Tom Stemberg is baffled why many venture firms steer clear of retail investments. After all, in the 1980s, such brands as Home Depot, PetSmart, Staples, Starbucks and Whole Foods Market, just to name a few, raised venture funding and are today consumer mainstays.
Stemberg, who founded Staples in 1986, aims to bring venture financing back to retailing as a managing general partner of Highland Capital Partners, which recently raised $300 million for its first fund dedicated to consumer investments: Highland Consumer Fund I. The firm already has four consumer companies in its portfolio and is actively scouting for more.
“Since the technology boom of the late 1990s, the consumer market has been underserved by the venture capital community,” Stemberg says. “We look to address that opportunity immediately.”
The consumer fund—which is separate from the $800 million that Highland raised last year for its seventh IT and life sciences fund—will invest in consumer products, services and retail companies. The geographic focus will be North America, although the firm will consider opportunities in foreign markets, says firm spokesman Michael Gaiss.
Stemberg transitioned out of Staples management beginning in 2002 and has been working as a partner at Highland since 2005. He helped lead some investments in specialty retailing for Highland, such as Princeton, N.J.-based Blue Tulip Corp., a retail store chain that provides personalized gifts and which has raised about $30 million from Highland and an undisclosed investor. Under his watch, Highland also invested in Lululemon Corp., a Vancouver-based maker of yoga apparel, as part of a $93 million buyout with Advent International.
Despite having invested in a scant number of consumer-oriented companies, Stemberg notes that Highland is primarily an investor in information technology, communications and health care, so the fund managers felt they needed a separate vehicle to focus on retail investments.
Since the technology boom of the late 1990s, the consumer market has been underserved by the venture capital community.
Tom Stemberg, Managing General Partner, Highland Capital Partners
Stemberg is one of two managing general partners of the consumer fund, based in Highland’s Lexington, Mass.-based office. Joining him is Ted Philip, who helped launch Internet portal Lycos Inc., where he served, at various times, as president, CFO and COO. Before that, was vice president of finance at The Walt Disney Co.
“Tom and Ted make an incredibly powerful team,” says Dan Nova, a Highland managing general partner and chairman of the newly formed Highland Consumer Fund Investment Committee. “Tom is a retail legend who constantly seeks opportunities for reinventing the industry. Ted complements with rigorous business discipline and diverse experience across consumer products and services companies.”
The consumer team expects to make between 15 and 20 investments over the next three to four years. Joining Stemberg and Philip are John Burns and Tom Guilfoile, who will serve as partners. Stemberg, who sits on the boards of Blue Tulip, Lululemon, PetSmart and Pharmaca Integrative Pharmacy Inc. (another Highland-backed company), says that each partner on the consumer fund will sit on three to five boards.
Highland has seen a number of its portfolio companies exit through acquisitions or public offerings in the last couple of years. Last quarter, Starent Networks Corp. and Helicos Biosciences Corp. launched IPOs.
Stemberg and Philip believe that the consumer market is large and attractive, with active IPO and M&A markets providing compelling exit opportunities for its portfolio companies.
“A dedicated consumer fund will enable us to take advantage of the significant volume of promising investment opportunities in the sector,” Philip says.
Highland Capital Partners
Fund name: Highland Consumer Fund 1
Fund size: $300M
Team: Managing General Partners Ted Philip and Tom Stemberg and Partners John Burns and Tom Guilfoile.
Focus: Consumer products, services and retail.
Sample investments: Blue Tulip, an operater of specialty gift giving stores; Lululemon Athletica, a yoga and athletic apparel retailer; Pharmaca Integrative Pharmacy, which offers prescriptions as well as natural health products and services; and Rec Room Furniture & Games, a game room furniture and equipment retailer.
Notable: The consumer fund is led by Thomas Stemberg, who founded office supply chain Staples in 1986. He has been working as a partner at Highland for the past two years.
Source: VCJ reporting