Highland Capital Partners of Lexington, MA, said today that it has closed its eighth venture fund, the $400 million Highland Capital Partners VIII Limited Partnership. “We are pleased to raise a fund in this challenging environment,” Highland general partner Bob Higgins said in the firm’s announcement. PE Hub’s Dan Primack has a deeper look at the long-delayed closing of this fund, which is just half the size of Highland’s $800 million seventh fund, reflecting the recession-ravaged fortunes of the limited partners who back VC firms. Higgins told Primack that Highland anticipates making fewer and smaller investments from the new fund—but that it doesn’t expect to shrink its partnership (in fact, it’s considering hiring up to three new partners).

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Woe is me, said the VC. With the exit markets all but closed, fundraising in a logjam, and portfolio companies struggling to stay afloat, it is a tough time to be a venture capitalist. Yet the good ones will survive, and thrive. As will the companies they are building.

That’s the message I got from chatting with a few prominent Seattle investors yesterday, after the release of the third-quarter venture stats from the entity that I’ll call MoneyTree / PricewaterhouseCoopers / National Venture Capital Association / Thomson Reuters. Indeed, there were enough interesting investments made in Northwest companies to give local VCs some encouragement (see top 10 list of deals below). In fact, some $242 million was invested in 30 Northwest companies during the third quarter, according to the report. That’s the most dollars invested in a quarter since the third quarter of last year ($280 million in 44 companies).

“For four quarters we’ve had growth. Things are up off the bottom,” said Andy Dale of Buerk Dale Victor. “We’re still a top-five market.” Dale also maintained, as he pointed out last quarter, that 10 or more of the 15 members of the Evergreen Venture Capital Association are actively making investments.

Thomas Hodge of Frazier Technology and Healthcare Ventures is similarly hopeful. Frazier co-led the region’s biggest financing deal of the year, Seattle-based Calypso Medical’s $50 million round announced last month. “As the economy improves, and we’re seeing it already, VCs will put more money to work. We feel that in our gut,” Hodge said. “First-time financings for us aren’t as busy as a year ago, but they’re consistent with national figures.” He added that in the healthcare space, later financing rounds are getting bigger, because it takes even more money to get to profitability now, and there’s “a longer holding period because of volatility in the markets.”

Scott Jacobson of Madrona Venture Group pointed out that in the IT sector, consumer software could be making a comeback—he points to recent investments in companies like …Next Page »

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I spent an enlightening week in Tokyo earlier this month participating in the Kauffman Fellows Japan Summit. This summit was the brainchild of three visionary Kauffman Fellows who are on a mission to instill entrepreneurship into the Japanese culture. During the three days we heard about the current (dismal) status of venture capital and entrepreneurial success in Japan—especially in the life sciences—in contrast to the unbelievable track record of Japanese engineering and precision manufacturing, as well as the country’s output of patents, which rivals that of the U.S.

Walking around Tokyo and interacting with the many smart minds at the summit, I had to scratch my head—at first blush, the ingredients of great entrepreneurship in life sciences are there. But why is there no soup? One of the most staggering statistics presented at the meeting was that just $200M was invested in local life science companies in 2008, with one pharma spin-out venture taking half the total!

And then it started to sink in how privileged we are in the Boston area, where the next successful or aspiring entrepreneur, scientist, engineer, venture capitalist, IP or venture lawyer, skilled technician, teaching hospital, pharmaceutical company, or device company is just a door away. We are steeped in this culture of entrepreneurship and have been so for many years now. This Boston life science ecotope is as unique as Silicon Valley is for the techies, and it behooves us to make sure we take full advantage of this incredible competitive edge.

People outside of our unique Boston ecotope understand how powerful our “soup” is—Japanese investors searching for attractive opportunities in private equity and venture capital are looking first to the U.S., then checking out Europe and China, only to search their own home market last. How discouraging that must be for the few life sciences pioneers in Japan! I will make it a habit now to remind folks in our industry, as well as local government officials, that we should cherish what we have and work hard to keep things intact and healthy.

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Depending on who you talk to, you get conflicting views about where real innovation and growth come from in today’s economy.

One school, well represented at the established venture capital firms on Winter Street in Waltham or Sand Hill Road in Palo Alto, says that there are only a few truly disruptive technology ideas in each business cycle; that these ideas end up generating most of the wealth and job creation in the technology industries; and that wise investing is mostly a matter of finding the right teams of entrepreneurs with the rare and magical combination of ingenuity and experience needed to build strong companies.

The other school, represented by the dozens of startup incubators, business plan competitions, and angel-investing groups currently popping up across the country, says it’s better to let a thousand flowers bloom, even if they turn out to be dandelions. According to this point of view, there are far more entrepreneurs with good ideas than the established venture-capital business can handle, and the important thing is to find ways to connect these innovators with capital, at least in small amounts, so that they can test their ideas in the market.

Chris Hurley belongs to this second group. He’s the founder and CEO of Revolutionary Angels, a new investing group based in Cambridge, MA. Revolutionary Angels isn’t a traditional angel investing group where members pool their own money to fund startups. Rather, it plans to run a quarterly business plan competition where the prizes—currently pegged at $250,000 for the first-place winner and $50,000 for second place—are financed by entry fees from the competitors themselves. The group began soliciting submissions for its first competition on October 1, and plans to announce the first two winners in November. In return for their fees, Hurley says, entrants will get not just a chance at the big prizes, but enough advice from a group of experienced advisors and service providers that the $4,995 entry fee could be a good investment even for teams that don’t win.

