for funding to launch a company or keep one going. But it could also have a silver lining.

Here’s what’s happening.

Two local VC firms have already put together smaller investment pools than they’d hoped for. Atlas Venture, in Waltham, had aimed to raise about $400 million but wound up with $283 million; as a result, last month Atlas jettisoned two of its partners and shifted two others to less active roles. Boston-based Bain Capital Ventures will likely wind up raising between $475 million and $550 million for its latest fund, rather than the $750 million it had set out to collect. Money in a venture capital fund is typically invested over the course of a decade.

Kodiak Venture Partners of Waltham has reduced the number of investors on its roster and is shifting its focus toward life sciences and medical technology as part of an attempt to burnish its appeal to would-be investors. Andrey Zarur, a partner there, says Kodiak isn’t out looking for new money right now, but plans to be at some point in the future.

“Kodiak just hasn’t had enough liquidity events to make their limited partners say, ‘I’m ready to step up again,’” says Howard Anderson, an MIT lecturer and former venture capitalist. (Limited partner is the term for the university endowments, wealthy individuals, and pension funds that funnel money into venture capital.) One example Anderson cites is Egenera, Inc., a Marlborough company selling technology for data centers that raised $176 million but never managed to go public. Anderson should know: his old firm, YankeeTek Ventures, was an early investor in Egenera.

Many other local VC firms are on the road, talking to prospective sugar daddies. Some have been at it longer than others. Among the firms trying to scare up more money in 2009 are Boston Millennia Partners, Highland Capital Partners, Polaris Venture Partners, Prism VentureWorks, Oxford BioScience Partners, Charles River Ventures, and North Bridge Venture Partners. New firms, like Genovation Capital and a medical device oriented fund called Makaira Venture Partners, are also out trying to raise their first funds.

Venture capitalists are prohibited by the Securities and Exchange Commission from discussing their fund-raising activities. But one partner at a Boston area VC firm that’s trying to put together its next fund told me last week that fundraising is happening “on a molasses pace,” adding that “universally, everyone is going to be lower than what they’d hoped to raise.”

One reason that the limited partners are avoiding commitments to new VC funds is that many of them have formulas for how they allocate their assets. If a certain percentage is devoted to bonds, a certain percentage to stocks, and a certain percentage to venture capital and private equity, for instance, things start to look out of whack when the stock portion of the portfolio plunges and the value of the VC portion stays roughly the same. (The valuations of the private companies in a venture capital firm’s portfolio isn’t updated very frequently, unlike publicly-traded stocks.)

If a limited partner needs to get their mix of asset allocation back in order, investing in new VC funds simply doesn’t happen. (Some limited partners, including the endowment managers at Harvard, Duke, and Columbia, are actually trying to sell the stakes in VC funds they already own – but there are few buyers.)

And investors who can’t get their money into the best-performing venture firms may simply be disappointed with the financial returns they get. “I’ve heard limited partners say that the VC business, in some cases, is like getting Treasury bill returns with venture capital levels of risk,” says Michael Feinstein, an ex-VC. “If you look at the median venture capital return over the past eight years, it’s about one percent a year.”

Josh Lerner, a Harvard Business School professor who studies the venture capital industry, describes what’s happening among limited partners as “a changing of the guard.” University endowments and U.S.-based pension funds are becoming smaller players in new venture capital funds, Lerner says. But what’s not clear is who will take up the slack – though sovereign wealth funds and pension funds from Australia are two potential candidates. “We can see who’s going out,” Lerner says, “but not who’s going in.”

The upshot is that VC firms will be managing smaller funds, and some firms will go out of business. Anderson, who refers to Atlas’ situation as a harbinger of things to come, predicts that some funds that aren’t in the 25 percent when it comes to delivering financial returns will simply fade into the sunset. “Everyone will swear to be in that top quartile, but this isn’t Lake Wobegon – not everyone is above average,” he says.

Fewer firms and smaller funds will obviously mean fewer jobs for venture capitalists and the staffers who support them. It’ll undoubtedly get harder for start-ups to raise money. It will take longer, and those that do manage to attract an initial jolt of capital will get less of it than before.

“There just won’t be as much money flying around,” says Todd Dagres, founder of Spark Capital in Boston. “And there’s good in that. If you can raise money for your start-up now, there’s going to be a lot more uniqueness value than there used to be.” In other words, entrepreneurs will run up against fewer well-funded competitors than they once did. That could help the entrepreneurs and their backers both.

Still, a contracting VC universe isn’t going to be as fun to inhabit as an expanding one – at least for most people, at least in the near-term.

