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Innovation Economy

Investing further afield

Mass. venture capitalists now thinking globally

Email|Print|Single Page| Text size + By Scott Kirsner
May 4, 2008

Massachusetts venture capitalists are starting to rack up more frequent flier miles. A business that was once exclusively local - a decade ago, most venture capitalists adhered to the adage that they'd never invest in a company they couldn't drive to - is becoming global, fast.

Battery Ventures of Waltham is planning to open an office in Mumbai, India, this fall, and shipping one of its senior partners to Israel to help build a small team there. Earlier this year, Matrix Partners of Waltham raised $275 million from investors for its first fund dedicated to start-ups in China. Billionaire publishing entrepreneur Patrick McGovern, founder of the Boston company International Data Group, is planning to announce a $150 million fund for Eastern European investments soon - but he no longer is putting new money into New England companies.

There's also been a tilt toward California at some local venture capital firms, like Greylock and Charles River Ventures, where the center of gravity had once been Massachusetts.

What's sparking the geographical shift, and what impact will it have on local entrepreneurs?

Venture capitalists raise money from investors they refer to as "limited partners" - wealthy families, state pension funds, or university endowments. Once they've collected the cash, their sole mission is to invest it in promising companies over the course of about a decade. Their choices help keep a region's innovation economy humming. And right now, in the technology sector, it's hard to find Massachusetts venture capitalists especially bullish about opportunities in their neighborhood. (Life sciences venture capitalists feel differently; more on that later.)

"It's clear to me that the opportunity set in the Northeast is diminishing," says Tom Crotty, general partner at Battery Ventures. "We did not rebound from the downturn of the bubble as well as the West Coast."

When Crotty looked at Battery's investing in New England companies recently, he found it had dropped by half in the five-year period between 2002 and 2006, when compared with the previous five years. "That wasn't because we made any strategic decision to do so," he says. Rather, the firm was just "chasing better growth opportunities" in California and outside the United States.

The economies of countries like India and China "are growing faster than ours, and the venture business there is still nascent, which makes it a good opportunity," says Tim Barrows, general partner at Matrix Partners. Matrix's fund dedicated to India was expanded from $150 million to $400 million late last year.

McGovern was the first foreigner to set up a venture capital firm in China in 1992; the firm now manages about $2.6 billion in the country. McGovern started a fund in Vietnam in 2004 and India in 2006. He plans to launch a new fund in a different country every year or 18 months; under consideration next are Russia and Brazil. "We find these developing markets very attractive," he says. "The GNP growth is high, and the government has invested a lot in technical education. They want to see the entrepreneurial sector of their country's economy move up."

But though McGovern planted the seeds for an investment group called IDG Ventures Boston in 2001, he no longer has a stake in the region. The partners at that firm split off from IDG in March. Though McGovern said the team had delivered better than average returns, he adds, "We didn't think the returns were competitive with the returns we could get elsewhere." Tellingly, he is participating in the creation of a new $180 million IDG fund in San Francisco.

Even some relatively new venture capital firms based in Boston no longer feel compelled to invest close to home. Among the recent investments by Spark Capital, a Newbury Street firm founded in 2005, are companies in Los Angeles, New York, and London. "We decided to be located in Boston, but do the best deals we can find around the country," says founder Todd Dagres.

That geographical wanderlust isn't escaping the notice of local entrepreneurs. "I've never seen Boston VCs traveling for deals as much as I have over the last one or two years," writes David Cancel via e-mail. Cancel was part of the founding team of Compete.com, a Web analytics company that was recently sold; he's now chief technology officer of Lookery.com, a company that helps marketers target consumers online.

But the picture is different when you talk to investors who focus on the life sciences industry, rather than high-tech. There, venture capitalists feel like the shelves are still well-stocked locally.

"This is the most fertile time I've ever seen," says Polaris Venture Partners cofounder Terry McGuire. "Our partners wonder if it's a distraction for us to do offshore deals when there's so much happening here."

Similarly, "Boston is still the top recipient of funding from the National Institutes of Health, and there's a steady supply of entrepreneurs who've built companies before," says Michael Lytton, a general partner at Oxford BioSciences Partners in Boston. "We'd just as soon take the T to Kendall Square for a deal than take a plane to Europe."

Data about where Massachusetts venture capitalists are putting their money aren't yet setting off any alarms - but they are likely a lagging indicator. According to Thomson Reuters, over the past five years, Massachusetts venture capital firms have invested just over $1 billion a year in Massachusetts companies, though the number spiked up to $1.4 billion in 2007.

But those numbers don't yet reflect the creation of new funds like IDG's $100 million South Korea fund, set up last October, or Matrix Partners' new China fund, which hasn't yet been officially announced.

"To some extent, setting up in India and China and Israel is kind of an admission that the backyard isn't as fertile as it used to be," says Dagres, formerly a partner at Battery Ventures, referring solely to technology investing. "Those are risky places to go."

No one expects it to get easier for entrepreneurs to find funding. As venture capitalists begin thinking globally, hometown company-creators are suddenly being compared with entrepreneurs with similar ideas in Beijing and Bangalore.

"You want to make sure you're betting on the best technology and the best team," says Jeff Fagnan, a general partner at Atlas Venture in Waltham.

"It used to be, 'What's going on on the West Coast?' Now, it's, 'Let's talk about what's going on in India and Eastern Europe.' We're benchmarking the company and the idea much more globally than we ever used to."

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

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