Boston VCs backing more companies close to home

Stephen Kraus, a partner at Bessemer Venture Partners in Cambridge, cites a number of reasons why Boston VC firms have shown a stronger appetite for investing locally. (Courtesy of the New England Venture Capital Association)
Stephen Kraus, a partner at Bessemer Venture Partners in Cambridge, cites a number of reasons why Boston VC firms have shown a stronger appetite for investing locally. (Courtesy of the New England Venture Capital Association)

Massachusetts venture capital firms are keeping more of their deal-making close to home.

Local venture capitalists closed on 199 deals in the Boston area in 2013, according to data provided by Dow Jones VentureSource. That represented 45 percent of their investments, the highest share of their total investing since 2007, as they pared back on deals in San Francisco, New York, and other innovation hubs.

Stephen Kraus, a partner at Bessemer Venture Partners in Cambridge, said the climate for venture investing improved dramatically in Massachusetts in 2013 with a surge of younger companies selling shares to investors through initial public offerings, or IPOs. Going public allows for venture firms to cash in on their early investments.

“Massachusetts was home to the most life science IPOs last year and a number of great local tech companies either have gone public, like, or are rumored to go public soon, like Wayfair and HubSpot,” said Kraus, who also serves as president of the New England Venture Capital Association, a trade group.

Wayfair, a home goods e-commerce firm, and HubSpot, a provider of marketing software for small businesses, have both reportedly lined up investment banks for IPOs this year.

The Boston area has also seen an uptick in seed funding for its tech companies and continues to have an active early-stage life science investor community, Kraus said.

“At every stage of the game we’re seeing tons of possibility, which means those of us investing can do more close to home,” Kraus said.

Dollar amounts were not available from Dow Jones VentureSource, so it’s not clear whether more total funding remained in Massachusetts in 2013 than in prior years. However, the data does suggest Boston-area venture capital firms are finding a strong contingent of tech and biotech companies in Boston relative to other innovation hubs in the US.

A number of Boston-area venture capital firms have also been well-endowed for making new investments heading into this year. In 2013, Massachusetts-based VC firms raised $5.4 billion for new funds, more than triple the amount raised the year before, according to figures from Thomson Reuters and the National Venture Capital Association.

At Boston startup Stackdriver, which aims to improve the performance of cloud-hosted software applications, chief executive Izzy Azeri said he’s found Boston-area venture capital firms to be highly interested in backing local startups. His company has two venture capital firms as backers, Flybridge Capital Partners and Bain Capital Ventures, and both are headquartered in Boston. Together they invested $10 million in Stackdriver in September.

Boston-area venture capital firms are “heavily focused here,” Azeri said, even though many have also opened offices in other regions of the US in recent years. Flybridge opened a New York City office in 2012, for instance.

NY & San Francisco investing

The increased focus on Boston for area VC firms is a departure from 2010 to 2012, when there was a notably lower percentage of investing in Boston by area VC firms. In 2010, for instance, the VCs closed just 36 percent of their deals in the Boston area as they increased their investing rate in San Francisco and New York.

By 2012, the percentage of deals done in San Francisco by Boston VC firms had hit the highest rate in at least nine years, 23 percent.

And Boston-area venture capital firms closed 17 percent of their deals in New York that year, up from 7 percent in 2007.

Companies funded by Boston-area VCs in the years leading up to 2013 included Twitter of San Francisco and Tumblr of New York, both backed by Spark Capital of Boston, and Marketo of San Mateo, Calif., funded by Boston-area firm Battery Ventures.

But the percentage of deals by Boston-area VC firms fell last year in San Francisco and New York, to 19 percent and 16 percent, respectively, as the firms favored deals with Boston-area companies.

Doubling down

Spark Capital is among the firms that appear to be paying more attention to Boston, according to Ryan Moore, partner at Atlas Venture in Cambridge. Spark’s Boston investments in 2013 included co-leading a $52.5 million deal for online insurance agency Consumer United and taking part in a $2.1 million round for Superpedestrian, which offers a product that converts bicycles into hybrid electric bikes.

Moore also pointed to General Catalyst Partners of Cambridge and Flybridge as other firms that are “taking their expertise and finding good investments here in Boston.”

Atlas Venture, meanwhile, has “definitely doubled down on our efforts here locally,” he said. The firm invested in several dozen Boston-area startups in both tech and biotech in 2013. They included fantasy sports startup DraftKings, online custom goods marketplace CustomMade, and obesity drug developer Zafgen.

“We have definitely put a stake in the ground of saying Boston is where we live and where we want to invest,” Moore said. “And we’re not alone.”

This article appears on page B7 of the Boston Globe on March 12, 2014, with the headline: Mass. venture capitalists keeping money nearby.

Kyle Alspach has worked in journalism in Massachusetts since 2005 and was one of the original staff writers at BetaBoston.
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