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VCs Pick the Hottest Inc. 500 Companies

VC investors' take on 2010’s best Inc. 500 companies.

Each year, the editors of Inc. send copies of the Inc. 500 issue, our ranking of the fastest-growing private companies in the country, to prominent venture capitalists. This year, we asked three VCs to single out what they see as the best of the best. Here are five companies that stood out from the pack:

Modcloth
Pittsburgh
Revenue: $16 million
Employees: 100
Three-year growth: 17,191 percent

What it does: Sells women's clothing online

Why investors like it: The company's clever business model -- shoppers vote on which styles should be stocked. "They're getting people to think about clothing in a different way," says Paul Holland, a partner with Foundation Capital in Menlo Park, California. That creates an emotional connection with customers that will make it hard for copycats to move in.

Red flag: ModCloth is run by a husband-and-wife team, which, given American divorce rates, means there is an even chance of a messy leadership struggle.

Box.net
Palo Alto, California
Revenue: $5 million
Employees: 65
Three-year growth: 1,822 percent

What it does: Provides online document management for companies and individuals

Why investors like it: Box.net operates in the so-called cloud, which our VCs identified as an increasingly popular method for sharing and collaborating on documents. Another plus: Box.net promises recurring revenue streams, because it is a subscription service. Thomas Ball, a partner with Austin Ventures in Austin, was drawn to the company for a more personal reason. "I use it on my iPhone," he says. "It's great."

Red flag: Box.net has revenue per employee of just over $78,000, which seems low for a software company. Profitability may be a challenge.

Stella & Dot
Burlingame, California
Revenue: $33 million
Employees: 40
Three-year growth: 3,458 percent

What it does: Sells jewelry through a network of independent sales reps called stylists

Why investors like it: Our VCs' eyes lit up at the size of the company's sales force: 10,500 reps. "It's like the Tupperware model," says Ball. "The leverage you get with these virtual-sales-force models is great." Another attraction: The company's founder, Jessica DiLullo Herrin, is a proven entrepreneur who sold her last company, WeddingChannel.com, for $62 million.

Red flag: Uncertain growth prospects. Once the economy heats up, those reps may ditch Stella & Dot for full-time jobs -- and health benefits.

Pandora
Oakland, California
Revenue: $50 million
Employees: 200
Three-year growth: 1,222 percent

What it does: Provides online music streaming

Why investors like it: Pandora is wildly popular, especially among young people. "I would have never thought that a radio-related service would be big someday," says Holland. "But the iPhone has changed things. There's a whole generation coming up that doesn't listen to terrestrial radio anymore."

Red flag: Pandora has been around for more than 10 years and has blown through a lot of money. "If you have a team that has been around for 10 years and hasn't been that successful, you have to ask what makes you think they'll be successful tomorrow," says Lawrence Lenihan, founder of New York City's FirstMark Capital.

LifeLock
Tempe, Arizona
Revenue: $131 million
Employees: 100
Three-year growth: 11,474 percent

What it does: For $10 a month, LifeLock promises consumers protection from identity theft.

Why investors like it: Fast growth and great marketing. "LifeLock is telling people your world will end if someone gets your credit card number," says Lenihan. "They're selling fear, uncertainty, and doubt, but that's a very compelling sales pitch." Plus, LifeLock, like Box.net, is a subscription business, which means customers will probably stick around for a long time.

Red flag: Legal bills. Identity-theft-protection companies, including LifeLock, have attracted class actions over their marketing practices.

Senior contributing writer Max Chafkin has profiled companies such as Yelp, Zappos, Twitter, Threadless, and Tesla for the magazine. He lives in Brooklyn, New York. @chafkin