It’s Wednesday morning at Boston’s Beth Israel Deaconess Medical Center, a teaching hospital of Harvard Medical School. Crowded into a small laboratory space in the basement of the facility are Harvard professor John Frangioni, a specialist in oncology and radiology; Jeffrey Bussgang, a general partner with venture capital firm Flybridge Capital Partners; Michael Greeley, also a Flybridge general partner; and Jessica Rosenbloom, a longtime friend of Frangioni’s who is working with the oncologist as a consultant.
Frangioni has received nearly $32 million in federal grants to develop a system that combines the principles of chemistry and engineering to develop imaging technology to identify cancer in its smallest possible manifestation. “If we can see cancer at an earlier stage than we now can, we will have a greater likelihood of curing it,” says Frangioni, giving Bussgang and Greeley a brief orientation before they all put on Tyvek shoe covers and face masks to enter the lab. There, among cages of lab animals, bottles of precious colored fluids and an imaging machine, the Harvard professor holds forth.
The lab, he explains, has developed an intraoperative near-infrared fluorescence imaging system that relies on invisible light to find tumors, blood vessels and nerves during surgery. It has also developed numerous cancer- and disease-specific contrast agents that can be used in mapping sentinel lymph nodes in breast cancer and lung cancer, so that when surgeons are operating, they not only can see the cancer they are working on but can also detect “precancers” or other cancerous cells that may be nearby.
“The detection and treatment of cancer has not changed in the last 200 years,” says Frangioni. Doctors still rely on surgery to remove a cancer, he explains, but they never have enough evidence of whether a cancer has been fully removed — at least, not until after surgery. The technology that Frangioni has developed can result in better surgical outcomes and also reduce the number of unnecessary operations.
With a discovery as potentially game-changing as Frangioni’s, most scientists would run to venture capitalists to create a start-up or would license the idea to a big pharmaceuticals company and cash out. Not Frangioni. He would like to find a way to develop the technology fully and make it available to as many people as possible. “You can’t take $30 million of taxpayer money and sell the product that results from it back to the taxpayer at the highest possible price,” he says.
Rosenbloom, who brought the Flybridge partners to meet with Frangioni, is Bussgang’s sister. She is very familiar with his firm’s interest in working with experimental laboratory research — Flybridge’s current portfolio includes T2 Biosystems, a Lexington, Massachusetts–based company that is developing molecular diagnostic tests, and Taris Biomedical, another Lexington company, which is working on bladder diseases — and felt that Bussgang and Greeley should visit Frangioni’s lab. “I wasn’t trying to get them to invest; I was just trying to get them familiarized with what is happening in the lab,” she says.
Bussgang and Greeley, who both have MBAs from Harvard Business School, are no strangers to innovation or to cancer diagnostics. In 2006 they met Marsha Moses, a researcher at Children’s Hospital Boston who had discovered a biomarker in urine that allows doctors to detect the presence of cancer. The two worked with Moses to create a venture to develop and commercialize the research. They invested in the start-up, Predictive Biosciences, worked to license the technology and then put together a management team that would run the company, which like T2 and Taris is based in Lexington.
Five years later Predictive Biosciences is a real business. It has raised $60 million in financing and has a product on the market whose sales could bring in as much as $20 million this year. The company still has a long way to go but has more than justified the commitment the Flybridge partners made to Moses five years ago.
Flybridge, which was founded in 2001 and has $560 million under management, is a relative newcomer to the Boston venture capital scene. (Georges Doriot launched the U.S.’s first venture fund, American Research and Development Corp., in Boston in 1946.) However, it has quickly developed a reputation as a small but highly focused firm that concentrates on early-stage companies in four key areas: consumer infrastructure, energy, health care and information technology. It has also put together an impressive list of investors, including the endowments of Yale and Princeton universities and fund-of-funds firms Alta Advisers, Grove Street Advisors and Knightsbridge Advisers.