“The pool of people looking to get a business of the ground is growing, while the pool of venture and angel capital available to help them is shrinking, and what occurred to me is that there has got to be a better way to do this,” says Hurley. A longtime sales executive and IT consultant, Hurley was until recently a member of corporate development group at Sun Microsystems. He says he resolved to leave Sun after Oracle announced plans to acquire the struggling maker of business software and servers.

“I decided it was better to control my own destiny than to have someone else control it,” he says. “I’m hoping this is an opportunity that will not only provide that control but help a lot of other entrepreneurs out there, because it’s a challenging environment.”

Despite, or maybe because of, startups’ thirst for capital, Hurley’s model may prove to be a controversial one. The $4,995 fee to enter Revolutionary Angels’ first competition is not inconsiderable to a business in need of cash. Hurley’s plan is to …Next Page »

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If you spend much time in the business or legal world, “due diligence” is a phrase you hear a lot. It’s the polite term for the time you have to spend figuring out whether a potential client, vendor, investment, acquisition, or partner is legit or phony, smart or just slick.

Part of the process involves discreetly (or not so discreetly) calling around, trying to find people who know the person or entity you’re “diligencing.” But what if due diligence weren’t such a guessing game? What if there were a central marketplace where you could declare which type of information you need, pick an expert, and—for a reasonable fee—get an hour of private telephone consultation?

That’s the whole idea behind Zintro, a Web-based client-expert matching service being rolled out in beta form by serial entrepreneur Stuart Lewtan. The founder of Lewtan Technologies, a maker of financial analytics software sold to UK-based DMGT in 2004, Lewtan believes there’s a problem with existing professional-networking services such as LinkedIn. They’re great for staying in touch with your acquaintances, he says, but they aren’t really designed to bring about conversations between people who don’t already know one another.

“LinkedIn is an excellent tool, but it doesn’t’ really provide a good mechanism for reaching an agreement to talk,” Lewtan says. “Everything Zintro does is built around trying facilitate introduction, qualification, payment, and all the other aspects of connecting two people and creating a safe environment for them to communicate and exchange information for a fee.”

Here’s how Waltham, MA-based Zintro’s Web service works: Say you’re an investor and you’re thinking about buying a big chunk of stock in A123Systems, the Watertown, MA-based battery maker that went public last week, but first you want to know more about lithium ion batteries. You sign up for a “client” account at Zintro.com and fill out a form describing your information needs. Zintro uses what Lewtan calls “fuzzy search” algorithms to comb its database of experts, who all fill out detailed profiles when they sign up for the service. Zintro sends your inquiry to appropriate experts who indicated they know something about batteries, electric cars, or material science.

These experts are then free to respond with a brief proposal outlining their rates and their qualifications for talking about A123. From your Zintro dashboard, you can sort through their proposals; if you need more details, you can request them from the experts via Zintro’s internal e-mail system.

Once you settle on an expert, Zintro helps you schedule a phone call, and charges your credit card or PayPal account for the amount of the expert’s fee, plus Zintro’s 30 percent introduction fee—say, $100 for the expert plus $30 for Zintro. The funds go into an escrow account, and Zintro provides a dial-in number that both parties can call at the agreed time.

Once the call is over and both parties confirm how much time was used, the fee is released to the expert. There’s also an escape hatch: if you …Next Page »

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A lot of people have been asking lately if the venture model is broken. But it seems to me that it’s just decrepit. Like an aging, rotund former football star, the venture industry is scratching its head and realizing that its glory days are long past. The industry collectively doesn’t really know how to handle its new reality. In the heyday, top-quartile funds might have gotten away with treating their important stakeholders arrogantly, but given that even top-quartile firms have not provided great returns over the past 10 years, venture GPs will need to make herculean efforts and adhere to a strict regimen in order to make the upcoming cut. With almost the entire industry needing to raise new funds over the next two years, there may be few survivors. I propose a three-step makeover plan for those paunchy firms that are on the edge.

Step one: Stop devouring entrepreneurs. These tasty morsels can be irresistible, to be sure. They work for years to create a business, innovate, and execute, and they bring the fruits of their labors to you. GPs, you must learn to control your appetite and realize that these individuals are not going to continue to feed you if you chew them up and spit them out.

A case in point was hinted at in an earlier post about “down” being “the new up” by Michael Greeley of Flybridge Capital Partners, chairman of the New England Venture Capital Association and a board member of the National Venture Capital Association. Greeley made the argument that venture-backed companies “should be considered fortunate to just raise capital, at any price, in this environment.” I don’t mean to pick on Michael, as he is only reporting on the current prevalence of this kind of thinking among VCs, but why should a company be lucky to take in financing that wipes out the ownership of everyone but the venture funds who participate, just because we are now in a tough economy? Venture capital is a long-term game that is meant to take companies to an exit years from now when the economy will probably be completely different.

