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Innovation Economy

Endeca founders steering search firm toward ‘business intelligence’ market

While about half of Endeca's business is selling technology to online retailers, its future may be in business intelligence. While about half of Endeca's business is selling technology to online retailers, its future may be in business intelligence.
By Scott Kirsner
Globe Columnist / January 31, 2010

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Steve Papa and Peter Bell hatched their idea for a company in Papa’s dorm room at Harvard Business School. Pals from their undergrad days at Princeton, Papa was in the home stretch of earning his MBA, and Bell was camping out on a futon in the small living room, helping to hone the idea that would become Endeca Technologies Inc.

The duo planned to take a different approach to Internet search. Unlike search engines that simply asked you to enter keywords and then presented a long list of results, Endeca would focus on “guided navigation,’’ helping you narrow down what you were looking for with a few extra clicks: A search for shoes might ask you to choose men’s or women’s, then your size, then casual or business. To make their new approach to information architecture tangible, they built a model made of clay, string, and coffee stirrers, which hung from the dorm room’s ceiling.

That was in 1999. Now, after just over a decade, Endeca has 400 employees in Cambridge and a dozen other offices worldwide. Of the top 100 online retailers, 42 use Endeca’s technology to make products more “findable’’ and lead customers toward the cash register, including Wal-Mart, Target, and Home Depot. Papa has raised about $75 million from venture capitalists (including one who was a professor of his at Harvard), and he is steering Endeca into the emerging marketplace for “business intelligence’’ tools that can help companies make sense of information they control (like marketing spending figures) and other information out on the Internet (like product reviews and blogger comments). But unlike another company that raised its first capital in 1999 - Google - Endeca is still privately held and independent.

“It’s one of the larger software companies in Boston that no one has ever really heard about,’’ says Mike Tyrrell, an investor at the Cambridge office of Venrock who serves on Endeca’s board. Though Endeca’s annual revenues are in the $100 million range, Tyrrell believes that “they have the potential to create a billion-dollar revenue company.’’

Most companies funded by venture capitalists are expected to have the lifespan of a dragonfly, not an elephant. After seven or eight years, venture capitalists tend to get itchy - they need to start raising their next pool of capital, or fund, and to do that successfully they need to show their report card to pro spective investors: how well have they done with their prior fund, usually by selling off start-ups or taking them public. Building a moderately successful, nicely profitable business - much like putting all your retirement money into a savings account - doesn’t generate sufficient returns for them.

And big companies have increasingly turned to start-ups for new products and technologies that they might have developed internally in the past, effectively doing much of their research and development activity through acquisitions. Endeca has considered two or three purchase offers since it was founded. (The company would not give details on the offers.) Asked why he turned them down, though, Papa says, “Most folks are shopping for something they can get cheap,’’ adding, “we’re interested in building something of significance.’’

But in 2008, Microsoft Corp. paid $1.2 billion - not an insignificant sum - for Fast Search & Transfer, a Norwegian company (with US operations in Needham) that, like Endeca, created search software for use within large companies. Several veterans of Fast have now gone on to start another Endeca rival, Newtonville-based Attivio Inc.

Endeca, meanwhile, hired an outside chief executive who didn’t prove an ideal fit; he left after a year. The company suffered through last year’s corporate spending freeze just like everyone else. And an early member of the technology team, Daniel Tunkelang, left the company last November to take a job with Google. But Papa and Bell both remain committed.

Papa says that about half of Endeca’s business is selling technology to online retailers, but he seems to feel the company’s future lies in the realm of business intelligence, helping companies blend, and then make sense of, information that lies in their own databases or floats around on the Web. Papa talks about it as the convergence of Internet-style search with business intelligence, which has typically been limited to looking for trends within internal databases.

“With more information in our lives, we need new ways to look at it,’’ Papa says, emphasizing that Endeca’s software can present data about sales or supply chains or new product development as charts, graphs, “tag clouds’’ of frequently occurring terms, or on maps.

But at a moment when many software companies are figuring out how to deliver their software over the Internet, paid for by inexpensive monthly subscription fees, Endeca hews to the old enterprise software model: its software is installed in corporate data centers, and usually purchased by a chief information officer writing a six-figure check. (Over the past year, Endeca reorganized its sales force to be more effective at sealing those kind of high-level deals.)

“That’s a much slower sale than software delivered as a service, and a more intensive deployment,’’ says Susan Feldman, an analyst at Framingham-based International Data Corp. “But Endeca has a lot of appeal for very large enterprises who want to get a real handle on what’s going on in their organization.’’

Papa says his 2010 campaign is ensuring that Endeca can help a new customer install the software and get “information visibility’’ within a week, and without requiring much custom software development to get it integrated with their systems. “You have to reduce the costs and complexity of considering something new,’’ he says.

Brian Walker, an analyst at Cambridge-based Forrester Research, notes that serving both business intelligence and e-commerce customers “risks some dilution, and brings up the question about what they’re focused on as a company.’’ Walker expects that morphing business intelligence marketplace “will be very competitive,’’ noting that giants like Oracle, IBM, and Microsoft intend to grab their share of it.

Papa says he’s confident that despite the $75 million put into Endeca thus far, “we’ll still be in the top 5 percent of returns on venture-backed companies.’’ But he says that he hasn’t been in a rush to get to the finish line. Too many companies allow the pressure to find an acquirer or go public cloud what’s best for the business, he says.

Papa seems to have found two exceptionally patient local investors: Tyrrell at Venrock and Felda Hardymon at Bessemer Venture Partners in Wellesley. (Hardymon taught a Harvard Business School course that Papa took.) “Would I like liquidity for this company? Of course,’’ says Tyrrell. “But I think being patient here is the right thing.’’

“There’s a structural problem in the venture industry when VCs have to sell their good companies early,’’ Hardymon says. “A great at-bat is something you have to treasure,’’ Hardymon says, adding that the company still sits on a large stockpile of cash.

“We’ve been investing in the technology and believing in the destination,’’ says Papa. “We’re in it to build something of consequence.’’

Scott Kirsner can be reached at kirsner@pobox.com.