At a time when most venture firms, many with coffers full of unspent cash, have chosen to abandon early-stage investing because they need to deploy large sums of capital, Flybridge has concentrated on funding entrepreneurs with promising ideas and businesses — some with no products or revenue in sight. It is not surprising to see Flybridge partners wandering the research labs of Harvard and the Massachusetts Institute of Technology in search of deals.
The 42-year-old Bussgang, who joined Flybridge in January 2003 after working at two start-ups, is one of five general partners leading the firm’s investments. Author of the book Mastering the VC Game, an insider’s guide to the world of venture-backed company formation, Bussgang is an engaging communicator and far more accessible than most of his contemporaries at other firms. He has emerged as one of the stars of a new and rapidly changing venture capital industry.
“There are the megafunds, the index funds and those VCs who are essentially stock pickers,” says Barbara Piette, a managing principal of Boston-based Knightsbridge, which has investments in more than 100 partnerships, including Flybridge. “And then there are the company-builders. Jeff and Flybridge are company-builders.”
Flybridge has invested in 60 companies. The firm already has enjoyed some nice wins, including Brontes Technologies, a maker of 3-D imaging technology used in dentistry, which 3M Co. purchased in 2006 for $95 million. Flybridge, which invested $2.5 million, made $20 million on the deal. Earlier this year another Flybridge investment, social marketing company BzzAgent, was bought for $60 million by Dunnhumby, a U.K.-based consumer goods and retail analysis company (Bussgang’s firm doubled its money on a $5.5 million investment). “Three of my companies — DataXu, Cartera Commerce and SavingStar — are superstars in their markets and will be big successes,” says Bussgang of some of Flybridge’s current investments.
The business of venture capital has always had a two-part mission: to manage innovation and to create wealth. And as research and development budgets get trimmed and corporate R&D gets jettisoned, the need for venture funds that can finance and create the next Apple, Google or Yahoo becomes even more imperative, says Knightsbridge’s Piette. “You want a fund that can manage innovation, build real businesses consistently and contribute to wealth creation,” she adds.
The early success of venture capital in the 1970s and ’80s resulted in large part from the high rate of technology market growth that was fueled by harnessing the power of the microprocessor in numerous applications. “It was the ability of venture-backed companies to fundamentally improve the productivity of businesses, combined with rapid economic growth, that really created the success stories that raised the perception of venture capital as an asset,” says Robert Raucci, a New York venture capitalist and an investor in venture partnerships. “Venture capitalists demonstrated that there was money to be made through creating new businesses with products or services that boosted productivity in the workplace.”
The extraordinary success of such venture-backed companies as Apple, Genentech and Intel Corp. brought a flood of institutional capital into venture funds during the 1990s, growing the industry from less than $1 billion in assets in the early 1980s to more than $150 billion by the start of the new millennium. But by 2000 the U.S. economy was sputtering to a halt. The GDP growth rate had turned negative, and venture capital hit the doldrums. Funds launched in 1999 had median annualized returns of –4.44 percent through March 2011, according to Cambridge Associates. Funds launched in 2000 did only slightly better, with median annualized returns of –3.31 percent through March.
“Venture capital returns have deteriorated immensely, predating the current economic downturn and traceable to the rapid expansion in venture capital assets under management in the U.S. in the late 1990s, a figure that has fallen less speedily than one would expect, in part because of the long duration of funds and the general illiquidity of venture capital,” economist Paul Kedrosky wrote in a 2009 report for the Kansas City, Missouri–based Ewing Marion Kauffman Foundation, which was established to encourage entrepreneurship. But he added, “There is immense interest in its capacity to catalyze economic change in a rapidly restructuring economy, and limited partners continue to make commitments to the asset class.”