One could argue that it’s only reasonable and good business to protect the venture firm’s downside at the founding team’s expense, but is that really true? Usually the founders are only left with a small percentage of the company after a few rounds of funding even in the best-case scenarios, so for an additional 5 to 15 percent of the equity is it really worth …Next Page »

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We got an early peek at second-quarter VC investing today from ChubbyBrain, a New York-based information service (and new Xconomy partner) that uses a “structured wiki” to collect data on startups, and monitors venture capital investments nationwide.

ChubbyBrain says venture activity bounced back, with more than $5.3 billion invested during the three months that ended in June. That’s up nearly 61 percent over the first quarter of 2009, when ChubbyBrain shows VC firms invested $3.3 billion nationwide. The strong rebound pretty much dispels speculation that investment levels would inch up slowly, according to ChubbyBrain co-founder Anand Sanwal

ChubbyBrain says the number of deals totaled 613 during the quarter, but it’s not possible to compare to its data for the same quarter in 2008, since it’s just starting out. Think of it as an exit poll until we get more detailed results early next week as the National Venture Capital Association and Dow Jones VentureSource release their data. In the meantime, ChubbyBrain provides some other insights:

—Healthcare was the biggest sector getting venture investments during the three months that ended in June, garnering 37 percent of VC dollars nationwide. Investments in Internet startups, which got 14 percent of the total, represented the next-biggest category, while energy-related startups got 10 percent.

—Most of the money, as usual, was invested in California. Almost 43 percent of the $5.3 billion was invested in the Golden State. Massachusetts got 9 percent of the dollars and about 8 percent went to Washington state. (ChubbyBrain breaks out its results by state, but not regional or metropolitan areas.)

—It has been widely reported that many venture capital firms are performing financial triage on their porfolio companies, so many expected VC funding for seed and early stage startups would suffer. But ChubbyBrain reports “healthy levels of early stage investment in Seed and Series A rounds, accounting for 35 percent of the total number of deals.

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On Monday we learned that Rob Day, a former principal at @Ventures in Wilmington, MA, and one of the dynamic young leaders of the energy investing scene in New England, has taken on a new assignment. He’s become a partner at Black Coral Capital, a Boston-based private equity fund formed in 2008 to build a cleantech investment portfolio for an unnamed high-net-worth family.

I’ve known Day ever since mid-2007, when I wrote about the nearly simultaneous decisions that he and Advanced Technology Ventures principal Andrew Friendly made to leave energy-related jobs in California and take jobs in New England cleantech investing. Both Day and Friendly have helped bring new vitality to the Boston-area energy innovation community, setting up an East Coast branch of the California-based Renewable Energy Business Network and participating in numerous local events. Most recently, Day was part of a panel on bringing energy innovations to market at Xconomy’s XSITE summit on June 24.

I caught up with Day by phone Tuesday morning, and asked him to tell me about Black Coral, which had been more or less in stealth mode until Day circulated a note about his job switch. Here’s the transcript:

Xconomy: What’s Black Coral all about?

Rob Day: It’s a new family office, with a broad mandate to invest in private equity in clean energy and related technologies.

X: What family is behind it?

RD: We have to maintain privacy about that.

X: But they’ve decided to put some of their money specifically into clean technology—why?

RD: They’ve got good strategic assets in related areas of energy, and they’re looking to put some money into the clean energy side of it. So we know we have some good assets we can bring to bear in our investments, but we also have a pretty broad mandate to develop an investment strategy with new things that make sense. We are going to be investing directly, and also indirectly, as limited partners in venture funds. We are looking across all sorts of private equity classes—capital projects, buyouts, early stage companies, growth stage, later stage. We’re really starting from a blank slate, which we think makes sense in this interesting time, economically.

X: When you talk about bringing strategic assets to bear, does that mean you’re going to be leaning away from new energy-generation technologies toward things that fit with the existing energy infrastructure?

RD: As much as anything else that reflects that the folks around the table are pretty pragmatic. We are investing to find good investments, we’re not making investments just in the latest cool technology.

X: Do you think too much venture capital in the cleantech industry has gone into blue-sky ideas?

RD: To be clear, at the places I’ve worked in the past, there has always been a shared pragmatic approach around the table. That’s why I’ve always invested in things like energy efficiency myself, in addition to other things. But if you look at where the money has gone in the cleantech venture structure, a lot of it has yet to come to market in terms of commercialized products. That, by itself, should tell you that there has been a lot of emphasis on funding breakthroughs, what some people have called the “black swan” technologies, where as the folks around the table at Black Coral are going to be really focused on …Next Page »

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The conventional wisdom used to be that technology startups should be located as close to their venture investors’ main offices as possible. That way, it’s easier to call on your venture partners’ experience and networks, get them to attend your board meetings, and so forth.

But the conventional wisdom may be dead wrong. Private equity industry news site PE Hub is calling attention today to a new study showing that startups located far away from their venture investors’ offices actually perform better than those headquartered closer to the mother ship. That finding may come as solace to entrepreneurs in cities such as San Diego and Seattle that are slightly off the beaten venture path, or that are losing homegrown firms.

