“The rest of the economy is now dealing with the uncertainty that we deal with every day in a good economy. We do that by choice, they’re doing it now out of necessity.”

The scene was XSITE, the Xconomy Summit on Innovation, Technology, and Entrepreneurship, held on June 24 at Boston University. The speaker was Noubar Afeyan, managing partner and CEO of Flagship Ventures. The question he was answering dealt generally with how the economy has affected the venture capital business. He continued the statement with the glass-half-full conclusion that because VCs are so used to dealing with uncertainty and risk, “Our world has gotten the least worst.”

It was a beautiful close—to audience laughter and applause—to a keynote panel on Innovating Early Stage Venture. To me, it’s also a nice opening to this week’s column, which is focused on the uptake from the session. The panel didn’t do as good a job as it could have with the core topic—i.e., how is venture capital reinventing its own models in these tough times (more on this below). But panelists did provide some interesting insights on issues ranging from how to cope with the current economic malaise (that’s an upgrade from outright disaster) to their thoughts on Greylock Partners moving its headquarters to Silicon Valley to how and whether to seek federal stimulus money.

Before we dive into the details, though, here is the lineup of who appeared that day (thanks to you all!):

—the aforementioned Noubar Afeyan
—Joel Cutler, co-founder and managing director, General Catalyst Partners
—Bob Higgins, co-founder and general partner, Highland Capital Partners
—Eric Paley, co-founder and general partner, Founder Collective
—Jo Tango, founder and partner, Kepha Partners

Their moderator was Michael Greeley of Flybridge Capital Partners, chairman of the New England Venture Capital Association. He did a great job keeping his squad team of panelists on its toes by asking pointed questions and bringing out the insights below.

‘Cut, Cut, Cut’ is only part of the story for entrepreneurs coping with the current economic climate

Afeyan took issue with the hoopla raised by West Coast VCs (i.e. Sequoia Capital Partners) last fall when they publicly advised startups to cut expenses hard and fast in the face of the recession. Cutting is only part of the challenge, Afeyan warned, saying you can’t cut expenses without a commensurate cut in goals.

Connections are more important than ever in this economy, someone pointed out (sorry, I missed who). That’s presumably because everyone is so busy trying to cope with the downturn that any edge a good connection can provide—in solving a problem or getting something done faster or more efficiently, etc.—is magnified. I took this to mean: make leveraging connections a bigger part of your mindset, whether that means reevaluating connections you already have, or by looking at the connection potential partners or investors bring to the table.

Is the recovery already here for VCs?

A series of snippets on this topic:

—Higgins: “Things really were, I think, back to normal in the spring of ‘09.”
—Tango: Deal flow is up 25 percent for Kepha. That’s when looking at the last three quarters on an annualized basis, versus annual figures from past years. (”We wanted to see how were doing since the September 08 stock market crash,” he explained to me in a follow-up e-mail.)
—”We’ve been really busy,” Cutler agreed, adding, “There’ll be plenty of money for good firms.” Then he seemed to catch himself just a bit, saying, “There’ll be enough money.”
—Afeyan: “The exit environment seems to be turning.”

On innovating in venture—early stage or otherwise

I think the panel came up short on addressing this issue. Greeley did his part by putting the question to his guests in several different ways, one of which was: “How do you react to the question that we don’t take enough risk?”

That led to a long silence that drew laughter from the crowd. Higgins then pointed out that Highland has done 60 seed deals the last four years, of which just 15 went on to a Series A round. “You’ll never hear of the other 45,” he said, illustrating his point that Highland, at least, takes risk. Higgins said that in his view, “The decline in venture capital is not the headline.” It’s the decline in angel groups, corporate venture arms, and hedge funds.

Afeyan also said his company is very active in early stage investing. Overall, he said, “I don’t sense a dramatic change in the amount of early stage risk capital, certainly not in Boston.”

Paley, though, had a slightly different take, at least on the surface. “There is a lot of room for some smaller funds” under $100 million, he said. He also said there was room to find new models for venture funding, or revisit old models with a new eye.

General Catalyst’s two-for-one sale

Following up on the previous question, Cutler put forth …Next Page »

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San Diego-based MojoPages, an online business directory that includes consumer reviews, said today it has raised $5 million in a Series A round of venture funding led by Austin Ventures, the venture fund based in Austin, TX. Founded in 2007, MojoPages says it plans to use the funds to expand its private-labeled local search solution for media properties, to attract new partners, and to develop its position in the expanding local search market.

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Venture investors like to talk about transformative change. But it’s becoming increasingly evident that San Diego’s venture capital community is itself in a period of transformative change.

The figures we reported this week on local venture investments for the first three months of 2009 were gloomy enough, with $194.6 million going into 15 deals, according to Dow Jones VentureSource. But local data released this week from another survey done by the National Venture Capital Association and Thomson Reuters are shocking: it counts just $87.4 million invested in that same number of deals.

While the deal count is identical, the disparity of dollars invested is so enormous that I called Brian Caisman at PricewaterhouseCoopers’ San Diego office, who helped compile the NVCA’s regional data.

“Obviously we’re aware of it,” Caisman told me by telephone last night. “I can’t tell you the reason for the difference, but we think we do more data validation.”

While the difference is huge, both numbers reflect anemic levels of venture funding unseen in San Diego since the 1990s. Whichever survey proves to be more accurate, though, it’s clear that San Diego’s homegrown venture community is ailing.

