Patience pays off for investment firm
General Catalyst’s tech companies find IPOs worth the wait
Eight years is a long time for a technology company to wait to go public - and for the venture capital firm backing it to get paid.
But for three companies in General Catalyst Partners’ portfolio that are now courting Wall Street, the timing turned out to be pretty good: The stock market has firmly rebounded from the crash of 2008, and investors are eager for shares of growing online tech firms.
The latest of the General Catalyst companies to go public is Demandware Inc., the Burlington e-commerce software firm that priced its initial public offering Wednesday night at $16 share, raising $88 million. It follows Brightcove Inc., the Cambridge Internet video company that debuted in February and closed Wednesday at $17.64 a share, 60 percent above its IPO price. Travel planner Kayak Software Corp., which has offices in Concord and Norwalk, Conn, is expected to go public soon.
“The IPO window opens every once in a while, so there are good firms that wait,’’ said Matthew Rhodes-Kropf, an associate professor of business administration at Harvard Business School. “I would expect we are going to see a lot of VC firms trying to bring tech firms to market.’’
All three companies started inside the Harvard Square offices of General Catalyst, which not only provided the seed money, but also the bare essentials for any start-up: a few desks and a place to plug in computers.
While it is not uncommon for a venture capital firm to see several of its companies go public in a short period, industry specialists said the debut of these three is both a good reflection on General Catalyst and a welcome statement on the investing climate for technology companies.
“It’s an indicator of a successful firm, and some great people,’’ said Bob Davis, a general partner of Highland Capital Partners, a Cambridge venture capital firm, and founder of Lycos Inc., the Internet search engine company started in the 1990s.
General Catalyst was founded in 2000 by a group of former technology executives and entrepreneurs who all attended the same private school in Cambridge - Buckingham Browne & Nichols. It opened in Cambridge at a time when many local venture capitalists were ensconced high on a hill on Winter Street in Waltham, overlooking Route 128.
“We wanted to build companies in Boston and Cambridge,’’ said David Orfao, a managing director of General Catalyst. “Being out on Winter Street in Waltham didn’t seem very exciting for the entrepreneurs who had to go up the hill to ask for money.’’
Many of those Waltham venture firms have since relocated to nearby Kendall Square to be closer to the growing tech ecosystem in Cambridge and Boston. Like many other firms, General Catalyst also has an office in Palo Alto, Calif.
General Catalyst focuses on early-stage companies, providing the seed money for HubSpot, a Cambridge marketing software firm, and Lose It, a young Boston company that has created a mobile app for weight loss.
“They understood that we really didn’t know what our business model was on day one,’’ said Brian Halligan, HubSpot’s chief executive. Halligan said General Catalyst has invested $15 million in HubSpot, which is on track to go public next year.
Investing in early-stage companies is inherently risky, said Larry Bohn, a General Catalyst managing director. “Not every firm has the stomach for this because it doesn’t always work out,’’ he said. “If you do really early-stage investing, it’s really all around passion and ideas and leadership.’’
But even though his firm was involved with Brightcove, Demandware, and Kayak at the conception stage, he said, each of those entrepreneurs had track records of success that paid off in the long run. Someone launching his second or third company, said Bohn, tends to have the patience to build a public company. “All three of those companies could have been sold to other companies for good profit,’’ he said.
Indeed, nearly all of General Catalyst’s successful investments came when its companies were bought by other firms. Of the 22 companies that left its portfolio, 21 were by acquisition, according to PitchBook Data, a research and data firm that follows the private equity industry. General Catalyst currently has $1.7 billion under management and 84 active investments, PitchBook said.
And its single largest investment is the $196 million the firm plowed into Kayak, according to PitchBook. Its payoff, however, is still uncertain.
Kayak initially filed to go public more than 15 months ago, in November 2010. But analysts said the company is being cautious since another travel firm, TripAdvisor Inc., saw disappointing results on Wall Street, while Internet giant Google Inc. is moving into the online travel business.
However, Kayak’s annual revenue grew by 32 percent, to $224.5 million, last year, and Kayak has been valued as high as $835 million.
Still, there is a growing buzz around tech companies as more move onto the open market. Ten of the 28 initial public offerings priced so far this year have come from technology companies, according to Renaissance Capital, a Greenwich, Conn., IPO advisory firm.
On average, according to the firm, tech IPOs this year have traded up 34 percent from the price of their initial offering.
“The Street is looking for high-growth stories, so these companies potentially offer that,’’ said Anand Sanwal, chief executive of CB Insights, an investment tracking firm. He predicted Demandware and Brightcove will do well.
Demandware, which makes software that makes it easier for merchandisers to build online sites and other digital applications to sell their products, will begin trading Thursday under the symbol DWRE. General Catalyst held 32 percent of the stock prior to the offering.