The study, by a group of researchers from Harvard Business School, the National Bureau of Economic Research, and the Federal Reserve Bank of New York, focused on venture firms in the nations’ three largest clusters of venture activity—Boston, New York, and the San Francisco Bay Area—and asked which of their portfolio companies outperformed the firms’ averages. “Surprisingly, much of the VC outperformance in these venture centers arises from their non-local investments,” the authors report. (PE Hub has put the full paper online here.)

The reason for this counterintuitive finding, the researchers speculate, is that there’s a higher “monitoring cost” to investing in a far-away company—because of the expense of traveling to those locations, among other things—and that venture firms therefore have a higher bar for making those investments. In other words, they only bet on companies that they expect to have a higher rate of return, and to the extent that they bet right, they get that higher rate.

This “hurdle rate” effect is so strong, in fact, that the researchers found that outperformance rates actually go down if a venture firm opens a branch office in the same city with once-distant portfolio companies. Harvard Business School professor Josh Lerner told PE Hub’s Dan Primack that the results ought to cause venture firms to rethink their assumptions about geography. Focusing on local investments because they’re less costly might be a “mental trap,” Lerner said, if it leads investors to relax their standards.

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The Keiretsu Forum is the world’s largest angel community, with 750-plus accredited members across 18 chapters from Barcelona to Bellevue. Since 2000, its members have invested more than $180 million in 200 companies spanning technology, healthcare, consumer products, real estate, and other sectors.

So it’s high time I caught up with Todd Dean, the president of Keiretsu Forum Seattle/Northwest, to hear his perspective on local angel investing in the current economic climate. Dean is originally from Montana and built his career at American Income Life Insurance before catching the startup bug in 2002. Dean has recently been an advisor and helped raise funding for Seattle-area companies like NodeLogic Networks, BioPassword (now AdmitOne Security), PayScale, and LINQware.

Members of Dean’s local chapter of Keiretsu Forum have invested more than $47 million in 74 Northwest companies, as of January 2009. He says the size of deals has tended to be $500,000 to $3 million per company in a typical Series A round (although those were almost certainly before the recession hit). In terms of investment philosophy, he says members shoot for a hit rate of 6 or 7 out of 10 companies getting a 2-5X return. The main goal of the forum is to bring a structured approach to angel investing, which Dean says is often thought of as a big, mysterious thing. “We act as a group even though we all invest,” he says. “The majority of investors are serial entrepreneurs.”

Just last week, Keiretsu Forum Northwest announced some prominent new members, including David Anastasi, the former CEO of Bellevue, WA-based Captaris (now part of Open Text); Bryce Fisher, former defensive end for the Seattle Seahawks, now into commercial real estate; and Steve Gahler, a vice president and station manager at KSTW-TV.

Dean says his chapter sees 50 to 100 inquiries a month, which get narrowed down to two to four companies that are then screened at investor forums. There is a $6,000 fee to present. The companies that apply tend to break down into about 50 percent tech, 26 percent consumer goods and retail, 6 to 8 percent sustainability and cleantech, and 12 percent real estate (with the rest miscellaneous).

As for his take on investing in the Northwest, Dean says, “We’ve never lacked entrepreneurs, and never lacked capital. But there’s a huge disconnect between the two.” He points out that Keiretsu has been successful in the Northwest in part “because of pulling deals from the Bay Area” and working together with other Seattle-area investors. For example, he points to Seattle-based Earth Class Mail, which raised a large Series A round ($13.3 million) in early 2008 from Keiretsu Forum members and Bellevue-based Ignition Partners.

But there’s no question the recession has hit angel investing particularly hard. “Last summer, we thought we’d have lots of members not renew,” says Dean. But that didn’t turn out to be the case. The number of deals Keiretsu looks at did decline between August and March, but Dean says he has seen an uptick in the last 90 days, and also an uptick in Keiretsu’s membership—it’s now up to about 250 members in the Northwest, counting Washington, Oregon, and Idaho.

Dean has no illusions about the prospects of a broader economic recovery, however. “Between now and September will be the telltale sign of what happens,” he says. “I think this fall will be fine.” As for capital liquidity and exits, he says, “I don’t see it happening for 12 to 18 months.”

I pressed him a bit about the tendency for local investors to become more conservative in the current climate. Asked what’s really at stake here, Dean says, “Angel investing is as high a risk as possible, but it is the future. We’re all investing for a big return. That will only happen if people are thinking big.”

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[[Updated: See editor's note below.]]

Founder Collective, a new seed-stage venture fund in Somerville, MA, has received total investments and commitments of $30 million from limited partner investors, Eric Paley, a general partner of the firm, told Xconomy in an e-mail. Yesterday the firm filed papers with the SEC that show that it has raised $24.4 million out of a planned $50 million in investments, but Paley noted that the group has garnered additional financing committments since the papers were finalized.  The firm was founded by Paley—a former senior advisor to IDG Ventures (now Flybridge Capital Partners) and the co-founder and former CEO of Brontes Technologies, which was acquired by 3M—and by David Frankel, the co-founder of The Internet Solution.

[[Editor's note: This news brief was updated to report that Founder Collective has recieved additional investment commitments for its seed fund since filing documents with the SEC.]]