One person who has been monitoring the vital signs is Hans Swildens, a principal and founder of Industry Ventures, a San Francisco firm that specializes in acquiring the distressed assets of venture firms and their investors. Swildens says Industry Ventures buys out VC investments in startups, angels’ stakes, and even founders’ shares. It also acquires the limited partners’ interests in venture funds—the stakes held by wealthy individuals, pensions, and college endowments who turn over their money to venture capitalists to invest.

Investments in venture capital funds tend to be high-risk, long-term plays for buy-and-hold investors. But a burgeoning secondary market has emerged for firms like Industry Ventures that acquire stakes throughout the spectrum of VC activity, from VC funds and their portfolio companies to the LPs, including any remaining unfunded commitments such investors might have. Other firms active in the secondary market include Paul Capital Partners, Pantheon Ventures, and Saints Capital, which all have offices in San Francisco.

Swildens wouldn’t discuss any specific deals involving San Diego VCs, but he says the nature of Industry Ventures’ business “gives us a unique vantage point on the market.”

In general, Swildens says, “What’s happening is the venture funds are triaging their portfolios, shutting down about a third of their portfolio companies so they can preserve some funds for the remaining companies.”

As Swildens put it, “The market in San Diego is actually kind of interesting, because it’s going through a transition.” While the region remains strong for entrepreneurs and technology companies—and out-of-town VC firms remain active here—he says only a handful of San Diego-based VCs have raised capital for new funds and that once-dominant players such as Enterprise Partners Venture Capital and Forward Ventures are not doing much investing anymore. “It represents an opportunity for some other funds,” Swildens says. “I think it will all play out in the next five years.”

While many of San Diego’s homegrown VCs are not doing much investing, Swildens says Industry Ventures has been doing lots of deals—buying out general partnerships, for example, at discounts ranging from 30 cents to 70 cents on the dollar. But even if he’s acquiring a VC’s stake for less than 50 cents on the dollar, Swildens says market conditions have eroded the worth of many portfolios to the point it’s not particularly meaningful to compare them to their original valuations.

“Even if we’re paying 50 cents on the dollar, those account values may be down 30 percent from the end of December,” Swildens says. As a result, he contends the discount his firm is paying is actually less than it might appear to be.

“I suspect the discounts to be huge,” says Peter Shaw, board president of the San Diego Venture Group. He agreed that many San Diego-based VCs are no longer making new investments, but he said quantifying the numbers could be difficult. “The VCs don’t want you to know the numbers, because it reflects the ill health of their industry,” he said.

In the meantime, Swildens has seen his business boom over the past year, as credit markets dried up and the global financial crisis dramatically increased the pressure on institutional investors. Last month, Industry Ventures announced fundraising for its fifth fund was oversubscribed at $265 million. When the firm set out to raise the fund, its original target was $200 million.

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San Diego-based online data cloud storage provider Nirvanix has secured $5 million in capital out of a $6 million secondary round of venture funding, according to a filing today with the Securities and Exchange Commission. The company, which was previously known as Streamload, aims to compete with Amazon’s (Nasdaq: AMZN) S3 storage web service. Nirvanix replaced Patrick Harr with Jim Zierick as CEO in January. Previously Nirvanix raised $12 million in October 2007 from Mission Ventures, Valhalla Partners, and Windward Ventures. Nirvanix said at the end of 2007 it had added Intel Capital and European Partners Fund as investors, but did not disclose the amount of those investments.

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A panel discussion about what’s happening on Wall Street sponsored yesterday morning by the San Diego Venture Group made it clear that venture investors are looking for pockets of light among the remains of last year’s market collapse. The general tenor of the conversation was that capital remains scarce and it’s going to take a long time for our financial markets to recover.

A defining moment in the discussion seemed to occur after the moderator and longtime technology analyst Harry Blount asked, where can companies go now if they start to run out of cash? The answers offered by the panel, which consisted of three experts in venture investing and lending, weren’t particularly encouraging.

But Zach Warren, a managing director of New York’s Guggenheim Partners, offered an interesting suggestion near the end of the breakfast session. After Blount asked the experts to identify sectors that are still attractive to investors, Warren seemed to get a lot of heads nodding when he said, “There’s an enormous opportunity to form new banks and broker-dealers—and just go out and take massive market share.” He mentioned that billions of dollars in federal bailout funding have gone to help prop up financial institutions considered too big to fail. Imagine what could happen, Warren suggested, if someone started a new bank with $3 billion in capital. “The opportunity is just too big to start a bank that doesn’t have the legacy problems these other banks have,” he said.

Glen Kacher, who oversees mostly software-related investments as a managing director in the Menlo Park, CA, office of Integral Capital Partners, said he oversees public companies such as Intuit and Adobe as undervalued opportunities. As a sector for potential venture investing, Kacher said he sees companies that specialize in software-as-a-service as “a major growth vehicle.”

Kacher later voiced skepticism about the cleantech and renewable energy sector, saying, Silicon Valley’s VC firms poured hundreds of millions into ethanol startups without thinking through to the billions of dollars required to finance production projects. “It’s easier to innovate on ones and zeros than it is on material sciences and physics,” he said.

Ric Spencer provided a different perspective, however, on the cleantech sector. Spencer, who oversees a global media and telecommunications investment banking group at Bank of America/Merrill Lynch in Silicon Valley, said he views cleantech innovation as a growth industry—especially with the federal economic stimulus package allocating $55 billion to develop such technologies. “There are too many dollars are being spent on the sector, and it just seems like there’s too big of an opportunity to ignore,” Spencer said.

