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Innovation Economy

New seed stage investors are finding fertile ground in Internet start-ups

Rob Go (left), Lee Hower, and David Beisel founded NextView Ventures, a Cambridge firm that provides seed stage funding. Rob Go (left), Lee Hower, and David Beisel founded NextView Ventures, a Cambridge firm that provides seed stage funding. (Nextview Ventures)
By Scott Kirsner
Globe Correspondent / January 16, 2011

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Even if you’re not a regular user, you have no doubt heard of websites like LinkedIn, PayPal, About.com, and eBay Inc., which have transformed the way we manage our careers, gather advice, and buy schlock we don’t need. A trio of investors with experience building those sites are launching a new Cambridge-based investment firm, NextView Ventures, to try to create a new generation of equally successful Internet businesses.

They are raising about $15 million in capital to help entrepreneurs get going. NextView is just one of three new seed stage investment groups, which put money into companies at the earliest stages, taking root around the Boston area.

“We really saw a gap in the ecosystem when it came to seed stage funding,’’ says David Beisel, one of the founders of NextView.

Another of the founders, Lee Hower, says many West Coast companies specialize in early investments in unproven start-ups, but, “We felt the East Coast was really underserved by seed funds.’’ Hower was part of the founding team at the professional networking site LinkedIn, just after leaving the online payment company PayPal. All three NextView founders are in their early 30s.

Two other seed firms emerged last year: Boston Seed Capital, founded by software entrepreneur Nicole Stata, and Project 11 Ventures, founded by Reed Sturtevant and Katie Rae, both executives who formerly worked at the Cambridge office of Microsoft Corp. Project 11 is hoping to raise about $5 million. Boston Seed Capital based in Wellesley hasn’t settled on a target number.

So what is the appeal of seed stage investing?

Few things are more risky than investing anywhere from $25,000 to a couple hundred grand in a company that hasn’t finished its product yet, or landed its first customer. Often, the founders are first-time entrepreneurs, sometimes fresh out of school.

“If you’re going to get involved early,’’ concedes Sturtevant, “you don’t have a lot of evidence that the business plan will work, and you can’t rely on standard due diligence, like talking to people who are using the product.’’

But seed stage investors say there is a kind of Internet start-up that can get off the launchpad, and perhaps even achieve profitability, with less than a million bucks in funding. In businesses like mobile phone applications and online advertising, the new seed stage investors think there is an opportunity to build thrifty and nimble start-ups that could be acquired in relatively short order by slower and less innovative big companies, providing a nice return.

Some of the companies in which seed stage firms have invested sound plausible, others a bit out there.

NextView has put money into ThredUp Inc., a site that enables parents to swap boxes of clothing their kids no longer wear, charging $15 for every trade. ThredUp was founded by James Reinhart, while he was earning a pair of master’s degrees at Harvard.

Another NextView-backed firm, Providence-based Swipely Inc., enables you to make your credit card transactions public online, via Facebook or Twitter. If you dine at a new restaurant, for instance, you can let friends know that and share your star rating. (You can, of course, censor purchases that you might not want others to know about.)

Boston-based PeerTransfer Corp., backed by Project 11, aims to make transferring money between international bank accounts cheaper. ScriptPad Inc., based in Colorado, wants to prod doctors to use mobile phones or tablet computers, rather than paper pads, when they write prescriptions for patients.

Among Boston Seed Capital’s first few investments are Airside LLC of Washington, a start-up that makes it easy for travelers to display airline boarding passes using their mobile phones, and Krush Inc. Krush’s website, not yet launched, would let users flip through hundreds of products to highlight ones they like best, or “crush.’’ Users’ feedback, in aggregate, could be useful to manufacturers launching new products or retailers selling them, and the site could eventually serve as a kind of online focus group for new products.

NextView and Project 11 are positioning themselves as especially accessible to young entrepreneurs who might still be wrapping up university studies, even as they build their first companies. NextView’s Beisel founded Web Innovators Group, which brings together roughly 500 members of the tech community every few months in Cambridge to see demos of new products. And Rae, the Project 11 cofounder, is the newly named head of the TechStars Boston program, a kind of three-month finishing school for entrepreneurs that focuses on building prototypes, talking to prospective customers, and presenting to investors.

“There was a time when investors could sit on Winter Street in Waltham and entrepreneurs would come to them,’’ says Rob Go at NextView. “I think now, you have to contribute and participate.’’

But seed firms face two big challenges in establishing themselves as fixtures in the local innovation economy. First, investors typically take an annual management fee of about 2 percent, based on the amount they have raised. On a $5 million or $15 million fund, that doesn’t provide much for office expenses, travel, and salaries. Second, if companies in which they invest turn out to need much more than a few million dollars, or not enough of their portfolio companies are acquired quickly, the seed firms run the risk of getting edged out of later rounds of funding because of a lack of money. That can mean the seed firm’s early investment gets diluted by much bigger investors who come in long after the business concept has been proven, or “de-risked,’’ as investors like to say.

All three of the new firms’ founders emphasize their experience building technology companies, as opposed to extensive track records as investors. As for helping start-ups to become as successful as LinkedIn or eBay, NextView cofounder Go says, “It’s really not rocket science. You build a great product, and then you’ve got to turn your users into advocates.’’

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.