 By Beth HealyVenture
capital returns are plunging. The IPO market is a minefield. Internet
start-ups are flaming out faster than you can say stock option. And
Kevin Landry couldn't be happier.
The
chief executive of Boston's TA Associates, pictured above, is relishing
a return to the bad old days of venture capital. That's right, the bad
old days. Before the Internet became an excuse to throw caution to the
wind. Before the bull market turned into a frat party. Before fledgling
incubators could make billions of dollars on half-baked business ideas.
''We were up 100 percent in 1999,'' Landry says of the firm's investment returns. ''I can't tell you how bad we felt.''
The
TA partners felt bad because they weren't in the thick of the Internet
extravaganza. One of the nation's largest and oldest venture firms, with
$5 billion under management and an appetite for late-stage deals, TA
was largely on the sidelines from 1998 through 2000, while less
experienced investors amassed fortunes backing dot-coms and high-tech
start-ups.
Even a wise elder of the venture business, as Landry, 56, is widely considered, felt pangs of jealousy these past few years.
''The start-up guys were knocking the cover off the ball,'' Landry says. ''I tried to explain to my wife that I'm a failure.''
Many
competitors now laud TA for sticking largely to its knitting: investing
in profitable companies, between $10 million and $100 million per deal.
But in the ''opportunity business,'' as Landry calls venture, there's
little solace in high principles and a solid three-decade track record
when one's rivals are getting filthy rich.
In
fact, resentment over missed opportunities began to bubble up inside
the firm, particularly among the ranks of younger, junior partners. By
1999, when tech stocks were soaring, TA's 44 percent average annual
returns suddenly seemed tepid. Landry found himself in the unpopular
role of sober father figure. He was shorting shares of then-hot CMGI
Inc. and warning his colleagues against high-priced risky deals.
''When the market was overwhelming, there was internal strife,'' says one person who runs a TA-backed company.
That
summer, the unthinkable happened. Bruce Johnston, a rising star among
the firm's junior partners, resigned in August to start a Boston office
for idealab!, a Silicon Valley-based incubator that was riding high on
the dot-com wave. Landry says he was disappointed. Some people were even
in tears.
''We
were very sorry that Bruce left,'' says Andy McLane, a managing partner
and part of TA's four-member executive committee. ''There's no doubt in
my mind or anybody else's that Bruce was going to be a full-fledged
partner, a managing director.''
Johnston,
41, says leaving TA was ''brutal,'' the toughest decision of his
career. And his timing, as it turned out, was bad. Within a year, the
Internet market had crashed and idealab! had withdrawn its planned
initial public stock offering. Johnston, who was lured to the firm by
his former Lotus friend, Bill Gross, recently had to cut his staff.
Recalling
his urgency to jump on the Internet bandwagon and leave TA, Johnston
says, ''It was just sort of this surreal environment.''
He
explains, ''When you see people at a cocktail party who invested $1
million and got $1 billion back in a year, that's a little
frustrating.''
Witness
the similar case of envy that drove leveraged buyout titans like
Boston's Thomas H. Lee Co. and New York's Kohlberg Kravis Roberts &
Co. into Web deals last year - a tad late, most observers agree. TA,
too, made some pricey bets in 2000.
Last
April, McLane, the managing director, could barely hide his excitement
over Questia, a Houston-based online library start-up that went live
last month. TA put $45 million into the company, a sum McLane now admits
was high. But he still has high hopes for the company.
''I
really thought Questia had a very substantial business model,'' says
McLane, who's credited with inking some of TA's best deals, like the
purchase and resale of AIM Management Group - a $35 million deal on
which the firm made 24 times its money. ''I did then. I do now.''
But he concedes there was some ''setting aside of the traditional rules.''
''I haven't made an investment in a company that wasn't profitable in probably 10 years,'' he says.
Johnston
blames his departure from TA on a mid-life crisis. But he says he
doesn't regret getting into the start-up game. He's working on his third
new company now. And he likes managing people, he says. ''But we
certainly haven't grown the way we thought we would.''
