Fairhaven Capital Raises $250 Million for Early-Stage Technologies and Theme-Driven Investing Philosophy

Fairhaven Capital Partners announced today that it has closed its second investing fund—and its first since TD Capital spun out the firm in June 2007. Known for their earlier investments in companies with successful exits, including Third Screen Media, Softricity, and EqualLogic, the seven partners at Cambridge, MA-based Fairhaven say they’ll use the $250 million fund to continue investing in early-stage technologies.

“We are bullish on innovation,” even in the face of economic turmoil, Fairhaven managing director Paul Ciriello told me yesterday. “We think it drives the U.S. and the world economy, and technology is certainly one of the key factors in innovation.”

The institutions and individual investors who contributed to Fairhaven’s fund are evidently bullish as well: the firm says it raised $50 million more than its target number. It’s already put money from the fund into several startups, including speech-to-text company EveryZing and data warehouse appliance maker Dataupia, both located in Cambridge, as well as Boulder, CO-based Cocona, a maker of eco-friendly fabrics, and Montreal-based Xtranormal, which is developing some cool tools that consumers can use to create animated movies.

Ciriello says Fairhaven invests based on broad opinions its partners have formed about how market demand is likely to evolve in four “theme” areas: enterprise information technology (including security), consumer technology, high-performance materials, and digital media infrastructure. In enterprise technology, for example, the firm sees an ongoing demand for technologies such as server virtualization that make operating the IT backroom easier and cheaper. If there isn’t a company serving what the firm sees as a market need, says Ciriello, it will start one. (That’s how Third Screen Media, a mobile advertising company founded in 2004 and purchased last year by AOL/Time-Warner, got off the ground.)

Located in the Draper Laboratory building at One Hampshire Street, the firm is about to lose its sliver of a view of downtown Boston, thanks to construction on the eastern reaches of the MIT campus. But that’s okay—Ciriello and his colleagues will probably be too busy filling up their portfolio with startups that exemplify their themes to look outside.

Here’s a transcript of my brief interview with Ciriello yesterday.

Paul Ciriello, managing director, Fairhaven Capital PartnersXconomy: Why did you spin out of TD Capital? What investing approach did you pitch to the prospective investors as you were raising the new fund?

Paul Ciriello: TD Capital had five investing groups; we were the fifth one. A few years ago, the bank decided it didn’t want to be in the direct investing game anymore, so it spun out three groups. We were the last in and the last out. They spun us out as Fairhaven Capital, and TD Capital is an investor. The entire team came over.

Under the TD Capital flag, we made 20 investments from 2001 to 2006, and we continue to manage those investments here. Of the 20 investments during that period we realized eight, including several interesting ones. Third Screen Media was acquired by Time Warner. EqualLogic was acquired by Dell. Softricity was acquired by Microsoft. IPhrase was acquired by IBM. And Cloakware was acquired by Irdeto, a Canadian division of a South African company.

So the platform we had built was a good platform. We have developed an approach to investing in early-stage companies which we would describe as ‘market-driven.’ All venture capital firms look at market dynamics, but we overweight that exercise. Before we develop a deal, we develop opinions about what are the dynamics of a market in an existing space. Then we find companies that are consistent with our view about how the dynamics of a given market will behave.

When it came time to start Fairhaven and raise the second fund, our limited partners, which include some very strong institutional investors from North America, Europe, and Asia, saw in Fairhaven an approach they believed was repeatable, that had produced good returns in a period without a lot of strong performers, and they liked the fact that we had demonstrated we could be good partners. So it was performance, plus the fact that we played well with others.

X: The technology areas where you’ve invested, like mobile advertising with Third Screen Media and storage hardware with EqualLogic, are pretty different. How do you master the ‘market dynamics’ in each separate area?

PC: We spend time up front developing specific themes and market opinions. If you remember the end of 2000, Time magazine was publishing a cover story called “Technology is Dead.” And most people didn’t know what the next best thing would be. We thought the enterprise market would continue to buy technology, but what would it buy, and why? Our view was that … Next Page »

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Wade Roush is a freelance science and technology journalist and the producer and host of the podcast Soonish. Follow @soonishpodcast

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