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Search is hot again. Just when you thought Google had everything figured out, along comes Microsoft with its new search engine, Bing. This upstart effort may not supplant the search king, or even compete with it all that seriously, but it will certainly make things interesting for a while.

Even more interesting, though, is the batch of new technologies and businesses bubbling up around the edges of traditional Web search. Take software that helps you understand relationships between people, places, and products online. Or Web services that try to collect content you are interested in, let you share it with others, and keep you up to date with the latest news about people you know. Google itself is getting into the act with its new Wave tool, which integrates e-mail, instant messages, documents, wikis, tweets, and other social media—all the comforts and stresses of modern life, really—in one place.

All of this raises the broader question of how we’re going to deal with all these different data streams on the Web and use them to improve our work and personal lives, rather than waste time doing an endless (and growing) number of searches for relevant information. To hear more about this emerging space, Luke and I talked recently with one of the field’s leading investors, Vulcan Capital managing director Steve Hall. (See also our wider-ranging interview with Hall and Vulcan Capital president Chris Temple here.)

In recent years, Hall has led investments in companies like ZoomInfo, Radar Networks, Evri, and Gist (the latter two are in Seattle), which all play in an arena he calls “information discovery and the intelligent Web.” Hall emphasized that “Google is not the be-all, end-all for how we discover information.” Indeed, in a deep dive into the technology and business opportunities of this fast-moving space, he talked about how companies can “rewire the Web” to be smarter, how to beat today’s search engines and help people find information more efficiently, and why World Wide Web pioneer Tim Berners-Lee is wrong about the “semantic Web”—his original notion that computers will someday be able to understand all kinds of content and transactions online, if we help them by tagging things like photos and documents with descriptions of their meaning.

An edited account of our discussion follows:

Xconomy: What is your background in online search and the intelligent Web?

Steve Hall: One of the themes I’ve been involved in, really since I started doing venture in 1998, has been information discovery, search, and evolution of Internet data. The first venture deal I ever did in 1998 is now called About.com. It used to be called The Mining Company. At the time, our thesis was that the amount of data on the Web is going up and to the right. It’s hard to find the needles in the haystack. Yahoo, Excite, and Lycos were portals, a main interface to the data, but they were largely a taxonomy directory of websites. You didn’t have very good needle in the haystack searchability. You had AltaVista, which had started, but didn’t have real relevancy control to it—there was no quality output on AltaVista.

Our thesis at the time was if you had humans, experts on many topics, comb through the …Next Page »

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New England is indeed a fertile ground for new technologies in healthcare and the life sciences, but the number of VCs doing the early and risky stuff is dwindling. We will probably see the number of start-ups in our space dive this year. Keeping to ol’ Darwin’s creed of adaptation, we simply have to find new and creative ways to keep early-stage VC alive, and to redefine roles and responsibilities among the inhabitants of the healthcare ecotope, or we will all perish together.

Yes, big biotech and Pharma have moved into earlier-stage deals to access breakthrough technologies—‘they sneak a peek,’ so to speak. But on the other hand, they spend tremendous amounts of cash to buy each other, or to purchase their own outstanding shares to prop up share prices, and I am skeptical that they will have the persistence and vision, the personal engagement, and the relationships to budding or serial entrepreneurs required to drive innovation in the long run. ‘Great ideas often start in small garages,’ and the big guys simply aren’t equipped to play in this space. Both mid-cap biotech and large Pharma rely on folks like us to take the earliest and highest risk in the innovation game. We work diligently, and more often than not fruitlessly, to search out what’s really innovative, a bit crazy, and differentiated.

It has been said in these challenging times that there are too many VCs, but whatever one’s opinion is, they are undoubtedly an essential part of the life sciences ecosystem. At the end of April, the National Venture Capital Association’s annual meeting here in Boston and Xconomy’s Biotech Forum offered glimpses into the function of the life sciences VC as a major driver of innovation-but we were preaching to the choir. VCs have to make a credible and high-profile case to the public and to Washington, for that matter: we are not the same as revenue-stage private equity, hedge funds, and leveraged buy-out! In fact, we are being hurt tremendously by being put into the same bucket as proposed in the current debate on taxes and financial industry regulation. Doing so simply takes the risk incentives out of innovation opportunities and will force the ecotope to grind to a halt.

In short, I believe life sciences investors must take an oath to adhere to the following principles:

• Keep the spirit of venture alive and seek out the new and crazy stuff. Don’t follow the crowd—being alone could either mean that you are crazy, or that you are first!
• Always take the opportunity and time to explain what ‘venture capital’ is to people who either don’t know or confuse VC with traditional banking. Explain the difference between equity and debt.
• Work with your entrepreneurs to help explain the VC/company relationship. They are your best cheerleaders.
• Help your academic community technology transfer efforts. Volunteer to listen to and critique researchers and budding entrepreneurs. Use the same degree of thoroughness as you employ for investment due diligence.
• Find a mechanism in your partnership to do seed investments. Help early-stage ventures find and address the killer issue or experiment as early as possible.
• Become a notch more political—know the impact of venture capital on our economy. Work with community leaders and your fellow VCs to find constructive ways to further entrepreneurship and early-stage venture.
• Keep a steady dialogue with the buy-side to understand what their needs and issues are. Check your assumptions regularly.