Kleiner Perkins Dialing Up Activity in Boston?

Last month, Michael Greeley of Flybridge Capital off-handedly mentioned that Kleiner Perkins had dialed up its presence in Boston, with two partners located here.

So I wanted to check if that was true.

When I asked KP's PR person if there was anyone based out here permanently, or an office that they'd set up in Boston, their reply via e-mail was, "KPCB’s official offices are in China and California. There is a plethora of innovation happening in the Boston area, and KPCB is involved in identifying new ideas and helping to build companies." They apologized for not being able to share more details.

Greeley mentioned that Tom Monath (formerly chief scientific officer at Acambis) is on the KP team, and based in Boston. KP wouldn't confirm that. But here's a two-year-old Mass High Tech article mentioning that they'd brought Monath on board, and were opening an office. But Monath seems to live in Harvard, Mass., and I couldn't find a listing for KP in the Boston area, though he is still listed on KP's Web site as a partner in the firm's "pandemic and biodefense fund." (He didn't respond to my e-mail last week.)

What Kleiner does have locally is a "strategic partnership" with GreatPoint Ventures in Cambridge. Kleiner doesn't have money in the GreatPoint fund, but they do get a first look at "interesting deals we bring them," according to Aaron Mandell of Great Point. That arrangement has been in place for "about six months," he said. They've invested together in GreatPoint Energy and Alta Rock Energy, a geothermal energy company. Mandell said GreatPoint is definitely not an affiliate or "branch office" of KP...

Among Kleiner's Massachusetts portfolio companies are CodonDevices, Bit9, Epizyme, Mascoma, Upromise (acquired by Sallie Mae), and Lilliputian Systems, which just yesterday announced plans to expand its manufacturing facility and add about 100 jobs.

Are you hearing about other KP activity in town? Post a comment if you would....

What Happened Between IDG and Flybridge?

I'm developing a few columns related to the venture capital world, so this afternoon I had a chance to chat by phone with IDG founder and chairman Pat McGovern.

One topic I wanted to ask him about was the split between IDG and the former IDG Ventures Boston team, which rebranded itself last month as Flybridge Capital Partners.

I'd run into Jeffrey Bussgang last week, one of the original partners at IDG Ventures Boston. He said that there were no hard feelings between IDG and the Boston investing team... but that IDG had chosen not to put money into the new $280 million Flybridge fund, after participating in two prior IDG Ventures Boston funds.

McGovern told me this afternoon that when the IDG Ventures Boston team asked how much he wanted to invest in their third fund, he said that he'd been getting better returns investing outside the US. (McGovern and IDG have funds in China, Vietnam, India, and Korea, among other places.)

"We didn't think the returns were competitive with the returns we could get elsewhere," McGovern said.

He was also bothered by the Boston team's desire to do more investing outside of New England and the East Coast. "They didn't want to stay east of the Mississippi," McGovern said, and they wanted to invest in some sectors outside of pure IT. (Another IDG fund is based in San Francisco.) "Your goals and the IDG brand are no longer aligned," McGovern said he told the Boston team.

"We agreed, they'll change their name, and raise money from people other than IDG," he said. (In 2005, when the Boston team raised its second fund, a $180 war chest, IDG had put in $25 million.)

Oddly, McGovern, who gave $350 million to MIT to start the McGovern Institute for Brain Research, said he thought the Boston team's forays into med-tech and diagnostics, like Predictive Biosciences' urine-based cancer tests, were too much of a stretch. "They were getting into areas where the...technology was no longer the major competitive advantage."

But McGovern said that "we're hoping that they do extremely well," referring to the new Flybridge fund. "We still have a lot of cash at stake in funds I and II." He said the team's historical returns had been "better than average."

McGovern is not totally pulling out of U.S. venture investing, however. McGovern said he's supporting a second IDG Ventures San Francisco fund, currently being raised. "We're putting 25 percent of the money into the new fund, which is a month or two away from closing at $180 million," he said.

I also spoke today with Flybridge managing partner Michael Greeley. (Disclosure: Greeley and I serve on the advisory board of the Nantucket Conference together.)

Greeley said, "It's a mischaracterization to say we've gone off-strategy," adding, "[Pat] has great personal interest in the healthcare convergence scene," given his philanthropic activities. Greeley also said that he expected about 80 percent of the new fund's investments to be companies that the partners can drive to from Boston, though he wouldn't rule out doing a seed deal on the west coast (though he termed it "unlikely").

