Here’s what you probably know about Bain Capital, the private equity company cofounded by Republican presidential candidate Mitt Romney in 1984: It buys up shares of companies like KB Toys and Dunkin’ Donuts, offering sweet bonuses to board members and loading the company up with debt in order to finance “dividend recapitalizations.” Maybe you read Rolling Stone's piece in late August about how Bain’s financial moves helped net Romney some of his fortune and left a trail of laid-off long-time employees in its wake. Even the Wall Street Journal in 2009 produced a list of 11 companies affected by dividend recaps, and Bain made the list twice as an investor in KB Toys and Warner Music Group. During tonight’s first presidential debate between Romney and President Barack Obama, you’ll probably hear the name Bain Capital often enough to fuel an energetic drinking game.
Now here’s what you probably don’t know: If you’re a fan of receiving quick shipments from Amazon, use Apple’s iCloud to store your favorite songs, or recently updated your LinkedIn profile, you’ve boosted the bottom line of Bain Capital.
Let’s connect the dots.
How do you think that box from Amazon (a Fast Company Most Innovative Company) gets outside your front door just 48 hours after you place an order--with free shipping, to boot? You’ve got Massachusetts-based Kiva Systems (another Most Innovative Company) to thank for that, and Kiva Systems has Bain Capital Ventures to thank for most of the seed money that got it off the ground. Kiva created a fulfillment model based on burly, but compact, orange robots that shuttle stacks of inventory around massive warehouses.
If you’ve recently purchased the iPhone 5 or upgraded your legacy device to iOS 6, you’re taking advantage of the software’s cloud-based music management properties developed by Lala, a company backed by BCV that was acquired by Apple (another MIC--you seeing the trend here?) in 2009. BCV led multiple financing pushes, including the Series A round in January 2005, that helped move the company’s business strategy from CD-swapping to cloud-based uploading and licensing of songs. Apple acquired the company for $80 million in December 2009 after bidding against Google.
Over half of the $103 million in venture funding LinkedIn raised from 2003 until its IPO in 2011 came in 2008 when Bain Capital Ventures and three other companies made a Series D investment. That round of funding helped the business networking service expand by nearly a factor of 10--from just over 100 employees to 1,000, and from 17 million members to 100 million.
Bain Capital Ventures has over 100 companies in its portfolio, and each has its own story. But Bain’s work with Kiva Systems from 2004-2012 seems standard enough to be educational. And it resulted in Kiva founder Mick Mountz’s fully formed company being purchased by Amazon in March for $775 million, netting BCV a hefty windfall.
Ajay Agarwal was Bain’s top venture executive on the Kiva Systems project and doesn’t want to ruffle the feathers of other companies in the portfolio, so he hesitates to rank it in the company’s top-5 all-time, saying, “We’ve been involved in a lot of successful companies, it depends on how you measure it” before rattling off BCV connections with LinkedIn, Doubleclick, Liberty Dialysis, and SolarWinds. (There’s Tennis Channel, Vonage, Princeton Review, Minute Clinic, and others, too.)
“But we were investors pre-revenue, and we were the largest shareholder, and … the absolute return on dollars was significant,” he says, unable to reveal specifics. “The limited partners and folks at our firm were thrilled about it, it was a very good outcome and an outstanding outcome for Mick and his team.”
Agarwal is being modest when he says 99% of the credit goes to Mountz and his colleagues, who wrote the code and built robot prototypes that made order fulfillment more efficient for warehouses. In fact, Bain’s long-standing connection with Staples led to an important trial run for Kiva.
“Bain’s venture capital group is a fund inside of the larger Bain Capital, and the private equity portfolio they had included companies like Toys-R-Us, Burlington Coat Factory, Michael’s, and a bunch of others,” says Mountz. “We felt as a small startup, if we were out trying to pitch our idea and get some reviews, their portfolio would serve as a natural backstop because they’d worked with so many businesses that were attractive to Kiva.”
So with funding came customer introductions but also an important vote of confidence that helped the startup allay clients’ concerns about handing over their precious warehouse inventory to robots. Even after hearing Mountz's pitches in 2005 and 2006, Agarwal says, “No one wanted to be the first guy to have this worst-case nightmare of robots running amok in their warehouse--no matter how compelling the value proposition was.” So BCV helped get Mountz an audience with Don Ralph, Staples' top executive for logistics in North America.
Once Kiva Systems proved itself with Staples, more clients like Walgreens and Diapers.com followed.
After a few years, what some potential investors saw as a $100 million risk started generating cash with just a third of that investment. Eventually it became an appealing target for Amazon.
“With a modest investment and long-term patience they were able to create a sizeable business that employs a lot of people,” says Mountz (over 300 in the Boston area), noting that Kiva also makes its robots and ships some of them to European installations. “[Bain’s] been able to create a mini jobs engine in the Boston area and a manufacturing exporter.”
In the final phase of Bain’s involvement with Kiva, it was a key advisor on hiring decisions--COO, CFO and others, something with which Mountz says he was glad to have help. And Agarwal says the Kiva timeline is a fair representation of how Bain Capital Ventures works with most companies.
“We are very active investors on the venture side,” says Agarwal. “Fifty percent of our investments are early stage, first institutional funding or Series A, and 50 percent are more growth-oriented. In both cases we tend to be the largest institutional shareholder, we tend to be the most active member on the board and the lead director on the board.”
Investments from private equity companies like Bain Capital don’t always work out, as some stories have noted and you’re likely to hear tonight. For Mountz a notable list of others, it clearly did.
“It’s another business model, like selling insurance is a business model, they all have their pros and cons,” Mountz says. “Selling hamburgers is another business model that’s killing Americans if you believe that movie [Super Size Me]. But the things private equity guys are doing inside the businesses they buy are the exact same things that good management teams inside any business are doing anyway.”
It's important to remember amid all the rhetoric tonight that Romney has said he left Bain in 1999, though documents suggest he helmed the firm as recently as 2003. Bain Capital Ventures was established in 2000, although the recipients of its funding have benefitted from relationships and expertise Bain Capital proper had forged years before, as was the case with Kiva.
But if you do play that drinking game tonight, remember that no matter which side of the aisle you support, the shot glass you use might not have made it into your hands without Bain Capital.
[Image: Joel Arbaje]