As for the long-term ramifications of the stimulus plan, Warren said, “Conservatism now rules the day. The companies that can do bridge loans today are Verizon and Pfizer.” Spencer agreed, saying, “I think we’re in a period of extreme caution. Today, it’s much more about value, and there’s a thirst for yield.”

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The highlight last week for Xconomy San Diego was our premiere event, “Physics for Future Presidents,” which drew a big turnout (about 200 people registered), including at least two Ph.D. physicists—Lowell Burnett of Quasar Federal Systems and J. Robert Beyster, the founder and retired chairman and CEO of defense contractor SAIC. Yet it also was an eventful week in San Diego for the life sciences, cleantech, software, and information technology sectors.

—As an equal-opportunity “Debunker in Chief,” UC Berkeley Physics professor Richard Muller separated science from mythology in his talk, “Physics for Future Presidents,” which touched on nuclear terrorism, energy, and global warming.

—San Diego Internet entrepreneur Lee Stein, who helped to pioneer online payment systems, travels in rarefied circles, which include PayPal founder Elon Musk, Ariana Huffington of the Huffington Post, and Segway inventor (and Boston Xconomist) Dean Kamen. His latest project is Prize Capital, a Del Mar, CA, investment firm he founded to help support the development of breakthrough green technologies.

—San Diego’s Mpex Pharmaceuticals says its $27.5 million in venture funding will carry the life sciences startup through Phase 2 clinical trials of its inhaled version of approved antibiotic levofloxacin for treating certain lung infections.

—The San Diego “regional algae initiative” has formed a virtual network to encourage the growth of all companies algal. Project manager Rick Halperin told me San Diego’s experience in aquaculture, expertise in algae biology, and sunny climate gives the region an early advantage in developing a new algae industry cluster here.

—San Diego’s Arena Pharmaceuticals (NASDAQ: ARNA), which has run …Next Page »

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San Diego’s biotech executives may be hearing billionaire investor Carl Icahn’s name more often than they care to. We begin our roundup today with Icahn, who has been increasing his stake in and demanding changes at San Diego’s Amylin Pharmaceuticals (NASDAQ: AMLN), also wants to shake up management at Biogen Idec, which is based in Cambridge, MA, and has a sizable operation in San Diego.

—After pressuring Biogen Idec (NASDAQ: BIIB) last year to sell itself to a big drugmaker, Icahn returned last week to nominate a slate of four new directors for election to the company board.

—On the Amylin front, Eastbourne Capital Management says it also wants to nominate a slate of five new directors for election to the company’s 12-member board. Eastbourne says its slate of new directors won’t conflict with Icahn’s bid to also get five new directors elected to Amylin’s board, but it surely increases the corporate intrigue.

—Video game maker THQ (NASDAQ: THQI), based north of Los Angeles in Agoura Hills, CA, disclosed plans last week to close its wireless game development unit in San Diego and lay off all 31 employees. A few days later, the global game developer announced additional reductions that altogether will reduce fiscal 2010 spending by $220 million and headcount by 600—or 24 percent of its estimated 2,500-person workforce.

—Other layoffs reported last week: San Diego’s Hollis-Eden Pharmaceuticals says its cut 20 employees, or about a third of its workforce; and semiconductor industry equipment maker Cohu revealed it cut 60 jobs, or about 6 percent, of its workforce.

—When the U.S. House of Representatives voted last week to postpone the digital TV conversion that was set for Feb. 17, San Diego’s Qualcomm was forced to delay the expansion of its MediaFlo service as well. In-Stat analyst Gerry Kaufhold told me he estimates that Qualcomm was gearing up to launch its wireless TV service in about a dozen markets on Feb. 18.

—Mike Krenn told me he expects it will be harder to get startup companies funded this year. Krenn started the Venture Pipeline at the San Diego office of the DLA Piper law firm to help screen and scrub startup business plans and advise the firm’s entrepreneur clients.

—As long as diabetes runs rampant in the United States, with more that 20 million people affected, San Diego’s Phenomix figures there will still be a market for the drug it is developing. Phenomix CEO Laura Shawver recently outlined the biotech’s plans for Luke.

—In a sign of the times, a relatively large syndicate of six venture firms came together to provide $13.3 million in Series C funding for SynergEyes, a Carlsbad, CA, startup developing and selling a line of hybrid contact lenses for vision disorders.

—By coincidence, Venrock Associates partner Bryan Roberts, who specializes in healthcare investing, told Luke the venerable firm is putting more care into its syndicate formation. Roberts anticipates the effects of the economic downturn could affect VC firms as well as their portfolio companies.

—Finally, the X Prize Foundation awarded UC Irvine students Kyle Good of Temecula, CA, and Bryan Le of Manhattan Beach, CA, won its $25,000 prize for winning its “What’s Your Crazy Green Idea?” YouTube competition. Their video “The Capacitor Challenge” called for creating a new type of energy storage device.

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Among San Diego’s venture capitalists, I’d say that Kevin Kinsella ranks among the foremost riskophiles. Since the formation of his first Avalon Ventures fund some 25 years ago, he has shown a willingness to take chances where even angels fear to tread—and an uncanny knack for making the right bet. Kinsella’s success in backing—and often founding—early stage ventures such as Sequana Therapeutics and Aurora Biosciences (which was acquired by Boston’s Vertex Pharmaceuticals) prompted The New York Times to crown him “the P.T. Barnum of biotech.”