The nature of those commitments is changing, however. Stanford University, for example, wants “small firms with partners with lots of operational experience to work with companies at the very early stage,” said John Hennessy, its president, during a panel discussion at the National Venture Capital Association’s 2010 annual meeting. Theresa Sorrentino Hajer, a venture capital research consultant at Boston-based Cambridge Associates, says the life cycle of an entrepreneurial company has changed. These companies, especially those in social media, are maturing faster than earlier venture-backed enterprises. As a result, the window of opportunity to invest growth money is much smaller. Limited partners also are recognizing that many of the old-line venture capital firms are simply not equipped to manage the change.
So what is the ideal venture fund?
Knightsbridge’s Piette seeks venture partners who have an operating background, coupled with proven moneymaking investment ability, and can deal with investments the way the early venture capitalists did. She is looking for relatively small and close-knit teams rather than big, sprawling, bureaucratic partnerships. Most important, she is looking for hardworking, intellectually curious partners who are capable of making important decisions quickly. “How do you, despite the popularization of venture and the media attention, remain highly disciplined and focused on the old-fashioned business of truly building great, lasting companies?” Piette asks rhetorically.
Jeff Bussgang and his partners at Flybridge know a lot about building lasting companies. The son of a Holocaust survivor, Bussgang is a classic New Englander. A diehard Red Sox fan, he grew up in Lexington and majored in computer sciences at Harvard College in Cambridge, Massachusetts. Following his graduation in 1991, he took a job as an associate with Boston Consulting Group. Two years later he returned to Cambridge to get his MBA. At Harvard Business School, Bussgang was a Baker Scholar and graduated at the top of his class. But when the job offers came his way — and there were plenty, from Wall Street banks, consulting firms, even venture capital firms — Bussgang chose to work at a Cambridge-based start-up called Open Market.
He joined Open Market, an early Internet commerce software leader, in March 1995 as a product manager and was later promoted to vice president of marketing and business development. The pay was only $65,000 a year, but the job came with stock options. The experience was extraordinary, Bussgang recalls. Just a year after he joined, Open Market went public. With less than $2 million in revenue, it had a market capitalization of more than $1 billion. Suddenly, Bussgang was a millionaire on paper.
In 1999 he left Open Market to join forces with Michael Bronner, a Boston entrepreneur who had founded Digitas, a successful interactive marketing firm. Together they launched Upromise, a new-millennium, green-stamp-like affinity marketing firm. By signing up with various Upromise affinity programs, parents received cash back from merchants that could be used to build savings funds for their children’s college tuition.
As president, Bussgang closed deals with big consumer companies like Citigroup and AT&T Corp. Upromise was no slam dunk, but through a series of ups and downs, the company survived. And in 2006, Sallie Mae, the giant student loan agency, acquired it. By 2010, 12 million families had signed up for Upromise, which had $21 billion of college savings under management, according to Bussgang.
In November 2002, while at Upromise, Bussgang got a call from Chip Hazard, who had recently left Greylock Partners for Flybridge, and Greeley to ask if he wanted to join them. Bussgang says he didn’t have to think twice about the decision. “Being a VC entails a very different kind of excitement than entrepreneurship,” he says. “The VC is the backer of a movie he never stars in.”
But in choosing his new path, Bussgang was also returning to the past — to the days when venture capitalists saw themselves as funders of innovation and partners with the entrepreneurs who were drivers of change. At Flybridge he has been drawn to entrepreneurially driven businesses like DataXu, which began as a real-time optimization software project developed by professor Edward Crawley and his Ph.D. student Willard Simmons in MIT’s aeronautics and astronautics lab. Using algorithms, the engineers applied the idea to online advertising, analyzing the ad slots available to a buyer at any given moment to predict which were most likely to induce clicks or conversions, based on dozens of parameters, such as the location of the viewer, the day of the week, the time of day and the content of the ad itself.
Michael Baker, an active angel investor in digital media and formerly a partner at Boston-area venture fund GrandBanks Capital, seeded DataXu in 2007 and discussed the company with a number of local venture capitalists, including Bussgang. It was Bussgang who suggested to him that the company would be best served if Baker became its CEO. “When I first invested, I had never planned it that way,” says Baker.
