Boston-based Ascent Venture Partners seems to know what it's good at. The firm, which started as a VC subsidiary of the Pioneer Group and went independent in 1999, has stayed faithful to its focus on early stage IT companies.
"We don't try to redefine ourselves around every fund on what's the flavor of the day," Ascent general partner Geoff Oblak told me when I visited the venture team in their Boston office last month. The firm has backed about 100 startups in its history and typically invests in companies that already have handfuls of customers.
Ascent has stuck to funds in the neighborhood of $150 million -- what it says is an appropriate size for early stage deal making. It has maintained this tactic even through the surge of VC money earlier this decade, and hasn't had to shrink its funds in response to the smaller venture pool in the past few years, as many other firms have. Many of its investments hover in the neighborhood of $2 million to $5 million, says partner Matt Fates.
Fates and the other team members make it a point to stay involved as board members of its portfolio companies, working with them on day-to-day or week-to-week bases, he says. Typically, each venture member sits on no more than seven boards. They heavily advise portfolio companies on developing their business models and staff, which are areas that Fates says pose the greatest threat to success among early stage companies. "It's not usually a technology risk," Fates says.
"It's very hard to take a little company and to grow it rapidly," Oblak says. "We view it as a craft."
Below are three major themes I pulled away from my conversation with the Ascent team.
1. Look for potential leaders in very new, must-have markets.
Ascent likes to spot companies that occupy space in "small, embryonic" markets of roughly $25 million to $50 million but are poised to create industry standards, Oblak told me.
To illustrate this point, he filled me in on one of Ascent's big wins: Guardium, a maker of data security software. Yes, I know, security software has been around for decades. But Guardium's focus isn't on blocking intrusions from outside Internet hackers, but rather on protecting corporate databases from internal security threats. Oblak says the firm researched the market and found that the industry for software that protects against data threats from within companies was far less common than software defending data against outside hackers. Something about the security products is also very likely to "withstand budget scrutiny," making them durable in a recession, he says.
Ascent invested in two rounds of funding for Guardium after determining that the market for enterprise database security was largely unaddressed, Oblak says. A few years later, it looks like IBM (NYSE: IBM) agreed. Big Blue acquired Guardium in 2009, shelling out a reported $225 million to roll the Waltham, MA-based company into its Information Management Software portfolio. (Ascent didn't disclose its amount of investment in the firm, but Guardium raised a total of about $21 million in venture money before being bought.)
Ascent is now backing another company with an interesting take on security. V.i. Labs, of Waltham, is making software hacking into a moneymaker -- for the party being hacked, that is. Its technology, called CodeArmor, allows software makers to trace the source of the hacking, which often comes from existing customers who are unknowingly using more licenses than they have purchased. "It's not just a hacker in a basement," says Oblak.
CodeArmor users can take the information to the offender and use it as an opportunity to sell them the necessary increase in software licenses to become compliant, he says. "Let's turn piracy into a revenue opportunity," Oblak says of the V.i. Labs attraction.
2. Data analysis is hot.
Data intelligence is a "huge theme" for the investments Ascent is pursuing, says Fates. He says that slice of software could surpass the large software markets for customer relationship management and enterprise resource planning.
With its fifth fund, Ascent is targeting IT companies that make sense of the massive amounts of data available through everything from social media sites to hotlines to merchant records, the team told me. In addition to V.i., which makes piracy data useful to software companies, Ascent has invested in ClickFox, an Atlanta-based start-up that's developing technology for measuring customer satisfaction in venues such as e-commerce, store kiosks, and the oft-frustrating customer service phone calls. The analytics technology aims to help merchants enhance their returns by focusing on interactions that bring customers back and eliminating those that turn them off.
Ascent also backed Cymfony, which was one of the earliest companies to track and distill what was being said on the Internet about a brand. Kantar Media, a European market research company formally named TNS Media Intelligence, acquired Watertown, MA-based Cymfony in 2007. In the meantime, many other media analytics companies have sprouted up, including Compete (another company now owned by Kantar), Lexalytics, and Crimson Hexagon. Fates says this market is already on its second-generation, measuring social media buzz, a fact that also illustrates Ascent's aim of backing future market leaders.
3. Small funds and acquisitions aren't necessarily a bad thing.
Many VC firms have been raising smaller funds than usual in recent years. But Ascent has consistently kept its fund sizes at around $150 million and hasn't had to react to the shrinking VC pool. The team says that the return to smaller funds on the part of other firms is the market correcting the excesses of too-large funds in recent years.
"Raising the big fund and trying to get that big return doesn't work well," Fates says. He says the firm is focused on making fewer, closely managed investments in younger companies, rather than spreading a big fund thin across a number of early stage deals.
The smaller pool of VC money doesn't necessarily preclude companies from getting funded, though, says Ascent principal Luke Burns, who noted that startups will be pushed to be more capital efficient and make do with less. "Even if the overall capital is shrinking, the number of companies funded will shrink by a lesser amount," says Burns, who has written about venture health indicators for Xconomy before.
The Ascent team also dished on the ever-present debate of IPOs versus mergers and acquisitions as preferred VC exits from startups. "Public companies happen in a minority rather than a majority," says Oblak. And, because existing tech giants like IBM have been setting aside cash for scooping up promising startups, the acquisition often derails companies on their way to IPOs, he says.
"Build strong companies [that are poised to go public] and make someone preempt you off that track," he says.
Lastly, Oblak drew an interesting parallel across disciplines. "IT is becoming akin to what is happening in life sciences," says Oblak of the trend of IT industry giants building their technology portfolios by acquiring startups. "Big pharma companies have great distribution networks, and they look to biotechs to innovate and incorporate drugs into their space."
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Erin Kutz is an Assistant Editor for Xconomy. You can reach her by email at [email protected] or by phone at (617) 252-0700.