The title is especially fitting these days, since Kinsella has been basking in the extraordinary success of his investment in the musical “Jersey Boys,” which opened on Broadway in late 2005. It may be one of the great, untold stories of venture lore, and Kinsella shared it with me during a long-distance call from Hawaii just before Christmas.

For those who don’t get out of the office much, Jersey Boys re-enacts the mostly true story of three working-class Italian tough guys from New Jersey and a fourth from the Bronx who became The Four Seasons, one of the best-selling groups in pop-music history.

The show, which is still playing strong at New York’s August Wilson Theater, went on to win four 2006 Tony Awards, including best musical. The play was such a runaway hit that additional productions were created, so it’s possible now to see Jersey Boys at theaters in London, Toronto, Chicago, and Las Vegas, with a traveling show in Denver that is scheduled to open in Boston this July.

“The investment in Jersey Boys is certainly among the best I’ve ever made,” says Kinsella—comparable …Next Page »

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A startup flat-rate wireless provider out of Texas may have San Diego’s Leap Wireless (NASDAQ:LEAP) in its sites.

Pocket Communications, a no-frills wireless service provider in San Antonio, announced today it has raised $100 million in venture funding to establish a broad footprint for its unlimited wireless service in the Northeast. Xconomy’s Wade Roush provides details on the financing here.

Leap’s Cricket has been competing against Pocket for nearly three years in the San Antonio area, where Pocket says it has become Texas’ fastest-growing flat-rate wireless company, with more than 250,000 subscribers. Cricket is in 11 other Texas communities, including Austin, College Station and Houston.

With its latest buildout, Pocket plans to provide its wireless services in a broad corridor that includes Hartford and New Haven, CT, Springfield and Pittsfield, MA and Poughkeepsie, NY. Leap’s Cricket is established in the New York cities of Buffalo, Rochester and Syracuse, but the company has no presence in Massachusetts or Connecticut.

Comments by Matt Niehaus of Battery Ventures, the Boston venture firm that lead Pocket’s $100 million in financing, suggest that Pocket plans to create broader corridors for its networks than Leap’s strategy of providing service in discrete cities.

Perhaps more importantly, Pocket’s founder and CEO Paul Posner told GigaOm he can undercut rivals Leap and MetroPCS on pricing and still make a profit.

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Stockholm’s Healthcap Venture Capital and Sofinnova Ventures, which has offices in the Bay Area and San Diego, have invested in Cebix Inc., a life sciences startup in La Jolla. PEHub reports that Cebix has raised $2.85 million in Series A funding, according to a regulatory filing. Cebix does not have a website and neither VC identifies Cebix as a portfolio company.

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Unlike a lot of bankers these days, Tim Bubnack of San Diego’s Huntington Capital is pretty upbeat about his business.

“It’s an exciting time for us,” Bubnack said between meetings yesterday. “While the credit markets are seizing up, we’re providing growth capital that allows companies to continue to expand, grow their businesses, and in some cases, to execute buyouts.”

Privately held Huntington Capital, which specializes in “venture lending,” seems to be thriving despite the credit crunch and broader financial woes that have sent markets tumbling and pushed the U.S. economy toward recession.

Conventional banks have clamped down on lending as bad home loans and other credit problems morphed into an international banking crisis in confidence and an acute worldwide shortage of liquidity.

But Bubnack says Huntington, which has no exposure to subprime loans or the troubled financial instruments at the core of the U.S. credit crisis, has not been subjected to the same economic pressures.

While it is small—the firm has raised about $80 million from institutional investors for its second venture-lending fund—Huntington Capital is hardly alone.

In the San Diego offices of Silicon Valley Bank, a venture lender focused solely on technology and biotechnology companies, senior relationship manager Andy Pelletier says, “We’re actively closing loans and seeing a significant uptick in activity.” Pelletier said he could not be more specific, noting that Silicon Valley Bank is publicly traded.

Hercules Technology Growth Capital also is seeing “unprecedented deal flow,” although Manuel Henriquez, a co-founder and the firm’s chairman and chief executive, says that doesn’t mean Hercules is making an unprecedented number of venture loans.

“We are busier than we have ever been—but we also are being cautious about the duration of this winter storm,” Henriquez says.

Hercules typically joins with venture capital firms in funding technology startups, which gives the new company a mix of equity investors and debt. At a time when some prominent venture capital firms are warning their companies to manage for hard times, Henriquez says he also is advising his “portfolio companies” to batten down the hatches.

“Even though we’re in the debt business, we’re telling people to use less debt,” Henriquez said. “It’s extremely expensive now. If you don’t need debt right away, you should wait 60, 90, 120 days.”

Companies that specialize in venture lending have thrived in part because they typically assume more risk in their deals than conventional lenders, which require borrowers to meet certain criteria or hold sufficient collateral before they will make a loan.

Venture lenders are willing to overlook conventional loan requirements, providing that borrowers have other positive characteristics, such as strong sales and positive cash flow. Such discretion …Next Page »

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LogMeIn, which provides IT support services and secure connections to PCs and other computers from remote locations, has registered for an initial public offering worth up to $86.25 million, according to SEC documents. The Woburn, MA-based firm intends to trade on the NASDAQ exchange under the ticker symbol LOGM.

Founded in 2004 as 3am Labs (the change to LogMeIn came in early 2006), LogMeIn’s main service is to allow customers to securely access their work computers from any location with an Internet connection. Clients include small and medium-sized businesses, consumers, and IT service providers. According to its SEC filing, LogMeIn’s customer base has nearly doubled in roughly the last year, going from 48,000 in November 2006 to 92,000 last November. During the nine months that ended last September 30, the firm reports generating $18.4 million in revenues against a net loss of $6.6 million, versus $7.3 million in revenues and a loss of $4.7 million over the same period a year earlier. The firm has never been profitable.

