Highland's Incubator Space Harks Back to Dot-com Era

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Boston Business Journal - April 14, 2006 by Lisa van der Pool Journal Staff

The first professional sale Barry Morris ever logged came from a pretty unlikely source.


"The first revenue that we had was from selling coffee to the other residents," said Morris, president and CEO Lexington-based StreamBase Systems Inc., which installed a coffee machine and charged the other companies that shared its incubator space for java. "In a good week, we made 10 bucks."


Coffee vending aside, Morris credits the company's 14-month-long tenure in venture capital firm Highland Capital Partners' entrepreneur space as an essential first step in the company's launch.


"These spaces are so attractive -- you try to stay there as long as you can," Morris said. "We're now a very successful company, and essentially, they provided us with a mechanism to get to the launch."


Highland's incubator, a rarity among venture capital firms in Boston, consists of about 8,500 square feet of space in the Lexington-based company's two-floor building. The area contains 18 offices and 13 cubes. In the past when space was tight, a broom closet would house a desk or two.


Although it is typical for venture capital firms to have a handful of entrepreneurs in residence, the size and scope of Highland's entrepreneur space is unique.


"There are a number of firms out there that have entrepreneurs in residence," said Emily Mendell, vice president for strategic affairs at the National Venture Capital Association in Arlington, Va. "Highland has a large space and a large number of people. Most have one or two of these folks."

Still, venture capital firms tend to stay heavily involved with their portfolio companies.


"From where we sit we still see VC as being integral to building companies. Most VCs require a board seat and make the investment with the intention to try and drive growth of the business," said Mendell.


Venture capital firms with large incubators were more prevalent during the dot-com era and have since become less popular, according to Jeff Fagnan, a partner at Atlas Venture in Waltham. Atlas has entrepreneur-in-residence space, with room for a maximum of about 10 people. Unlike Highland, the companies Atlas houses all are portfolio companies.


"We're not populating it with a bunch of people to see if three or four good ideas will come out of it," said Fagnan.


StreamBase entered the space at Highland at the beginning of 2004 as a four-person team armed with a business plan and little else. StreamBase left the space the spring of 2005 with about 30 staffers.


Today StreamBase, which has since received $16 million in venture capital funding (Highland participated in both rounds) and amassed 50 employees, will not disclose revenue but is "growing rapidly," according to Morris.


Much more than just free office space, startups in the incubator space say they like the access they get to Highland's venture capitalists and other entrepreneurs. And Highland gets to identify bankable concepts early on.


"A lot of people in the venture business are not venture building, they are venture banking," said Jo Tango, general partner at Highland. "This is how the industry used to be and we think that's where the fun is."


Tango said there's usually a waiting list of companies hoping to get a spot in the incubator space. Since opening its entrepreneur space four years ago, 28 seed projects have been housed in the space. Of those 28, six are still in the space.


Highland has chosen to invest in six of those 28 and has opted to not invest in 16 of the Teams are made up of anywhere from one person to 20 people.

Two of Highland's local portfolio companies include VistaPrint USA Inc. in Lexington and YesDirect Inc. in Waltham.


StreamBase found Highland when its founder, Mike Stonebraker, approached the VC firm with his idea. StreamBase was given $500,000 in seed money to test the market.


"Once they've chosen to make an investment in a company, it's much more in their interest that I spend time talking to customers as opposed to real estate agents," said Morris.


StreamBase's case was unusual, according to Tango, in that the company's business plan was formed and a small team had already been assembled. Most of the time, executives enter the incubator space because they have an idea or Highland has an idea for a company and the two parts come together to see if an idea will work.


"We don't scan their business plans because usually there isn't a business plan," said Tango. "We expect to help them write their business plan."

Tango said that the companies in the incubator space are free to speak to other VC firms.


"Competition is good," said Tango. "They can go meet with any VC at any time. If we can't add value, we shouldn't be investors."


Framingham-based IMO Corp., the startup multicarrier mobile phone retailer, spent a year in Highland's incubator before its February launch earlier this year.


IMO founder and CEO Mort Rosenthal first approached Paul Maeder, managing general partner at Highland, about his idea.


"It was convenient and it was easy," said Rosenthal of the incubator space. "It was a nice community."


Lisa van der Pool can be reached at lvanderpool@bizjournals.com.

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