While not an all encompassing solution to the challenging times ahead, the innovation industry as a whole stands to gain when venture capital not only stays the course, but pushes to become a more integral and vocal part of the entire life sciences ecotope.

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It feels like the dawn of a new era at Vulcan Capital. The private investment group, which manages billionaire Paul Allen’s personal and professional holdings, has been very private—until now, it seems. Coming off a series of high-profile successes (like BiPar Sciences, a $100 million-plus return on $13 million investment) and failures (like the Charter Communications bankruptcy), Vulcan Capital looks to be opening up a bit to the innovation community and the general public.

From the outside, at least, this is a big deal. The Vulcan Capital team has backed some of the most interesting early-stage startups around the country, and around Seattle—including AltaRock Energy, Evri, Gist, Redfin, and Smith & Tinker. But they’ve never been ones to talk to the press about exactly what they’re doing and why.

So Luke and I were excited when Vulcan Capital hosted our visit to company headquarters near Seattle’s International District this week. We sat down with Chris Temple, Vulcan Capital’s new president, and Steve Hall, the managing director who heads Vulcan Capital’s venture investments (he’s also one of the judges for Xconomy’s upcoming Battle of the Tech Bands).

Hall, who could almost pass for a cleaner-cut Mark Wahlberg, has been a venture capitalist since 1998. He got his start with Prospect Street Ventures in New York, where he funded About.com and a number of other successful Internet software startups. Before that, he was an entrepreneur and an attorney. Hall originally came to Seattle in 2002 to work with Allen. Meanwhile, Temple arrived at Vulcan last year from Tailwind Capital in New York, and was promoted to president of Vulcan Capital just this month.

In a rare in-depth interview, Hall and Temple gave us a sweeping overview of the Vulcan investment strategy—with some deep dives into various technologies and specific companies (more on that soon). They told us Vulcan Capital’s venture team has invested $115 million in 20 companies since 2003, and has helped bring in $700 million of additional capital from other investors. They touched on the “new” Vulcan vs. the “old” Vulcan, the importance of early-stage investing and forming syndication partnerships with other venture firms, and what the real opportunities are in the Seattle area and beyond. “This is one of the first conversations, since I’ve been part of the venture effort, that we’ve said what we’re doing, how we’re doing it, and why we’re doing it,” Hall says.

Here is an edited version of our interview:

Xconomy: How is it different being an investor with Vulcan Capital, as opposed to a venture firm with a network of limited partners?

Steve Hall: I’ve done both, it’s very different. This is Paul Allen’s investment vehicle. It’s his money. Every one of these deals I’ve done since I’ve been here, Paul has been integrally involved with the decision. Not only getting involved in the first place, but probably 50 follow-on transactions over the course of the years. I view that as a great benefit to us. You have someone with a diverse worldview, with many, many areas of technology, a strong understanding of science and bioscience. His intellectual curiousity and understanding of such a wide range of disciplines is very helpful, particularly as we set up to invest in early stages.

I view working with a single investor as a great value add, when they’re actively involved in the decisions. He’s not, in most cases, sitting on the boards of these companies or in product sessions with these companies, but he’s certainly involved as an investor with us. In a couple of cases, like with Evri, which we incubated here, Paul was involved in the conceptual level, whiteboarding what it was we were going to build there. Similarly, we incubated Gist, and Paul was involved.

Chris Temple: I was introduced to Paul by my predecessor, Lance Conn, who recruited me out here. It’s obviously an interesting time to be changing jobs. Most of my background is in private equity, partnership based firms, not broad investment portfolios in large family offices. Paul is a fabulously complicated, smart, interesting guy. He’s got so many different elements and perspectives.

To think about it from a VC perspective, you’ve got a guy who knows how to code software. He’s a guy who designed user interfaces for commercially successful products, foresaw the PC revolution, and is a consumer and investor, rolled all into one at the table. It’s not like you sit down across the table from one person who has one perspective. In Paul’s case, he has all those experiences rolled into one. All in all, it’s rewarding, but it can also be challenging. In that, he can follow up a question about how or why a piece of software was engineered this way, or how it should look on the screen that way, as to how you’ll roll out a product and get it adopted through a certain distribution channel. There’s no way to get soft goals.

X: How much of the Vulcan Capital portfolio do you allocate towards venture, versus other kinds of asset classes?

CT: There’s not a hard and fast rule. There are three legs to the stool at Vulcan Capital. Venture is one of them. We have a more-mature-company, private equity effort, and we have what we call …Next Page »

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Here’s a minor setback for the venture capital industry in Boston. Greylock Partners is relocating its headquarters from the Boston area—where it got started 44 years ago—to Silicon Valley, the firm announced this morning.

Does this mean that the Hub is losing its edge as a haven of entrepreneurial activity? That was the question raised in this piece today about the Greylock move in the New York Times tech blog Bits. At least for Greylock, Silicon Valley was a more appropriate place for its main office, because three quarters of the firm’s portfolio companies are on the West Coast, Greylock partner Bill Helman tells Bits.

(The Bits piece also points to Xconomy’s recent interview with Paul Graham, who revealed in January that Y Combinator will stay in Silicon Valley year round and no longer divide its startup incubation activities between Mountain View, CA, and Cambridge, MA.)