The venture-backed company has raised more than $18 million since its inception. Investors include Prism VentureWorks (which owns approximately 24 percent of LogMeIn shares), Polaris Venture Partners (21 percent), 3TS Capital Partners (16 percent), Integral Capital Partners (9 percent) and Intel Capital (5.5 percent).

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I rounded the wrong way when I got Shmuel Gniwisch on the phone, referring to the $46.6 million financing round his online jewelry retail company—Ice.com—had just closed as $46 million. “It’s $47 million,” the Ice CEO corrected. Then there was a pause. “That’s 47 parties.”

He was joking, of course—breaking the ice, you might say. And why not? He was one happy rabbi (more on that in a bit). The Series B funding, formally announced today, was led by Waltham, MA-based Polaris Venture Partners and included return investor Ignition Partners of Bellevue, WA. It marked only the second time Ice had taken in funding (well, third if you count Bill Gross—more on that, too). And I think you can view it as a vindication. It has been a long haul to get to this big-money inflection point—from four rabbis in Montreal to four rabbis in Gross’s Idealab Internet incubator in Pasadena to four rabbis buying back their troubled business, returning to Montreal and turning it into the kind of operation that could attract big money from big VCs. “We’re very profitable and having a great time,” says Gniwisch, who describes his high adventures as movie-like—”part of the new Nicholas Cage series.”

This is the way the script reads. Gniwisch grew up in a family jewelry business that manufactured affordable jewelry for big retailers. Then, in 1999, the new generation—Shmuel, his two brothers, Mayer and Pinny, along with brother-in-law Moshe Krasnanski (all are ordained rabbis)—got the retail bug. “We decided that we would like to take this to this new thing called the Internet,” Gniwisch says. It was the dot com heyday, he explains. Retail sites like Priceline, Amazon, and Buy.com all seemed to be going gangbusters. “Why shouldn’t we be able to tap into this inventory that’s sitting there anyhow and give it to the consumer and make a little for being the matchmaker?”

The inventory he’s speaking of was his parent’s, and the new business was called Buyjewel.com. The idea behind it (and now Ice) was to bring affordable, stylish jewelry—such as diamond rings, bracelets, and earrings, mostly in the $100-$500 range—to more mainstream consumers. “We are great merchandisers. We’re trend setters, we’re tastemakers,” Gniwisch says.

Not long after their September 1999 launch, Bill Gross invited them to join Idealab, which churned out dozens of companies in this period, including eToys and Goto.com (later named Overture), a pioneer in contextual advertising for search engines. Gross and his team had a lot of experience in e-commerce and online retail. Gniwisch says it seemed like “a match made in heaven.” So they accepted Gross’s offer of $7 million for roughly 60 percent of Buyjewel, which was already taking in some $30,000 a month in revenue—and in early 2000 moved down to Pasadena. “Four rabbis with big beards,” …Next Page »

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Call it a hair-raising event. Follica, a Boston startup out to develop novel ways of treating and even curing baldness and other hair-follicle disorders, today announced it had completed a $5.5 million Series A financing round. The round was led by Interwest Partners of Dallas and Menlo Park, CA, and joined by founding investor PureTech Ventures, in whose offices Follica is currently housed.

Follica was founded in late 2006 by PureTech and a group of leading academics who include Harvard Medical School dermatologist Rox Anderson, University of Pennsylvania stem cell biologist George Cotsarelis, and Vera Price, director of the University of California, San Francisco (UCSF) Hair Research Center. Its primary initial focus is an extremely common form of hair loss called androgenic alopecia—aka male pattern baldness or female pattern baldness.

Follica has targeted a, shall we say, growth industry. According to PureTech’s website, treatments for conditions of the follicle—chief among them hair loss, acne, and pigmentation issues—represent a $10 billion-plus annual market. It’s all part of the even broader category of “aesthetic medicine,” which also includes things like plastic surgery and many obesity treatments. And it is really in the recognition of the potential of aesthetic medicine that the, um, roots of Follica’s story lie.

Daphne Zohar, PureTech’s founder and managing partner (and an Xconomist), says the firm began thinking seriously about aesthetic medicine in early 2006. “There’s huge markets, and most of the technologies and things that are out there don’t come from real academic science,” she says. “A lot of them are this late-night infomercial type of thing.” But the market potential is undeniable, and it wasn’t lost on Zohar that people pay out of pocket for aesthetic treatments, meaning no health insurance reimbursement issues for manufacturers to contend with.

PureTech put together a team of expert advisors to begin looking at different aspects of aesthetic medicine. Their survey spanned everything from skin rejuvenation approaches to fat melting techniques, perhaps more than 100 different ideas in all, Zohar says. “As we were looking, we noticed the most interesting things …Next Page »

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HiWired, a Needham, MA-based provider of IT support and services for consumers and small businesses, announced today that it has received $9 million in a Series B financing. The round was led by North Hill Ventures and includes Series A investors Sigma Partners and Kodiak Venture Partners.

HiWired was founded in 2004 by Singu Srinivas and Michael Wexler, both veterans of IBM’s services operations, who share the title of HiWired’s president. “We just saw this opportunity about three years ago, where we wanted to be sort of the Cisco of the digital home space,” says Srinivas. The company, he says, provides “the picks and shovels” to “make the digital home a reality.” Such tools (which turn out to be helpful for small businesses as well) range from PC backup services to set-up services for wireless networks to trouble-shooting of common IT problems; HiWired offers some of these directly, and aggregates some of them from other companies.

