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Nothing ventured, nothing at all gained

There are two topics most venture capitalists hate to discuss: companies they invested in that tanked, and companies they didn't invest in that soared.

The judgment of venture capitalists isn't perfect. They occasionally back proven entrepreneurs with terrible ideas, and decline to fund inexperienced entrepreneurs who turn out to be working on a breakthrough technology. At least two Silicon Valley firms passed on Google. In Boston, Oxford Bioscience Partners opted not to invest in Momenta Pharmaceuticals, and Atlas Venture said ''no thanks" to Idenix Pharmaceuticals, two biotech companies that went public this year.

''Most of the time, people will not fess up to having passed on Yahoo," says David Friend, a serial entrepreneur who is in the process of starting a venture capital firm, Orchid Partners, in Boston. ''But sometimes if you're in a bar late at night, and everyone's sloshed, they'll talk about the ones they said no to that turned into big hits."

Charles River Ventures, Greylock, and Advanced Technology Ventures all declined to talk to me about deals they'd dinged. Even Bessemer Venture Partners, which has a page on its website listing companies the firm chose not to fund (including eBay, Apple, Intuit, Lotus, and FedEx), wasn't eager to chat. But some VCs, even without the alcoholic assist, were willing to acknowledge that being human means occasionally missing an opportunity.

Paul Maeder, one of the founders of Highland Capital Partners in Lexington, fits into that group. He has made successful investments in companies like Avid Technology, Sybase, and CheckFree. But he wasn't persuaded by pitches from UUNet, the first commercial Internet service provider, and Ciena, a maker of fiber-optic networking gear.

''In both cases, the technical founders were unable to explain the economic significance of what they were doing," Maeder writes via e-mail. ''It's our job as venture capitalists to extract the threads of business meaning from the often tangled weave of technical achievements. When we fail to do so, it's very painful --in hindsight, of course." Ciena is now publicly traded; UUNet was acquired by MCI.

Ramanan Raghavendran, managing director at TH Lee Putnam Ventures in New York, was involved in the initial funding of E-Trade and Proxicom. But while at another firm, General Atlantic Partners, Raghavendran discovered an e-commerce entrepreneur who wasn't talking to any other investors at the time. He had the chance to buy almost a third of the entrepreneur's company for $5 million. But then one of the company's board members brought another firm into the negotiations, and the price was bid up. Eventually, when the bidding go too rich for General Atlantic, the other firm, Kleiner Perkins, won the right to put its money into Amazon.com.

Raghavendran says that General Atlantic typically invested in more mature companies, and the Amazon.com opportunity was an anomaly: ''I was going against the grain."

Similarly, he says, he was proposing an unusual deal in the early 1990s when he discovered an outsourcing company in India that was already publicly traded in that country. ''It was way out of the box for practically any US-based private equity firm," he says. ''I pounded the table a bit." But he couldn't convince his colleagues to invest in Infosys. The company's market cap at the time was about $100 million; today, it's $18 billion.

''For all of us, there are one or two opportunities that you look back on and you do think about," Raghavendran admits. But he says that the undone deals need to be seen in the context of the ones that do get sealed. ''If you've got a long list of deals that have done well for you, it's OK to miss the occasional whale," he says.

Todd Dagres, a longtime investor at Battery Ventures in Wellesley who recently struck out on his own, says personality clashes sometimes torpedo good deals.

At Battery, Dagres discovered Akamai Technologies at MIT and tried to bring in New York-based Venrock as a co-investor.

''We had a deal in principle," Dagres recalls. The last step was for the Akamai team to go visit the senior partners at Venrock. One of the partners got into an argument with Danny Lewin, an Akamai cofounder who died in 2001.

''Danny was a guy who didn't back down," Dagres says. ''If he thought someone was stupid, he'd tell them." The senior partner, whom Dagres won't name, decided to back out. ''It would've most likely been the biggest deal of their history," Dagres says.

Battery and Polaris Ventures wound up supplying Akamai's start-up capital.

Entrepreneurs can't help but take it personally when a VC isn't swayed by their idea; it's possible that those who suffer through numerous rejections might feel even more motivated to make their company a success. Call it the ''I'll-show-you-idiots" phenomenon.

But David Friend, a founder of FaxNet, Pilot Software, and several other companies, says that burning bridges isn't wise. ''It's a small world," he says. ''The time will come when you need them."

Friend has raised more than $125 million at his various start-ups, and he doesn't write off a venture firm if it passed on a previous deal of his. ''The good ones will always tell you why they're passing," Friend says. ''Often it's that they just can't get comfortable with the market. All these things are close calls. I don't think there are obvious slam-dunks in technology."

Friend says that FaxNet, a company he started that made it possible to send faxes over the Internet, was the hardest company he ever raised money for. Venrock and Greylock both passed. ''The investors who did come in on the first round made, like, 48 times their money back," Friend says. But the mild-mannered Friend isn't rubbing that in.

Frank Moss remembers making a pitch to Burr, Eagan, and Deleage, a Boston venture firm now known as Alta Communications. He was raising a second round for Tivoli Systems, and trying to get Burr, Eagan to agree to value the company at $13 million -- a significant jump from its first round valuation.

''I took my suit coat off and put it on the back of the chair," Moss recalls. ''It was a suit from Louis Boston. One of the Burr, Eagan partners said, 'You're trying to sell me this company the way Louis sells suits.' "

The firm decided not to invest. Tivoli later went public and was acquired by IBM for $743 million.

Howard Anderson, a founder of Battery Ventures, says he was once a technology consultant to Sears, Roebuck & Co., which may have passed up the best venture capital opportunity of all time. According to Anderson, Bill Gates once offered the venture capital arm of Allstate Insurance (which was then owned by Sears) the chance to buy 20 percent of Microsoft for $8 million. Allstate passed.

''Giving up $100 billion is something that doesn't happen often," Anderson says.

''To err is human, and to regret is human," writes Maeder at Highland. ''The trick is to learn from it once you're done with the self-flagellation."

Scott Kirsner is a contributing editor at Fast Company. He can be reached at skirsner@verizon.net. 

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