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Innovation Economy

Revisiting the hands that fed the VC funds

Entrepreneurs visiting a venture capitalist to ask for money sometimes feel like kids asking Dad for an allowance. Ordinarily, they're not in the power position.

But every few years, Dad has to hit up Grandpa for a handout. When VCs spend through a given pool of money, they return to the investors who supply them with cash to manage the pension funds, university endowments, and wealthy individuals whom they refer to as "limiteds," or limited partners.

Just as fund-raising for entrepreneurs is a pivot point at which businesses will get a jolt of juice or struggle to hang on - fund-raising is a moment of truth for venture capitalists, too. Some will keep on truckin', and some will run out of gas.

"There's a tremendous amount of weeding out that takes place when younger firms go back and try to raise more money," says Josh Lerner, a professor at Harvard Business School.

The paradox of raising money for a venture capital fund is that it can in some ways be easier to do when you're starting a new firm from scratch than when you have a track record of several years that the "limiteds" can scrutinize. Two local VC firms, DACE Ventures of Waltham, which will be launched formally tomorrow with a $70 million fund, and Masthead Venture Partners of Cambridge, a $160 million fund that is a decade old, illustrate that.

"A track record can be a hindrance," Lerner observes, "when that track record is unspectacular."

David Andonian won't claim that it was easy starting DACE, even though he'd served recently as an entrepreneur-in-residence at Flagship Ventures in Cambridge, and as president of CMGI Inc., the Andover-based dot-com factory.

But after Andonian had a meeting with a managing director at Tudor Investment Corp. and began spinning his vision of investing small amounts in about a dozen next-generation Web start-ups, Tudor committed to being the primary limited partner in Andonian's new firm - provided he could attract money from other limiteds.

Connecticut-based Tudor even gave Andonian some spending money before he'd scare up cash from others. He invested that money in three local start-ups, including LocaModa Inc. which allows people to interact with large publicdisplays using their cellphones. "Our focus," Andonian explains, "is capital-efficient, early-stage Web businesses."

But as more established VC firms have grown bigger - Waltham-based Battery Ventures raised a $750 million fund this year - that's made it harder for them to invest small sums into fledgling companies, Andonian says. DACE's strategy will be to put about $5 million over time into each company, and then ideally sell it to a larger firm.

"You'll see us back some seasoned teams, and you'll see us back some first-time entrepreneurs," says Jon Chait, one of the other DACE partners. Tomorrow, the firm will announce its fifth investment, and its first outside of Boston. DACE is part of a group that is investing $10 million in ViTrue Inc., which helps businesses use the Web to solicit user-generated content, like home-made video ads for a product.

DACE isn't the only new firm on the block. Maria Cirino and Larry Begley recently launched .406 Ventures in Boston, a $125 million fund; and Jo Tango, formerly a VC at Highland Capital Partners, launched Kepha Partners, a smaller fund.

But as new VC firms open for business, an earlier generation of firms are returning to the well.

The roots of Masthead Venture Partners go back to Portland, Maine, where founders Steve Smith and Brady Bohrmann live. When the firm raised a $160 million fund in 2002, the partners opened up an office on the Charles River in Cambridge. Of that money, $100 million came from a Small Business Administration program designed to help foster entrepreneurship.

The firm's biggest successes were Bitpipe Inc., a company that collected analyst reports and technical white papers, and which was sold for $40 million in 2004; and Tacoda, an ad targeting start-up that was purchased by AOL in July for a reported $275 million.

But the partner who got Masthead involved with Tacoda, Rich Levandov, decided to move on. He's now the East Coast partner for Avalon Ventures, a VC firm headquartered in San Diego.

And in May, David Beisel, one of the rising stars of the Boston VC world, left Masthead to join Venrock, the 40-year-old firm that originally backed Apple and Intel.

Changes in the team can make limiteds skittish about investing in a second- or third-generation fund, says Lerner from Harvard.

Further complicating things for Masthead: The Small Business Administration program that gave them $100 million five years ago was discontinued in 2004.

"The participating securities program had been losing quite a bit of money, going way back to the dot-com failures," explains Dennis Byrne, a spokesman for the Small Business Administration.

That leaves Masthead trying to nudge its 17 remaining portfolio companies toward happy final chapters, and perhaps making one or two last investments using its remaining capital. Masthead partner Brian Owen says the firm is likely to wait until next year before it tries to raise a new fund. "Our thinking is to have a few more exits and then go raise a fund. We could start earlier without as much evidence and have it take a long time. But if you have more evidence, hopefully it goes faster."

Masthead won't be alone in trying to raise a new fund while kicking its dependence on the SBA. New Atlantic Ventures, based in Cambridge and Washington, D.C., is hoping to raise a fund of $200 million, while changing its name and affiliation. The firm originally was affiliated with Draper Fisher Jurvetson of Silicon Valley, and known as DFJ New England.

And Longworth Venture Partners hopes that a string of recent successes will help it raise a new fund in that same $200 million ballpark. Microsoft grabbed two of Longworth's portfolio companies, and one, Constant Contact Inc., which supports e-mail marketing campaigns, recently went public.

Innovation Economy is a weekly column focusing on entrepreneurship, technology, and venture capital in New England. Scott Kirsner can be reached at

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INNOVATION ECONOMY David Andonian, founder of DACE Ventures, discusses his new fund's strategy, and some of its early investments, at