“Silicon Valley is a hotbed of entrepreneurial activity in Greylock’s two key areas of focus: enterprise software and systems and consumer Internet,” David Sze, a Greylock partner in Silicon Valley, said in a statement.

Greylock says it plans to keep an outpost in Waltham, MA, and continue to invest in startups in the Boston area. But its back office, administrative functions, and planned growth will be at an office under construction in Menlo Park, CA. The firm began operating in Silicon Valley in the early 1980s and has an office in San Mateo, CA.

Greylock’s planned move may be another vote for social media activity in Silicon Valley. The firm’s portfolio of West Coast-based social media firms includes Facebook, LinkedIn, and Digg, to name just a few.

There’s no debating that Silicon Valley has a clear lead over Boston on the social media front, but Bob recently pointed out in his new column The X Factor that there are signs of viability in the social media ecosystem in and around the Hub.

[Update, May 19, 2009, 11:35 a.m.: Scott Kirsner of the Boston Globe spoke with Greylock's Bill Helman and has posted interview outtakes on his blog. "We have a responsibility to our limited partners," he told Kirsner---meaning, presumably, a responsibility to be headquartered closer to the center of gravity of the firm's portfolio companies.]

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Seattle-based Alliance of Angels officially announced its new $4.25 million seed fund this week, which it will invest in early-stage companies alongside individual investors. The Alliance of Angels’ Marty Smith first revealed the fund at the Technology Alliance’s annual luncheon in Seattle on May 1.

“AoA continues to actively invest in great local companies and now will be able to put even more money to work,” said Dan Rosen, chair of the Alliance of Angels, in a statement. “With this additional vehicle available to benefit both investors and entrepreneurs, AoA is poised to take angel investing in the Pacific Northwest to a new level.”

Alliance of Angels said it would make seven to 10 investments per year with the new fund, over a period of three to four years. To qualify for investment, startup companies need to make it through the Alliance of Angels’ screening process, as well as secure at least $100,000 in funding from two or more AoA members. Eligible companies will be vetted by Peter van Oppen of Trilogy Partnership, Tim Porter of Madrona Venture Group, and angel investor Gaylord Kellogg.

The new fund, which is managed by executive director Emer Dooley of the University of Washington’s Foster School of Business, should help bolster the Alliance of Angels’ recent track record. The angel organization has made 80 investments in the last two years, and five companies it has funded were acquired in 2008: Cleverset, Shelfari, Insitu, SnapIn Software, and Coffee Equipment Company.

Incoming Alliance of Angels program director Greg Huey, who started in his new position last week, said the seed fund “will have a lasting, positive impact on the entrepreneurial ecosystem of our region.”

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Prism VentureWorks in Needham, MA, has given up for now on fundraising for its sixth venture fund, PE Hub reported this morning. The firm had hoped to raise $275 million for the fund, but expected commitments from large institutional investors such as the New York School Teachers’ Retirement System and the New York City pension fund haven’t materialized, according to the report. Prism told PE Hub it still has money to invest from its $250 million fifth fund.

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Every deal has a back story you can learn from. In the case of Gist—the Seattle software startup that announced yesterday it raised $6.75 million in Series A funding from Foundry Group and Vulcan Capital—the key connection came about because of a timely combination of blogs and social networks. Which is fitting because Gist is all about managing those kinds of information streams, which we’re all increasingly being bombarded with, so as to help people build better business relationships.

Gist released its product in beta trials last September. It’s basically a way to put all your information about your business contacts—e-mails, blogs, tweets, articles in the media, and so forth—in one place, with an efficient, user-friendly dashboard interface. Founder T.A. McCann says his target customers fall into three camps: executives and salespeople who spend a lot of time building relationships; “super networkers” who need to keep track of many different contacts; and the “Twitterati” who are the earliest adopters of social software.

An investor like Brad Feld of Boulder, CO-based Foundry Group fits in all three categories. Last fall, managing director Chris Wand from Foundry reached out to Gist about its product and set up a call with McCann. “Our plan was to put our product out there, get feedback, and raise money in the early part of [2009]. Foundry cares a lot about the ‘Implicit Web,’” McCann says, referring to websites and services that aggregate and synthesize personal information from the Internet. “They blog about a lot of their themes. These guys are switched on, they’ve thought about it.”

In November, the Defrag 2008 conference took McCann to Denver. “I went on Twitter and read more about Foundry,” says McCann. “I found out Brad’s a big runner. I said, ‘Hey, I’m going to Denver, I like running, can you recommend a place to run?’” Feld suggested they meet up at the hotel for a run. They put out a general invite on Twitter, but they were the only ones who showed up. Over the next couple of days, McCann and Feld spent three hours running together on local trails, shooting the breeze about running, Gist, Foundry Group, and other topics. “That only happened because Brad published that he likes to run. And because of Twitter,” McCann says. “That afternoon, we showed [Gist] to Foundry. He and the other guys started using it.”

By January, McCann was well into the fundraising process. (Vulcan Capital previously had seeded Gist.) “I was raising money, and I’d use Gist all the time,” he says, adding that the software allowed him to prepare for meetings quickly, keep track of what info he’d sent to whom, and generally be better informed about each person he met. McCann talked with many venture firms around Seattle and elsewhere.

