Now is far from the best time for an entrepreneur to try to raise money. Venture capital investment has been flat this year, and initial public offerings, the vehicles by which VCs achieve their outsize returns, have been almost nonexistent. "It's never been harder to create the kind of company that VCs look for," says Jim Armstrong, a managing director in the Santa Monica, California, office of Clearstone Venture Partners. The ideal candidate for venture backing, he says, has the potential to quickly become a public company worth at least $1 billion -- a tall order in this economy. Even so, venture capitalists, by their nature, are always on the lookout for an interesting deal, and many firms are sitting on huge war chests of capital raised over the past few years. So, as part of an annual exercise, we asked Armstrong and partners at three other firms that invest in young, fast-growing companies to take a look at this year's Inc. 500 (which we published in September, and which you can find at Inc.com). Please note that the panel was given no information beyond what was printed in the magazine: no balance sheets, no business plans, and -- gasp! -- no PowerPoint decks. Nevertheless, the VCs gamely told us which companies caught their fancy.
Todd Dagres is a founder of and general partner with Spark Capital. Based in Boston, the firm manages $640 million in two funds and has invested in Web 2.0 standouts Twitter, Veoh, and thePlatform.
Solar Liberty (No. 92)
2007 revenue: $15.7 million
What it does: Installs solar electric systems for homes and businesses
"High oil prices are creating big opportunities in energy," Dagres says. "Normally, I would bet on a company with intellectual property, which Solar Liberty doesn't seem to have. But a lot of companies are developing solar technologies and, as an installer, Solar Liberty can wait to choose the technology that works the best. That puts these guys in a pretty good position." (Reflecting solar's popularity, Armstrong also identified Borrego Solar Systems as a company to watch. For more on Borrego, see Cool, Determined & Under 30.)
Zipcar (No. 327)
2007 revenue: $59 million
What it does: Operates a car-rental service in cities such as New York and San Francisco
"I like the fact that Zipcar is using technology to disrupt a huge market, that they're going after the most attractive geographical segments, and that they're capturing a young demographic," Dagres says. "The big rental car companies could compete with Zipcar, but it would take a while for them to catch up, and Zipcar has some patents. More likely, one of the rental companies will one day buy Zipcar, or the company will go public someday."
Delivery Agent (No. 49)
2007 revenue: $22.6 million
What it does: Creates media-company websites at which, for example, a consumer can buy the shoes she saw Carrie wearing in Sex and the City
"I should say up front that I have a tiny investment in this company through another fund," Dagres says. "I think Delivery Agent could be the next Home Shopping Network. The company helps TV networks and film studios sell products that are featured in their shows and movies. They're inventing a new kind of shopping experience. Plus, the entertainment industry tends to be countercyclical. When times are bad, people still go to the movies to escape."
Dave Furneaux is founder and managing director of Kodiak Venture Partners, based in Waltham, Massachusetts. The firm manages $676 million in three funds and focuses on early stage deals, primarily in the Northeast and Canada. Its portfolio includes Live Gamer and Hanger Network.
Big Fish Games (No. 204)
2007 revenue: $50.5 million
What it does: Makes games that can be played online or downloaded
"The classic technology sectors -- like IT and software -- are not as strong as they used to be, because technology is becoming more commoditized and more globalized," Furneaux says. "But there are still areas in tech that are attractive, and the gaming world is a bright spot. My kids use Big Fish Games, and I think it's a really interesting phenomenon: These guys build a bunch of games, put up a site, and, presto, in just five years they're doing $50 million in revenue."
Brad Feld is managing director of Foundry Group in Boulder, Colorado. The firm's $225 million fund focuses on early stage and seed investments in North America. Feld also co-founded and manages Mobius Venture Capital, a firm that backed GeoCities, VeriSign, and FeedBurner.
Sittercity (No. 287)
2007 revenue: $2.6 million
What it does: Runs an online directory at which parents can search for babysitters, housekeepers, and other help
"I've met the founder, and she's building a really interesting company in what is a well-defined vertical market," Feld says. "Sittercity's model of matching service providers -- babysitters -- with consumers in a trusted way has a lot of potential. I also like that this company is still at a pretty early stage, which means that the valuation would be attractive from an investor's point of view."
Winshuttle (No. 353)
2007 revenue: $5.1 million
What it does: Makes software that pulls data from a desktop PC into an SAP enterprise system
"Of the software companies on the list, this was the most interesting to me," Feld says. "At our firm, we call this a 'glue' company, meaning it connects different software services together, and it's a theme we try to invest in."
Jim Armstrong is a managing director in the Santa Monica, California, office of Clearstone Venture Partners, which also has offices in Silicon Valley and Mumbai. The firm manages $650 million through three funds. Clearstone's past investments include PayPal and Overture.
Red Ventures (No. 17)
Charlotte, North Carolina
2007 revenue: $103.7 million
What it does: Identifies households that would be good sales leads for customers such as DirecTV (NASDAQ:DTV) and ADT, the home security provider
"Lead generation is a massive growth industry," Armstrong says. "The Web is really good at driving traffic, but most businesses don't want traffic -- they want customers. Internet advertising companies, including Google, haven't really thought this through. Red Ventures could eventually be in a position to create a universal technology platform for lead generation that could be used by marketers in all different industry verticals." During due diligence, Armstrong says that he would take a hard look at the company's customer mix to see how broad it is: "A lot of lead-generation companies have problems with customer concentration, meaning that they've grown large on the backs of only a few big customers."
Cymphonix (No. 168)
2007 revenue: $3 million
What it does: Helps large companies apportion the bandwidth employees tie up at work
"At $3 million in revenue, Cymphonix is kind of small," Armstrong says. "But as Web video and VoIP become more popular, companies are going to need to look at employees' browsing habits and set priorities for bandwidth. Some people are revolting against this type of technological control, but at the end of the day, I think it will be a growth industry."