Cue Ball Capital Adds $30M to “Evergreen,” Unconventional VC Fund

Cue Ball Capital, an unconventional Boston venture fund that counts some well-known business and media names among its investors, has added another $30 million to its ongoing investment fund.

The new fundraising follows a significant deal for Cue Ball’s portfolio: scientific publisher Reed Elsevier’s acquisition of Knovel, a provider of online engineering software.

The Knovel sale, announced in January for undisclosed terms, was the first “exit” for Cue Ball since it started doing business in 2008. If it can find more success, Cue Ball’s approach could inspire cheers from critics of the traditional VC industry, which has not lived up to performance standards in recent years.

Unlike traditional venture capital firms, which raise a series of separate funds expected to pay back investors over a decade or more, Cue Ball maintains an “evergreen” pool of investment cash of $100 million to $150 million.

That structure is intended to help Cue Ball shepherd its portfolio companies to maturity, rather than trying to hit an exit through acquisition or initial public offering based on the investment fund’s timetable.

The firm’s investments range widely and include Web commenting software provider Livefyre, flash-sales startup Ideeli, medical marketing firm 1-800-Dentist, and all-natural hamburger joint Epic Burger. It emphasizes solid business models with predictable revenues—an approach the Boston Business Journal called “venture capital with a hint of Warren Buffett.”

“All of us have been operators and entrepreneurs,” CEO Tony Tjan says of the general partners, who typically also have one of the largest stakes in the fund. “We’re very much focused on our operator advantage.”

They get paid differently, too. Instead of a typical “2 and 20” structure (2 percent management fee on the fund being invested, 20 percent of the profits), Cue Ball’s investors give the firm a budget for management costs, “which is very reasonable and has always been under 2 percent,” senior associate Tony Pino says.

Cue Ball does collect 20 percent on any returns, which means the firm is rewarded for performance rather than for raising ever-bigger pots of money—something that critics of lackluster VC performance have called out as a major problem in the sector.

Cue Ball’s chairman and general partner is Dick Harrington, former CEO of Thomson Reuters. Its 35 or so outside investors are made up of wealthy people, including Mehmet Oz, known to most as “Dr. Oz” from Oprah Winfrey’s media empire, and Steve Pagliuca, managing director of Bain Capital and co-owner of the Boston Celtics.

The venture firm generally has about 30 percent of its investments in startup-type companies with up to $10 million in annual revenues. The remaining 70 percent goes toward “early growth” companies, typically those with more than $10 milllion in sales per year, Tjan says.

Cue Ball also has some specific conditions about the business models it looks for in companies to back, including recurring revenue, intellectual property advantages, and good cash flow.

That’s notably different from some of the fashionable big bets in regular VC, particularly on the consumer Internet side, where investors are hoping for a Facebook or Google-like company that rockets to huge revenues well after establishing its product.

For all its differences, Cue Ball remains a smallish, relatively new player in the venture investing scene—one that has seen Boston-area firms rake in outsized shares of financing recently. But it’s one that may be worth keeping an eye on as the sands continue to shift in the fast-changing private investment world.

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