With Baker as CEO, a legion of venture capital firms lined up to invest, including Flybridge. Baker was impressed by how quickly Bussgang used his network to get up to speed on DataXu and the ad-optimization market. More important, he gave Baker a list of references that included the CEOs of portfolio companies with which Bussgang had worked — both successes and failures. “He was the first VC who ever did that,” Baker says. “I thought that was really cool.”
DataXu was formally launched in spring 2009 with $6 million in capital from Flybridge and Atlas Venture. Six months later the Boston-based company unveiled its first product at San Francisco’s TechCrunch50 conference. Bussgang, who is on the DataXu board, continues to work actively with the company (which raised an additional $11 million in March 2010), introducing it to potential customers and using his network to recruit new employees.
The parameters of web advertising have been dictated mostly by sellers of advertising. DataXu shifts the controls to buyers, explains Bussgang. Advertisers can plan their media buy based on empirical results taken from the Internet on the fly instead of relying on the age-old concept of a “media plan,” the carefully compiled list of outlets where ad buyers would traditionally look for ad inventory, often based on historical reach rather than actual effectiveness.
If DataXu is an attempt to change ad buy metrics, Waltham, Massachusetts–based SavingStar is a plan to revolutionize the grocery coupon world and the 367 billion coupons that are printed each year. “It’s a convenient, eco-friendly way to save,” says Bussgang. More important, SavingStar is attempting to streamline a business that has become far too fragmented, with multiple vendors for the same set of products.
The idea for SavingStar actually began at Upromise, when Bussgang was still an entrepreneur. He had recruited David Rochon and Michael Libenson to Upromise to build a grocery network. After Upromise was acquired by Sallie Mae, Rochon and Libenson approached Bussgang for the financing to spin off the grocery unit. “We felt we could take the idea of electronic coupons and make them easily transferable for anything,” says Rochon.
At first, Bussgang balked. He says he wasn’t sure that Rochon and Libenson’s vision was big enough. He also wasn’t sure how the spin-off would work. But after Rochon and Libenson, along with four other Upromise executives, quit Sallie Mae and came up with a more expansive plan, Bussgang was onboard. In 2010, Flybridge, together with Philadelphia’s First Round Capital, invested $2.25 million. This past April they invested an additional $7 million. “It’s not simply about revolutionizing the coupon business; it’s about changing the way business promotion is done,” explains Rochon, who is CEO of SavingStar.
Members get to choose from a wide list of discounted items available on the company’s web site and on a free smartphone app. When they purchase the e-couponed items, they can swipe their supermarket or drugstore loyalty cards at the checkout counter and receive a savings that is automatically deposited in a designated account at PayPal, their bank or any other account they designate.
Unlike Groupon and LivingSocial, which sell discounted coupons for products and services that people use infrequently, “SavingStar plans to give users value every single week,” says Rochon. It doesn’t want to be the archetypal digital company that has millions of registered users but only a handful of regular users.
Bussgang is more like a business partner than an investor, says Rochon. The Flybridge partner helped persuade Michael Lazerow, chairman and CEO of Buddy Media, to join SavingStar’s board and recruited Greg White, who once worked at a Flybridge portfolio company, to be SavingStar’s CTO.
jeff Bussgang likes to refer to the companies he backs as his “movies.” But he isn’t just their backer; he also is their casting director. He is perpetually looking to recruit for his companies. And even when there isn’t a specific role for those who are auditioning, he is thinking of future roles they can fill.
On any given day his calendar includes face-to-face meetings, phone calls and peripatetic messaging. Call him a traveling Rolodex, a human GPS or simply a friend and mentor, but Bussgang is the reaction to the 1990s and 2000s, when venture capitalists outsourced the people part of the business to recruiters such as Spencer Stuart and Heidrick & Struggles International. The costs in both money and time were enormous, and the results disastrous. Smart venture capitalists now do it all themselves.
