An entrepreneurial fairy tale

The first time I met Tim Healy, at a cocktail party in 1999, he was an associate at Commonwealth Capital, a Waltham venture capital firm.

The next time I bumped into Healy, at a cocktail party last month, the 38-year-old entrepreneur had taken his company, EnerNOC Inc., public on Nasdaq, and he was on his way to Manhattan to ring the stock market's closing bell.

What happened in the intervening eight years is an entrepreneurial fairy tale.

Healy left Commonwealth for business school in 2000, just as the dot-com party was breaking up. "I felt like there were a lot of things that I needed to have in my tool box," he says, "like understanding why a company should be leveraged in a certain fashion, or the way you price direct sales versus indirect sales."

Healy went to the Tuck School of Business at Dartmouth, where he'd also been for his undergrad. In the first week, he met David Brewster, a classmate who'd worked in the energy business, most recently for Beacon Power in Wilmington. Within a few weeks, the duo were brainstorming about energy-related businesses they might start. When Healy's father, who had spent his career at United Technologies developing and selling fuel cells, came up to New Hampshire for a visit, they floated their ideas past him and asked for advice.

Brewster and Healy honed in on "a seedling of an idea," in Healy's words: building virtual power plants. If they networked together enough small and midsize businesses, they figured, and got the companies to agree to let them adjust the firms' electrical usage, then that was a service they could sell to utilities and electrical grid operators. (The concept is known as "demand response.")

On a hot summer day, for instance, when the local grid operator is approaching peak capacity, a supermarket that was linked to the network might allow the company to remotely switch off 20 percent of its lights. Other participants in the network might have their own generation capacity, like an on-site diesel generator, and agree to switch that on for a brief time.

A grid operator will pay for those "negawatts," which reduce the strain on the system -- and the risk of brownouts or blackouts. The company pockets some of the money, but passes much of it to the supermarket at the end of the year.

"The second year-and-a-half that we were at Tuck, we were full-time entrepreneurs and part-time students," says Brewster, now 35. They entered the school's business plan competition, and won.

But getting the business off the ground presented a chicken-and-egg conundrum. Utilities and grid operators like ISO New England wouldn't be willing to buy negawatts from EnerNOC unless the company assembled its network of businesses, and could adjust their electrical usage at a moment's notice. But businesses didn't have much incentive to sign up with a company that didn't have contracts with utilities and grid operators.

"We were naive entrepreneurs," says Brewster. "We just figured that we're going to run through any barrier presented to us." They also felt that the idea had major economic and environmental merits. It's expensive to build power plants to handle periods of peak demand; no one wants them built near where they live; and even the cleanest plants release nitrogen oxides and carbon monoxide into the environment.

As they were getting close to graduation in 2002, they started talking to venture capitalists. It was a tough time to be raising money since most firms were still in the midst of shutting down and restructuring the companies they'd funded during the Internet heyday.

Most VC firms don't say "no" outright after they hear an entrepreneur's pitch. "We called it 'getting hit by the padded two-by-four,' " says Healy. "It's a soft 'no.' " They kept a list on a whiteboard of all the firms they'd met with, circling the few that had expressed interest in at least staying in touch.

But when it came to actually putting money on the table, Borealis Ventures, a firm with strong links to Dartmouth, wasn't interested. Neither were Charles River Ventures or Polaris Ventures. Even Healy's old employer, Commonwealth Capital, declined to invest; Healy says he offered to sell half the company for about half a million dollars.

"Nobody here knew anything about energy at the time," says Michael Fitzgerald, managing general partner of Commonwealth.

Talking to Brewster's mother one night on Beacon Hill, Healy said that he was ready to try doing something else. She told him he couldn't do that. "She told us, 'You guys are going to make this happen,' " Healy recalls.

After pitching about 37 venture firms, Healy found one, DFJ New England, that was willing to spend the time to learn about the energy sector, and eventually agreed to invest. But Healy and Brewster didn't like the DFJ's first offer, presented just before Christmas 2002. So they decided to give Scott Johnson, a partner at the Cambridge firm, the silent treatment. "We didn't talk to him for 14 straight days," Healy says.

"That had an effect of making me more interested and more intrigued," says Johnson. "Tim is a very savvy entrepreneur."

In early 2003, they reached a deal. A few months later, EnerNOC's founders and investors got together at Kingfish Hall in Boston to celebrate the acquisition of a rival, and their first big contract with ISO New England to supply negawatts. Healy estimated that it'd be worth $10 million to $17 million.

"That was relative to having earned a total of less than $100,000 from inception up to that point," he says.

Over time, the company raised $28 million in venture capital, and by the end of 2006, had grown its annual revenue to $26 million. In February, EnerNOC filed to raise $100 million in an initial offering, and in May, five years after Healy and Brewster graduated from Tuck, the company went public.

Though the original plan was to offer shares between $21 and $23, the stock went out at $26 per share. Healy and Brewster watched the start of trading at the Manhattan offices of Credit Suisse, one of their underwriters.

"We had tears in our eyes," Brewster says. Then they went to Times Square, where Nasdaq was showing a video about EnerNOC on its giant TV screen. The stock ended its first day at $31.

The two founders each sold $2.7 million of their stock on the day of the IPO, but Brewster still holds 1.4 million shares, and Healy about a million, according to SEC filings. The company still isn't profitable, but Healy says they're investing to acquire new customers -- and Wall Street seems OK with that.

"They're winning lots of business, and the expectations for profitability are in the 2009 timeframe," says research analyst John Quealy of Cannacord Adams. (Cannacord was one of EnerNOC's underwriters, and makes a market in the stock.)

On June 1st, Healy and Brewster hired a new employee with 39 years of experience working with the electrical utility industry, to serve as EnerNOC's senior director of market development. The new hire was Herb Healy, Tim's dad.

The new firm, Third Rock Ventures, is based in Boston, and working alongside Levin are former Millennium executives Bob Tepper, Kevin Starr, Lou Tartaglia, and Nick Leschly. The executives will emphasize their ability to provide hands-on management to start-ups, not just cash.

Greylock Partners of Waltham offered an assist in getting Third Rock into orbit, investing some of its own money and introducing Levin to several investors; Greylock's Bill Helman was one of the original investors in Millennium. Levin himself was a VC with Mayfield Fund in California before starting Millennium.

"Life sciences is an area of pretty mediocre returns for venture capital," says Helman. "They have a strategy for breaking out of that." Levin didn't respond to calls seeking comment.

Innovation Economy is a new weekly column that will focus on entrepreneurship, technology, and venture capital in New England. Scott Kirsner can be reached at kirsner@pobox.com.