But one thing in particular stood out about Feld and the Foundry team: they really …Next Page »

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Two weeks ago, I was in Atlanta for the annual Angel Capital Association (ACA) conference and, this past week, here in Boston for the annual National Venture Capital Association conference. Depending on whom you asked at both conferences, it was the best of times or the worst of times, most likely depending on whether or not they had money to invest. In fact, NVCA conference chair, Kate Mitchell, even kicked off the event with that opening line from Dickens’ book.

That said, both events were generally positive-you’ve got to be an optimist to be involved in entrepreneurship-and both had a roll-up-your-sleeves, let’s-make-things better outlook. Overall, the mood and energy was somewhat more upbeat in Atlanta than in Boston, as characterized by ACA Chairman John Huston’s welcoming remark and call to action, “Thank you for supporting capitalism!” which drew a lot of applause. Perhaps it was because individual investors don’t feel obliged to go to conferences and the pessimists just stayed home. Maybe this part of the venture investing market is still so young that that there’s a lot to be learned and done.

The hot topics among angel groups were on fund formation, increasing deal flow, deal structuring, and how to syndicate deals—while top of mind with venture capitalists was how (or whether) to invest in the current climate. Kudos in particular to NVCA President Mark Heesen for making the trip down to the ACA annual meeting for the second year in a row to build bridges. He participated in an excellent, frank discussion about how venture firms and angel groups can collaborate better and more frequently. Attendance was about the same as 2008, with around 350 people present. Certainly, a lot of angels have had their portfolios hit hard by the recession and have cut back on investing, but at least this crowd was looking forward.

The NVCA meeting had nearly twice as many people, just over 650, but that was down by maybe half from last year when the conference was in Silicon Valley. To be fair, travel logistics from the West Coast to the East Coast for a mid-week conference may have also played a role, but the mood was still different.

NVCA does a vastly superior job to ACA when it comes to inspirational messages, but a lot of them provided a sober contrast between what venture capital has achieved in the past and what might no longer be possible in the future unless there is structural change in the market. Outgoing NVCA Chairman Dixon Doll’s opening comments included a call for action to the federal government: “Unless we are willing to pull out all the stops, we’re in danger of heading down a slippery slope.” He then proceeded to unveil NVCA’s “Four-Pillar Plan to Restore Liquidity,” which you can read by clicking here.

Both organizations had high concerns about liquidity and availability of capital. At ACA, a lot of the discussion revolved around state and federal tax credits to increase the availability of capital for individual investors. NVCA provided a lot more data and structure, as noted above in the call to action, showing that with liquidity down so much over the past 10 years, the cycling of capital already is decreasing and is at risk of slowing even more.

To me, perhaps the most important issue centers on the fact that these two meetings happened in two different cities. Overall, both organizations still have a lot to gain from each other. In addition to Mark Heesen coming to the ACA conference, about a half-dozen ACA members-including yours truly-also were present at the NVCA conference because we are members of both organizations. But there could be far more overlap and dialog as well. Roughly two-thirds of ACA-member angel groups co-invested with venture firms last year. We have a lot of the same goals and cooperate and collaborate far more than we compete. No matter if you think it’s the best of times, or the worst of times, ultimately, it’s the entrepreneurs who benefit by having the players in the capital markets work more efficiently and effectively together.

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I am at the annual meeting of the National Venture Capital Association being held in Boston lastthis week. The tone was remarkably upbeat—but only for those firms with either a new fund or who somehow avoided making a lot of overvalued investments during the last few years. There was a lot of rhetoric about how/when/whether the world will improve, whether VC’s will make money in cleantech, and when LPs will begin to wade back into the asset class.

But I did learn a number of things I did not know when I woke up…

* Revenues at VC-backed companies accounted for 20.5% of the nation’s GDP

* VC-backed companies represented 8.6% of all employment

* There are 12 million jobs at public companies which were once VC-backed

* Once companies went public, headcount grew 92% (94% in the 1980’s, 76% in the 2000’s – not a great trajectory admittedly)

* There were 1,171 new VC-backed companies in 2008

* Unfortunately there were only 6 IPO’s in 2008 and 341 M&A transactions that same year

* It now takes on average 9.6 years to get VC-backed companies public (or 6.5 years for an M&A transaction)

* $4.5 billion is being spent now from the stimulus package on “smart grid” technologies

* One in three people have been meaningfully helped by VC-backed biotech companies (staggering)

* WalMart recently lowered the cost of generic drugs to $4 which they believe served to take more costs out of the healthcare system than any single act of healthcare legislation

* Shockingly this year the 65,000 annual H-1B visa cap was not hit in the first week of being available (not happened before) which speaks to the limitations instituted that foreigners are not able to displace US workers

* There is now great anxiety that the federal government will regulate the VC industry given the “concerns” that the VC industry may create something called “systemic risk”

The industry I work in has certainly been an engine of innovation and job growth; to hear some of the specific statistics only reconfirms that understanding. It also underscores the need to get the VC ecosystem back on track and should provide caution to the government to be careful on how it feels it needs to regulate the industry.

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