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

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the market would acquire technology that lowered the cost of operation, that facilitated enhanced control, and that helped to centralize IT administration. EqualLogic, iPhrase, Softricity and a series of other investments in the enterprise market were made in response to that opinion. EqualLogic significantly lowered the cost of storage, both upfront capital costs and the total cost of ownership. Softricity, one of the first virtualization companies, lowered the cost of supporting laptops. The one thread running through all that was the response to the market dynamic we thought was relevant.

X: And as you were raising the second fund, did you modify those themes and opinions at all, or were your investors pretty happy with the original focus?

PC: We had three or four themes over our first seven years. We continue with all of them into Fund II, and I think the limited partners were interested in both the approach and those opinions. We continue to look at the enterprise market as one where the focus is on ways to simplify and lower the cost of operation and provide greater control. Enterprises have spent a lot of time over the last few years reducing the number of servers they own, and we don’t believe that market dynamic has changed. It will become more difficult, though, because of the 80/20 rule—getting that last 20 percent is harder.

X: What about Xtranormal? That’s an animation company that, on the surface, has nothing to do with servers or storage or the lowering cost of IT ownership. It’s kind of wild.

PC: That’s another of our market themes, one we didn’t focus on too much in Fund I, but we are in Fund II. And that’s a focus on what is going to happen in the digital media space. We are not interested in content so much as the content development infrastructure—technologies that will spur the growth and management of this very large, expanding digital media market. Xtranormal does that for animation—making it better, faster, cheaper. Ultimately, it will get to the point where it will be true text-to-animation: where you write something and it will dynamically animate it. It’s breakthrough stuff.

X: What was it like to raise your second fund? Did you finish the fundraising before the real economic pandemonium struck in September?

PC: We were done by then. But it was a fascinating period nonetheless. We made a lot of friends and learned a lot during the process. The investors asked really good questions. They spent a lot of time drilling down into our approach and checking our references. They did what we do to the companies we invest in. And they seem to have put a premium on the performance we’ve been able to generate.

X: When you talk about diagnosing market dynamics like IT consolidation that are likely to be in place for a while, that’s all well and good, but aren’t there occasional discontinuities when market realities change? Many people think we’re going through one of those right now. How does the current economic turmoil affect your investing outlook?

PC: One thing you should know is that we look for investing time horizons on the order of three to five years. That’s what we have realized so far. Our oldest unrealized investment is just over six years old, compared to the industry average of eight and a half years. So we look for relatively near-term time horizons. The more time goes by, the more risk, and the more opportunity for major market shifts.

So, here we sit in October 2008, and we’re look at a time horizon for investing that takes us into 2011 or 2013. We’re looking for opportunities to create businesses that will be market leaders post the economic turmoil we’re going through right now. They need to be able to survive this period, so they have got to add value in the near term, but the real value creation is likely to come after the economic downturn has corrected. That’s how Fairhaven would look at the current situation.

We are bullish on innovation. We think it drives the U.S. and the world economy, and technology is certainly one of the key factors in innovation.

X: Has the recent shutdown of the IPO market affected your view of the time horizon for exits?

PC: Fairhaven has produced very good performance returns without ever having had an IPO. We had one that got really close, EqualLogic, and in the end it was probably a good thing that it didn’t go public. We are very happy selling companies if that’s the best outcome. And eventually the IPO market will come back.

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Wade Roush is the producer and host of the podcast Soonish and a contributing editor at Xconomy. Follow @soonishpodcast

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