The startup handles its customers’ requests through a New England-based 24/7 remote support operation. “We can address about 95 percent of the problems out there without doing what a Geek Squad does at Best Buy, which is get you to take your PC to a store or having someone come to your house, which is pretty intrusive,” says Srinivas.

HiWired will use the new funding to expand its sales and marketing efforts and increase its customer base, as well as continue development of the technology behind its offerings, Srinivas says. One important target market is the customers of retailers such as OfficeMax, which sells optional tech support services packages provided by HiWired. The Needham firm also provides a tech support platform for Cox Communications, a leading cable company. “We think the market is matured, where retailers and ISPs [Internet service providers] understand what we want to do,” he says. And since the funding actually closed on December 19, “our team enjoyed the holiday knowing we closed it and could go into 2008 with fuel in the tank.”

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Third Rock Ventures, the new Boston venture firm zeroed in on funding early stage, local life sciences companies, announced the hiring of three new partners yesterday. The company, which closed its $378 million fund in September, says it has now completed the core team needed to implement its somewhat unique model of providing top-tier operational and business development experience to startups that couldn’t afford it on their own. “We now have people that have founded companies, built companies, governed companies,” with experience in everything from business to medicine, finance, and science, says co-founding partner Kevin Starr. “We can actually go in with the entrepreneurs side-by-side and fill leading operating roles as we get these companies started.”

Third Rock’s new hires include Cary Pfeffer as partner, and Neil Exter and Craig Muir as venture partners. Also appointed, as senior associate, was Jake Bauer.

Third Rock was formed by a core trio of executives formerly with Millennium Pharmaceuticals (NASDAQ: MLNM) in Cambridge. Serial entrepreneur and footwear connoisseur Mark Levin, Millennium’s founding CEO (and founding chief executive of four other biotech firms); Robert Tepper, who was the company’s head of R&D and chief scientific officer; and Starr, who served as COO and CFO. Three additional partners (one of whom was also a Millennium veteran) had joined the firm by it’s official debut in September; this week’s additions bring the partner total to seven, and the venture partner total to two.

The core observation behind the firm, says Starr, was that many existing venture funds are so large they almost have to invest in later-stage biotechs, where the high costs of clinical trials and other work allows them to really put their cash to work on a scale big enough to make a decent return for the fund. The skill sets of these funds’ partners is also geared to this stage of a biotech’s evolution, and not the startup phase, he says. These and other factors, says Starr, leave a big opportunity for a firm focused only on early-stage biotech investments, especially those coming right out of a university. “What we realized was there was a big void that started to occur about 10 years ago that’s at an acute stage right now,” he says. “Nobody was playing that bridge from academia into business, and that was our opportunity at Third Rock.” (Nobody might be an exaggeration—as firms like Boston’s PureTech Ventures, led by Xconomist Daphne Zohar, have a similar focus. But we’ve heard about the void from many quarters.)

Another big idea behind Third Rock was that of forming a partnership team with deep operational, business development, and marketing skills, as well as more traditional finance experience. That way, says Starr, Third Rock could take a far more active role in working with its portfolio companies than venture firms normally do—and, because the partners could be deployed to work with several firms at once, Third Rock could provide much more experienced, hands-on help than most startups could typically afford. “We tried to get non-overlapping complementary skills of people that are just company builders,” he says.

The latest hires complete Third Rock’s team, he says. Pfeffer is an experienced business-development executive whose roots go back to a decade at Biogen—and he’s had his own biotech advisory firm since 2003. Muir, most recently senior vice president of technical operations for Codon Devices, has the extensive knowledge of robotics, automation, microfluidics, IT, bioinformatics, and other key areas needed to help companies build drug discovery platforms. Exter recently finished a stint as chief business officer at Alantos Pharmaceuticals, which was sold to Amgen. Both he and Muir are also former Millennium VPs. Bauer, joining as senior associate, just got his Harvard MBA and has worked in several biotech firms.

Third Rock has only made one investment so far, Starr says, in a still-unnamed obesity company that is currently housed in the same Newbury Street building as Third Rock. Starr says his firm will likely make two other investments early in the new year. And he can’t wait to be part of the action. “We’re going to be active in launching these companies ourselves,” he says.

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Denver-based NewsGator Technologies, which makes one of the leading RSS news feed aggregators as well as other products designed to allow users keep up with online information, announced today that it has closed a $12 million funding round. The financing was led by new investor Vista Ventures of Boulder, CO. But it includes existing investor Mobius Venture Capital, also of Boulder, and Cambridge-based Masthead Venture Partners.

We couldn’t help but noticing that representing Masthead on the NewsGator board is Rich Levandov, the would-be tattooee behind Extreme VC: The Tale of the Tacoda Tattoo. That story chronicled Levandov’s bet with Tacoda founder and chairman Dave Morgan, wherein Levandov said he would get the Tacoda logo tattooed on his body if the company brought him a 10X return on his investment. When Tacoda was sold to AOL this past July for around $275 million, the price was high enough that Levandov got his 10X return. The tattooing is supposed to happen soon.

Given today’s news, we e-mailed Levandov about his NewsGator plans (as well as for an update on his Tacoda tattoo). His BlackBerried response:

“Dave Morgan and I are still looking for the perfect evening to do this.