Greeley says one big reason for the name change, and the split from IDG, was that he worried entrepreneurs would confuse his new fund with the IDG Ventures San Francisco fund. He and the other partners said that raising money for this new fund wasn't a problem, even without IDG's allowance: "We did not to an offering memo" to market the new fund, Greeley told me.

He also told me that the firm is looking for new space in the Back Bay, having outgrown its current digs at One Exeter Plaza, IDG's headquarters. "It's a shame not to be able to bring on entrepreneurs-in-residence because you don't have enough space," Greeley said.

(PEHub's Dan Primack served up some inside info on the relationship between McGovern and the new Flybridge fund last month.)

Last Night's "Thinking Big" Party: How Do We Build a New Generation of Really Big Companies in Massachusetts?

I've been interested for a while in the question of how we can build a new generation of "pillar" companies in Massachusetts...companies like EMC, Lotus, DEC, Akamai, Genzyme, and Boston Scientific.

Last night, a group of folks put together a cocktail party to talk about the issue.

It was an amazing crowd -- it felt like someone had summoned the 'Super Friends' to the Hall of Justice. George Hatsopoulos, founder of Thermo Electron, was there, as was Bill Warner, founder of Avid Technology, Carol Vallone, CEO of WebCT, Scott Griffith, CEO of Zipcar, Tim Healy, co-founder of EnerNOC, Rick Hess, CEO of Konarka Technologies, Aron Ain, CEO of Kronos, Jonathan Seelig, co-founder of Akamai, and Robert Coughlin, the new head of the Mass Biotech Council. At one point, Russ Wilcox of E Ink was showing off a new Amazon Kindle e-book reader, which uses a screen made by his company. Wendy Caswell, CEO of ZINK Imaging, was our host, and the firms KMC Partners, Goodwin Procter, and BSG Team Ventures helped underwrite the event.

Dan Bricklin has some photos and an audio recording of the discussion. Paul Maeder from Highland Capital Partners touched on some of the same issues he brought up at a lunch last month: "We have been selling the seed corn," is his assessment.

Here are some of my thoughts on the evening's "main event" -- a conversation that Maeder and Michael Greeley of IDG Ventures led, with my help and lots of input from the crowd.

First, the question of why pillar companies are important:

1. They get big, employ lots of people, and tend to be supportive of their community (through philanthropy, supporting local schools, etc.)
2. They tend to attract media and Wall Street attention, which lets the world know something important in their sector is happening where they are based. They also hold conferences for customers/users... think of the annual MacWorld conference in San Francisco as an example. All of this sends a message that a particular place is a center of gravity, which brings more people interested in that area -- and more small companies -- to that place.
3. They tend to think like acquirers rather than acquirees.
4. They tend to spin off smaller companies in their space. (But we need to get rid of non-compete agreements to foster this.)
5. They serve as a source of experienced employees and executives to other companies in their space. (Again, we need to get rid of non-compete agreements to foster this.)
6. They make it easier for companies in their space to recruit people to the area. Say a consumer tech company in Boston -- like Bose -- is trying to bring a marketer in from the West Coast. That person, should things not work out at Bose, will not have a lot of other wonderful choices of other employers here in the Boston area. Same is not true when a chip company like Intel tries to recruit people from anywhere in the world to move to Silicon Valley.
7. They pay more taxes.

Now, as for what we can do...

1. Entrepreneurs need to have a jones to build a big, important company. The typical New England VC will not push them to brush off acquisition offers and stay independent.

2. Big companies get their start by discovering emerging sectors and opportunities. I don't think we're going to build an important, independent new PC company in Boston, or a networking equipment company, or even a medical device company. Boston Scientific got big because they saw the opportunity for less-invasive medical procedures before anyone else. Invent a cool new medical device today, and you're basically gonna get integrated into the product line of someone like a Boston Scientific or Medtronic before you have a chance to launch a second product.

3. So that means we need to support entrepreneurs dedicated to building pillar companies in new, as-yet-undefined market sectors. (Avid, which helped establish the market for digital video editing, is a great example.) I think the media -- that's me -- plays a role, and I'm gonna do my best to focus on entrepreneurs working on these new frontiers. But angel investors and VCs also play a role (can they avoid the temptation to fund a serial entrepreneur doing his seventh enterprise software start-up, instead of a first-time entrepreneur who is breaking new ground?) And finally, entrepreneurs and executives who have built really big companies need to give back. This does not just mean donating to or speaking at their alma maters. They ought to be serving on boards, or as informal advisors, to a handful of interesting start-ups in or near their areas of expertise. Some do, but too many don't.

Dharmesh Shah, founder of HubSpot, offers a different perspective on his blog.