In the wild, when too many members of a single species appear, Mother Nature quickly resets the balance. The weak starve. The strong survive.
In venture capital, the cycle isn’t quite so merciless. There are many who disagree, but it seems clear to this columnist that despite the smaller size of venture capital funds, there’s still too much venture capital.
Count Charley Lax among my dissenters. Sort of.
“I think it’s imperative that we get more companies funded,” Lax said. The New England economy depends on it, he said.
The problem, Lax contends, is not so much that there are too many companies funded, but rather that these companies are overfunded.
But it’s not a problem that’s got him all weepy. Instead, he’s actively encouraging and funding his companies so that they can buy up financially bloated competitors and complimentary ventures.
“The other investors put in a dollar and may get back 10 to 20 cents, but at least it’s not zero,” Lax said.
Lax made a fortune during the go-go days as a co-founder of Softbank Venture Capital, taking scads of young companies public and selling them to the likes of Lycos, Yahoo, AOL and Microsoft.
Softbank Venture Capital has morphed into Mobius Venture Capital, a billion-dollar fund in Palo Alto, Calif. But today, Lax spends his time working on GrandBanks Capital, a smaller, $125 million early-stage, East Coast fund that’s affiliated with Softbank and is based in an old church in Newton Center. Lax is managing partner.
To date, GrandBanks has made eight investments, many of which have been avid acquirers.
For example, Boston-based OutStart, an e-learning software company in GrandBanks’ portfolio, announced last week it had made its second acquisition of the year by purchasing Chicago-based Participate Systems.
Founded in 1997, Participate was a dot-com star in Chicago, developing software for creating online communities. By the time it filed a failed bid to go public in 2000, it had raised $32.8 million in private equity financing from TL Ventures, InterWest Partners and other firms.
In 2002, it dropped its dot-com name. It forged ahead by providing online customer and sales management systems.
Terms of the acquisition weren’t released. OutStart has, however, publicly announced it has raised $21 million; it closed its last announced round in 2002.
Likewise, Glasshouse in Framingham, another GrandBanks’ company, has built itself into the largest independent storage consultancy in the United States, thanks in large part to four purchases in the spring and summer.
And Boston-based Ember Corp. used some of the $53 million that it has raised to buy talent and intellectual property earlier this year from U.K.-based Cambridge Consultants in order to transform itself from a maker of low power, embedded wireless mesh networking modules into a maker of both modules and the microchips that power them.
Lax isn’t the only VC who is actively encouraging companies to acquire, judging by some recent deals.
Over two rounds in less than four months, Kodiak Venture Partners, General Catalyst Partners and 3i have invested $24.4 million into Manchester, N.H.-based Vette Corp.
Vette needs the cash because it’s rolling up thermal management component companies. Vette has already bought two Asian companies since it was founded earlier this year.
Battery Ventures got into the act last year with its purchase of a public company, Indiana-based Made2Manage Systems. It has since bought two similar companies.
And these are just the most notable. I could fill this column with a list of nothing but recent mergers of venture-backed companies.
So Lax may be on to something.
“I think there’s an inefficiency in the current private equity markets where there are many more companies funded than there are public buyers for the company,” said Peter Falvey, a co-founder of Revolution Partners, a boutique Boston investment bank that specializes in M&A.
Some of these companies go out of business, Falvey said, but most others carry on as small organizations, putting them at a disadvantage.
“Tech buyers are gravitating toward big companies,” Falvey said. “As the old saying goes, ‘No one got fired for buying IBM.’ “
To catch the attention of more customers and potential acquirers, these small venture-backed companies have to grow. Acquisitions therefore look plenty appealing.
Another advantage to VCs, Lax points out, is acquisitions eat up capital. Many VCs are desperate for deals in which they can put big chunks of money to work.
“I just got off the phone with two investors trying to tee them up to a deal, and I hear from them, ‘My minimum is $5 million.’ These are quality investors, but the problem is, they’re raising too much money.
“I take advantage of the fact that there’s too much money out there,” he adds.
With a smile.