At a recent breakfast at the Mandarin Oriental hotel in Boston, Bussgang meets with a business school friend, the chief marketing officer of an online marketing firm acquired by a giant media company several years ago. Now that his earn-out is over, the executive wants to explore new opportunities, possibly higher up the ladder in another entrepreneurial company. Bussgang himself is looking to fill a spot in one of his portfolio companies.
Two hours later he is at a lunch at Petit Robert, a noisy downtown bistro, fielding an investment pitch from a charismatic and controversial Boston serial entrepreneur. The entrepreneur says that his most recent venture offers “the most advanced Facebook ad-optimization solution in the industry on a fully managed, pay-for-performance basis.” One of his recent endeavors, a software storage company, raised more than $100 million from major venture capital funds before the entrepreneur himself left the company. He tells Bussgang he has had problems with venture capitalists, especially those in his last deal.
“They simply didn’t understand what I was doing or what I wanted to do,” he explains.
The afternoon is for catching up with Michael Oiknine, a French-born entrepreneur and CEO of Apsalar, a San Francisco company that is developing a mobile behavioral targeting and analytics platform for iPhone and Android developers. Bussgang was introduced to Oiknine last year but felt the project wasn’t fully out of its cocoon. Since that meeting Apsalar has received $1 million in seed financing from two West Coast investors and is ramping up its business.
That evening Bussgang is at a fundraiser for nonprofit Facing History and Ourselves with the likes of veteran hedge fund managers Seth Klarman and Richard Perry. Bussgang and Klarman have been working for 15 years with Facing History, an organization that helps students examine the Holocaust, as well as other recent examples of genocide and mass violence, to combat prejudice and misinformation.
One entrepreneur who is familiar with how Bussgang works marvels at his ability and desire to meet people face-to-face. On any given day he might, for example, take the shuttle from Boston to New York to speak to a group of entrepreneurs and venture capitalists, then cab it down to a trendy restaurant in Greenwich Village to meet with Gawker COO Gaby Darbyshire.
“This is a people-to-people business,” says Mark Heesen, president of the National Venture Capital Association. The venture capital firms that are failing, he says, are the ones that have forgotten the fundamentals: the need to understand technology, work closely with innovators, take chances on technology that still is nascent and shepherd it to maturation. The funds most likely to succeed going forward are those that are recalibrating the business, bringing people back into the equation, Heesen adds.
William Sahlman, who teaches entrepreneurial finance at Harvard Business School, believes that the future of the venture capital industry is not in financial returns but in its ability to provide unique solutions. There will always be the investor who will make a bundle from investing in new technologies. The venture capitalist, Sahlman says, is the one who can “save the world.”
For Bussgang, saving the world with Frangioni’s cancer diagnostic technology will have to wait. The Harvard Medical School professor doesn’t want venture capital funds, at least for now.
Frangioni has established a foundation and plans to raise $500,000 over the next six months to establish its organizational structure; begin its education, research and charity activities; and start the worldwide dissemination of research-grade imaging systems and contrast agents. He also wants to try a new way of accelerating development. He is willing to sell the system to any number of users but only if they agree to share their data with him. This method of “open source” drug development could radicalize drug research, he says.
Bussgang doesn’t mind waiting. Research projects, no matter how promising they may be, take time to come together. In the case of Frangioni’s technology, both he and Flybridge would like to see more results.
Bussgang also needs to reconcile the business of investing with the desire to save the world. Is there a novel business solution that can preserve Frangioni’s vision and goals and also advance the development and use of the technology? he asks. Is there a way to create a private development partnership similar to what the Bill & Melinda Gates Foundation has established to develop drugs for diseases endemic in low-income countries?
Not every deal gets done in a day, or even done at all. And that’s perfectly fine with Bussgang, who is attempting to recast the role of the venture capitalist in terms of what it once was — being a hands-on partner and working with entrepreneurs to finance innovation. • •