As for Newsgator, I am upping my bets to 20x :)”

You hear that, AOL?

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In the early 1980s, Steve Jobs famously recruited Apple CEO John Sculley, then the president of Pepsi, with the question: “Do you want to sell sugar water for the rest of your life?” I can’t help thinking that if Jobs visited Highland Capital Partners and asked general partner Ted Philip the same question (replacing “sugar” with “flavored”), Philip might just say, “Sure. Why not?”

Okay, that may be a leap—but probably not a huge one. Philip, after all, is a managing general partner of Highland’s new $300 million consumer fund. The fund just made its seventh investment—in Tom First’s (he’s one of the two Toms behind Nantucket Nectars) Cambridge-based company O Beverages. It makes, you guessed it, flavored water.

When I last spoke to Philip, it was for Xconomy’s VC Varsity story. The black-belt wearing, triathlon-running, motorcycle-, snowmobile-, car-, and ATV-racing Highland partner made the second team of the Boston area venture athlete elite. But his current fund is in a somewhat different league from most other local VC enterprises, thanks to a combination of its consumer focus—Boston and Highland are known for their high-tech focus, after all—and the extensive operating experience of the partners involved. Says Philip, himself a founding member and former COO, CFO, and president of Lycos, “There’s nobody else out there doing what were doing at the stage we’re interested in.”

Philip says Highland began testing the waters in the consumer market more than a year ago. “We found that not only was there an opportunity, but there was a big opportunity,” he says. (Philip, by the way, has a long history with the Highland team. Dan Nova, one of Highland’s managing general partners, co-founded Lycos when he was at CMG@Ventures. When he came to Highland, the Lexington-based firm took a piece of Lycos. Another Highland managing general partner, Bob Davis, was also a founding member of Lycos.) But instead of making consumer investments inside an existing fund, such as the $808 million Highland Capital Partners VII formed last year, Highland decided to raise a new fund especially dedicated to consumer products and services and retail operations. The first close came last February; the final closing took place in June.

Joining Philip are co-managing general partner Tom Stemberg, a founder of Staples, and two general partners: Tom Guilfoile (a longtime Philip colleague at Lycos and other ventures) and John Burns, a veteran of both Highland and Summit Partners. The group has been moving at full speed since before even the first close in February. “Our team at this point has made seven investments,” says Philip. “There’s a tremendous amount of opportunity, but one of the great things about this is we got a running start.” He’s talking about an early investment in Vancouver-based Lululemon Athletica, a maker of Yoga-inspired athletic wear that successfully went public this summer (NASDAQ: LULU). (Lululemon has been cloaked in controversy the past month, since the New York Times tested material from a line of its clothes purportedly made with seaweed and found none.)

The new Highland fund generally invests in companies seeking their first round of venture financing—meaning they are well beyond the conceptual stage and farther along than true startups. Philip says the team likes to see retailers with between 3 and 12 stores, enough to measure the unit economics of the business. If it’s a consumer play, Highland likes firms with enough sell-through in a channel (such as online) or region that the partners can extrapolate to the rest of the country. For instance, O Beverages sold its water successfully in New England and California, making Philip et al comfortable investing. If the water was only selling well in O’s hometown of Cambridge, that wouldn’t cut it.

As I mentioned, one unique aspect of Highland’s new fund is that its partners—three out of four of them—bring a lot of operating experience to their jobs, as opposed to what Philip calls the more traditional finance background of many venture partners. “We can help the enterprises build their businesses and get through the wall of tricky growth issues that they’ll face, because we’ve been there and we can help solve them,” he says.

Another thing about the fund that I find interesting is what it says about the overlap between consumer markets and Highland’s traditional focus in tech, life sciences, and high-tech healthcare. “If you look at a lot of the hot areas right now, they are a convergence of both healthcare and consumer and retail,” says Philip. Take another of the fund’s portfolio companies, Boulder, CO-based Pharmaca Integrative Pharmacy, which in addition to the usual prescription services offers “natural” treatments, along with toiletries and gifts. As Philip puts it, “they’re doing to the conventional pharmacy industry what Whole Foods did to the traditional supermarket industry.”

In fact, that investment overlapped Highland’s more traditional interest in healthcare to such a degree that the consumer fund and Highland Capital Partners VII are both investors equally. “It was a nice way to combine the strengths of Highland Capital with the Highland consumer fund, so we did that together,” says Philip. And that won’t be the only side-by-side deal the two funds make. E-commerce, for instance, is another area that can involve both technology and consumer and retail markets. “If it overlaps our worlds, then we’ll look at doing it together,” Philip says.

Here’s an alphabetical listing of the consumer fund investments to date:

Blue Tulip (Bordentown, NJ) — Specialty gift stores

Guitar Center (Westlake Village, CA) — Retailer of instruments and audio and recording equipment

Lululemon Athletica (Vancouver, BC) — Retailer of Yoga-inspired athletic apparel

O Beverages (Cambridge, MA) — Maker of flavored and nutrient-infused water

Pacific Pathway (Solana Beach, CA) — Maker of emergency and disaster preparedness products

Pharmaca Integrative Pharmacy (Boulder, CO) — Chain of pharmacies offering traditional and alternative products

SuitePlay! (Algonquin, IL) — Game room furniture and equipment retailer

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Nick Sinai, a rising senior associate star at Polaris Venture Partners, will be leaving the firm at the end of the year to become a vice president in the newly created Boston office of Lehman Brothers’ venture capital arm. Sinai, just 31 years old, will also be stepping down from his position as interim vice president of corporate development at GreenFuel Technologies, the Cambridge-based energy firm where Polaris general partner Bob Metcalfe stepped in as interim CEO this summer.

