West metes East
Maria Cirino deliberately sought out a long-distance relationship. Jonathan Stern says that he stumbled into his.
Cirino and Stern, two founders of Boston area tech companies, each raised money from venture capital firms headquartered on the West Coast. It's not something that happens all that often. But when it does, both investor and investee can win.
Getting money from a top-notch firm on the West Coast gives a Boston company a golden child glow, because it isn't easy. ''We are exception-based Boston investors," says Doug Leone, a partner at Sequoia Capital in Menlo Park, Calif. ''We invest after a lot of due diligence and filtering. We're always asking, is it really worth investing in a company that's 3,000 miles away?" Leone's firm has invested in Netezza, based in Framingham; A123 Systems, a battery company spun out from MIT; and Cirino's company, Guardent, a security services firm acquired by VeriSign in 2003.
Cirino says that when she was raising money for Guardent in 2000, she thought back to an earlier career experience, working at a company funded by a mix of East Coast and West Coast VCs. ''I do think there is a benefit, if you can get the West Coast firms involved," she says. ''You get diversity of opinions. It promotes a healthy dynamic. It's not like having all East Coast investors, who all know each other and serve on the same boards together all the time."
Cirino also believes that West Coast investors are less risk-averse. ''Folks like Sequoia and Kleiner Perkins encourage you to swing for the fences," she says. ''People always wonder why it's so hard to build a really big company on the East Coast. I think some of it is rooted in the risk appetite of VCs here."
Stern, the founder of ZoomInfo, a Cambridge search company that until recently was known as Eliyon Technologies, says he wasn't trying to raise money last year. But Vulcan Capital, a Seattle-based VC firm, was kind enough to offer. ''It's like the famous joke," he says. ''When you go to the bank, you can only get a loan if you don't need it."
Steve Hall, the director of venture investments at Vulcan, says his firm's decisions to fund ZoomInfo and Ember Corp., another local company, weren't ''the result of a proactive initiative to go look at the Boston market." Instead, he says, Vulcan examines various competing start-ups that operate in a sector of the tech market that the firm expects to explode. ''We hope to find the best company in that space," says Hall. ''You always like to invest locally, because it saves you some travel time and you can be a bit more hands-on. But we're geography-agnostic."
Sometimes, a backer from the Left Coast will join the board of a Boston company; other times, investors opt to be more passive. In most cases, they don't invest in the first funding round for a start-up, since fledgling companies often require close supervision. And most invest alongside local venture firms they've worked with before.
Some Western VCs say they look east to diversify. ''We don't want to concentrate our entire portfolio in Silicon Valley," says Dave Crowder of Thomas Weisel Venture Partners, based in Palo Alto, Calif. ''Half of our portfolio is here, but the other half is in places like Boston, Seattle, Utah, and Southern California." Locally, Crowder's firm invests in Arbor Networks, AutoCell Laboratories, Exit41, and Application Security.
For the entrepreneurs who attract West Coast investors to their companies, there's plenty of upside. They get access to a different network of potential partners, customers, and employees. It's also helpful to have eyes and ears on the far side of the country. ''We have a pulse on the market, and we know about the other early-stage companies out here that are potentially competitive," says Hall at Vulcan.
Like Cirino, WorldWinner.com CEO Steve Killeen says he appreciates the mix of viewpoints he gets from having West Coast investors on his board. (Bob Kagle, a partner at Benchmark Capital, is on the board of Killeen's Newton company. Kagle was an early investor in a little auction site called eBay.) ''Bob has these great marketing ideas that he brings from his West Coast portfolio companies," Killeen says. ''We end up with a combination of financially-oriented investors from the East Coast who are interested in the operational efficiencies, with the West Coast guys who ask, what will the consumer audience need? What are the product and distribution initiatives we need?"
''If I had just the West Coast group, we'd only be focused on consumer needs," Killeen continues. ''And if I had just the East Coast group, it'd be, get your profit margins where they need to be and keep riding there. Having both perspectives makes for interesting board meetings."
Sometimes, bicoastalism can work the other way. David Epstein, a general partner at Crosslink Capital in San Francisco, says West Coast start-ups can benefit from East Coast investors. ''You love to get some East Coast presence," he says, for all the same reasons that East Coast start-ups appreciate West Coast investors.
The risks of a long-distance relationship primarily involve breakdowns in communication. CEOs have to put in extra effort to keep their West Coast investors apprised, whether the investor has a seat on the board or not. The cultural differences that Killeen describes can sometimes give rise to conflict.
And the possibility is always there that VCs will simply make bad bets, something that can happen at close-range, too. Kleiner Perkins Caulfield & Byers, the well-regarded California firm that funded Amazon.com, made the largest single investment in its history -- a reported $38 million -- in a New England company. That money went into New Hampshire-based Segway LLC, the company that makes Segway Human Transporters. As of yet, it hasn't paid out.
One last observation: while driving around Silicon Valley, you can't help but notice the satellite offices of Boston venture firms like Advanced Technology Ventures and Battery Ventures. But you don't see very many branches of Valley VC firms when roaming Waltham's Bay Colony Center, the roost of many local venture groups.
Prominent Massachusetts firms feel that it's essential to participate in the Silicon Valley ''deal flow," giving them the opportunity to look at prospective investments there. Bay Area firms don't feel the same way.
''I don't want to be a geographical snob," says Epstein, who earlier in his career worked for several Massachusetts tech companies, including Data General. ''But I guess we feel busy enough here without an East Coast office."
Cirino puts it more bluntly: ''Boston firms have to open West Coast offices. Valley firms don't."
Scott Kirsner is a contributing editor at Fast Company. He can be reached at email@example.com.