This
return to normalcy is being lamented across the country, in high-tech
circles and among the nouveau venture crowd. Many VCs are likening the
current market to the more difficult days of the 1980s. And at TA, the
environment is becoming considerably more comfortable, partners say.
''It's
a lot different than it was a year ago. We're more united,'' Landry
says. ''The things we're going to be fighting aggressively are our
competitors and the economy - and not ourselves.''
TA's
investment returns in 2000 were roughly zero, partners estimate. That's
better than the losses some firms may show, they argue, but it's
certainly not going to impress the firm's clients. But Landry says the
firm is ''coming back.'' After a couple of years of identity crisis -
dabbling in start-ups, struggling to find mature companies that weren't
overpriced - Landry insists the firm is clear in its mission: technology
buyouts.
In
December, TA did a second round at Datek Online Holdings Corp., the Web
brokerage, in a $700 million deal with Boston's Bain Capital and Silver
Lake Partners of Silicon Valley. Landry thinks plenty of buyout
opportunities will present themselves as tech companies lose hope of
going publicand look for buyers.
He
also expects TA, like other private equity firms, will spend more time
with its portfolio companies in the coming year to help make those
investments successful. With the economy slowing down, Landry says,
business is bound to get more difficult.
Back
in 1983, when venture capital went through an ugly cycle, Landry says,
TA had to grapple with having invested in some lower-quality companies.
The firm had to let some companies go out of business, and cut the
number of boards on which its partners served.
''I knew this time we'd make a different mistake,'' he says. ''There are prices I wish we hadn't paid.''
Plenty
of venture capitalists swear they prefer to spend their time toiling
alongside their favorite entrepreneurs. Landry is perhaps more honest:
''It's much more fun to just go out and do deals and make seven or eight
times your money.''
It's
Landry's straight-shooting manner and wisdom, people who know him say,
that has helped make TA such a strong firm. He was one of the original
hires when Peter Brooke started TA - spinning out of Boston brokerage
Tucker Anthony - back in 1967.
''He's
a very competent manager,'' says Brooke, who went on to start Advent
International in Boston. ''He's very smart. He has a great sense of
urgency.'' Brooke adds, ''He's kept that company together for a long
time.''
Most
of the seasoned venture capitalists on the East Coast trace their
beginnings back to TA. Summit Partners' founders worked at TA. So did
Bill Egan, who would later start Burr Egan Deleage & Co., and whose
firm would spawn Alta Communications and Polaris Venture Partners.
William
Collatos, a former bank lender like Brooke, cut his teeth in the
venture business at TA starting in 1980. After becoming a general
partner, he helped start a TA spinout, Media/Communications Partners
(now called M/C Partners). He went on in 1983 to cofound Spectrum Equity
Investors, a Boston venture firm that invests heavily in the telecom
sector. Brion Applegate, his cofounder at Spectrum, also started his
career at TA in 1979.
Any
number of venture pros call TA a training ground, the Harvard Business
School of venture capital. They only leave, Collatos says, to become
general partners of their own firms.
''Many
people went on to be very successful in venture capital, in no small
part due to the discipline and experience of that environment,''
Collatos says of TA. And while Landry puts high value in loyalty, he
doesn't hold a grudge, Collatos says.
''When
we went out to raise our first fund, at a very difficult time in the
market [1993], Kevin and his partners were our personal financial
backers,'' Collatos says. ''I took it as a statement of confidence, but
also as a statement of friendship.''
But
make no mistake about Landry's competitiveness. He says in the recently
published book ''Done Deals,'' that Brooke left TA because ''Peter was
less interested in making money than I am.'' Landry is in the venture
business because it's fun, he says. And to make money for the firm's
investors and partners. Few complaints there: TA's 1993 fund and its
1988 fund both returned to investors more than 325 percent of their
money, according to estimates by Stephen Lisson of InsiderVC.com.
Sitting
out the Internet jackpot was enough to make any good dealmaker squirm.
But now, Landry says, ''I'll take our portfolio over almost anyone
else's.''
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