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Chasing Innovation- Fresh Start-Ups Attract Venture Capitalists, Signal New Era “love bombing" of Wooing Hot Companies
Julie Farris, chief executive of Scalix, went through furious bidding wars by VCs eager to get into the company.
By Matt Marshall
Mercury News
Most people think it’s tough now for entrepreneurs to get money. But if you have the right experience, and a good idea, venture capitalists will fight to give you their money — and even shower you with gifts to make sure you take it.
Take Scalix, a start-up that offers an e-mail system, based on cheaper and more flexible Linux software. On Wednesday, it said it received $13.2 million from two top-tier venture firms, Mayfield and New Enterprise Associates.
In early April, the company’s chief executive, Julie Farris, let a handful of venture firms know she was interested in raising money. Each pursued her relentlessly, wined and dined her, called constantly, and some even refused to take accept a “no” after the deal was wrapped up in a month without them.
Scalix is just one of several hot deals in recent months that some say underscore a new era. During the downturn, most start-ups were reeling: Their sales were non-existent or declining, few could sell products to skeptical larger corporations, and venture capitalists were like deer frozen in the headlights.
But lately, some companies are finding fresh ideas, showing growing sales, and boasting experienced management teams cherry-picked from a large pool of available labor.
The average deal still takes about three to four months, says Jesse Reyes, vice president of Venture Economics.
But hot ones get wrapped up in little more than a month. New Enterprise Associates calls the process of wooing a hot company “love bombing.” Partner Stewart Alsop said he “bounced around in his chair” when Farris called him April 10 to tell him about Scalix.
Large companies were desperate for a more efficient e-mail platform for their employees, he knew, and Scalix offered that. He said he was irked, though, because Farris forced him to compete with other VCs — even though he’d helped her get a job at one of his previous start-ups.
Still, Alsop swung into action. He had the chief executives of his best companies — including TiVo’s CEO Mike Ramsey, who had earlier worked with Farris, Boingo’s Sky Dayton, and MailFrontier’s Pavni Diwanji — phone Farris on his behalf.
He delivered a bottle of 2000 Rochiolli Pinot Noir — from his personal collection — to Farris’ doorstep on April 24, the day he delivered his written offer to invest. He then dropped by the Mayfield Fund, and delivered a present to Allen Morgan, the partner who helped incubate Scalix in Mayfield’s basement: a bottle of Knob Creek bourbon, Morgan’s favorite. As an existing investor, Morgan would play a key role in deciding. To top it off, Alsop bought Farris dinner at the well-known Bacchanal restaurant.
Within 48 hours, four offers from other VC firms arrived, Farris said.
Fear motivated Alsop to beat the others: “My partners were asking every day: `How’s Scalix doing? Are we in?,’ ” recalls Alsop. “You’d think we’re all very cooperative. But when we want to get in a deal, the knives come out,” he said.
Farris said she was bombarded night and day by phone calls by other VC firms: “I felt like I had planes circling around my house with signs saying `Julie, please pick us!”’ she said. “I had dreams about it.”
Her fiancé had worked previously for one of the suitors, and was loyal to that firm — a firm she ended up not choosing. The hardest part was giving the bad news to the losers. Two were so upset they refused at first to accept the rejection.
Companies offering a Linux platform, and other open-source platforms, are getting special attention for their operational flexibility, analysts said.
Besides offering a good idea, Farris boasts 15 years of experience in the messaging space, and has hired a team of messaging experts — the sort of recipe that investors like.
Other such start-ups are getting multiple suitors.
Benchmark, a young firm known to be aggressive when it wants in on a deal, upped the ante when it heard about MySQL, a company that sells an open-source database management system. Most of its customers are in the Bay Area, including Yahoo, Cisco Systems and Google — and its sales have been growing quickly.
Benchmark found the company late, but partner Kevin Harvey said he was smitten. He scrambled to make an offer within two weeks — canceling appointments to do so.
“It was a big fire drill for me,” Harvey said. He was careful to meet the company’s proposed terms, and beat out five other investors. MySQL’s chief executive, Marten Mickos, said he chose Harvey for his experience: Harvey built his own database company and funded several open source companies.
San Mateo’s Biz360 is another start-up showing solid revenue growth. It also effectively set the terms for its recent $10.5 million round.
The software company helps other companies search the Web and other sources for marketing intelligence, and chose BA Venture Partners from a bevy of five suitors. BA partner Sharon Wienbar got the inside track by wooing Chief Executive You Mon Tsang before he even started raising money.
As soon as her offer was accepted, she caught a 6 a.m. flight from Boston, took a cab to her home, printed out the final documents, grabbed a bottle of champagne, and rushed over to sign the documents with Tsang.
Michael Murphy, chief executive of Inquira in San Bruno, has been raising money for less than two weeks, and he’s already got a written offer and two other venture firms interested, he said. Last time he raised money, it took five months. “People were hanging up on me,” he recalls.
Contact Matt Marshall at mmarshall@ mercurynews.com or (415) 477-2518.