While he didn’t want to be quoted directly, Sinai did confirm his move this morning. He will be joining at least two others in the Boston offices of Lehman Brothers Venture Partners, which opened late this summer when Brian K. Paul moved over from the firm’s Menlo Park office, where he was managing director, to open and manage the new arm. Before joining Lehman Brothers in 1994, Paul worked as an associate at First Boston.

Sinai has an undergraduate degree from Harvard (where he was on the crew and boxing teams–did someone say VC Varsity?) and an MBA from the University of Chicago. He’s been at Polaris three years, working closely with Metcalfe and concentrating on information technology and energy investments. Among the Polaris investments he’s worked on: Mintera, Integrian, Emo Labs, LogMeIn, RoundBox, Dataupia, Confluence, GreenFuel Technologies, and Infinite Power Solutions. Before Polaris, he concentrated on telecommunications investments for Madison Dearborn Partners, and was a manager at strategy consulting firm Cambridge Strategic Management Group.

Lehman Brothers, the famous New York investment bank, formed its venture arm, which is focused on technology investments, back in 1995. According to its web site, the venture business doesn’t target any one particular industry, but rather focuses its investments on companies in any industry that are “capable of rapid growth through the provision or implementation of innovative technology.” Lehman’s latest venture fund—the $365 million Lehman Brothers Venture Partners V announced in September—is focused on mid- to late-stage investments in high-growth technology companies.

In addition to Boston and Menlo Park, the venture group has a New York office. The Boston operation has made at least one investment so far—taking the lead in a $20 million financing round announced last month by ExaGrid Systems, a disk-based data protection company based in Westborough, MA. Lehman joined existing investors Highland Capital Partners and Sigma Partners.

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Marc Dulude loves it when, after showing up at the far-flung offices of a company he’s thinking of buying, his eager-to-please hosts ask him how much time they’ve got to make their case before they have to get him back to the airport. “Don’t worry about that,” he replies. “We’ll take as much time as this needs.”

There aren’t many business travelers who get to say that every time they fly in for a meeting. Certainly not airline passengers. Chartering a plane or even owning a share of one won’t always do the trick, either—a fellow charterer or share-owner probably has the aircraft spoken for after your scheduled return. And even if the aircraft is available for an extra while, the flight crew may not be.

No, if you want complete freedom from aircraft schedules, you’ve pretty much got to own that sucker, and fly it yourself. That’s what Dulude does. A former CEO of Framingham, MA, plastics manufacturing design firm Moldflow who has also run software companies, Dulude is now a partner at Wellesley-based Ampersand Ventures. He specializes in buy-outs for the high-tech VC firm, where his portfolio companies have included information retrieval firm Endeca Software in Cambridge, biotech imaging specialist RadPharm in Princeton, and medical packaging system manufacturer Kortec in Ipswich. The need to check out existing and prospective investments has him constantly visiting companies all over the U.S. and Canada. To get the most out of his travel time, Dulude tools around in a Piper Mirage, a small propeller plane.

What, no jet? Don’t feel sorry for Dulude. It’s true, most privately piloted propeller planes are cramped four-seaters that top out around 140 mph or so, and tend to be either grounded or tossed around by any bad weather along the flight path. Dulude started off with one of those—a Cessna Skylane—when he got his license in 2001, thinking his flying would be strictly personal. But then he upgraded to the roomy six-seat Mirage, and had its piston engine replaced with a 560-horsepower turbine engine, essentially a jet engine that turns a propeller. Because the Mirage is pressurized, and because, unlike piston engines, turbine engines don’t lose power in the thinner air at altitude, it comfortably flies in the same 20,000-feet and up, above-the-bad-weather flight levels as jets. At 300 mph, the Mirage isn’t much slower than a business jet, either. That sort of aircraft can set you back 1.5 million bucks or more, but that’s still half the cost of a typical light business jet. Dulude’s operating costs are far lower than those of jets, too, and he can fly in to tiny airports close to his destination that couldn’t handle most jets.

The Mirage has won Dulude the sort of travel flexibility and efficiency that most of us can only daydream about. “When I want to visit some of the companies I own, or that I’m thinking about buying, I’ll just string a bunch of meetings together that run from one end of the country to the other, and do them all in one trip,” he says. “I’ve visited three companies in three different cities and ended up back home, all on the same day. And I know that however long a meeting runs, that plane isn’t leaving without me. The benefits of that sort of convenience can’t be exaggerated.” He doesn’t get much argument at Ampersand, where four of the five partners fly their own planes.

Even so, Dulude doesn’t try to argue that he’s saving money by owning a plane. No matter what the convenience, the damn things just cost so much more than commercial flying—total per-mile costs for an aircraft like Dulude’s run from two to seven times those of a business-class seat, not including the tens of thousands of dollars you’ll eventually spend in pilot training–that you’ll always end up in the red in any sort of reasonable accounting. “You can try to rationalize it by assigning a ridiculously high value to your time,” he says. “But I see it as a quality-of-life question rather than a cost-justification question. You can’t put a value on gaining this sort of flexibility, and of not having to deal with the frustration and loss of control that you put up with in commercial flying.”

Just one more little piece of information for those of you reading this in an airport, as you listen for an announcement about your delayed flight while trying to dodge the ejecta from the guy sneezing next to you: www.trade-a-plane.com.

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