After $150M exit, Bullpen Capital’s Paul Martino talks ‘Series A Crunch’

The Series A Crunch is the collision of a rise in seed stage investors and a retrenchment of institutional venture capitalists into the later stage. That hole in the market to fund tech startups, between the early money and the late money, though some question its size, is right where Paul Martino is working.

A resident of Doylestown, Martino is the fast-talking entrepreneur whose current project is as cofounder of Menlo Park-based Bullpen Capital and recent father of a $119 million exit of his adtech business Aggregate Knowledge (closer to $150 million with stock options, Martino says).

Here’s what’s happening: as the cost of launching a venture has plummeted (cloud based services, free social media marketing tools, etc.), there’s been a gold rush of new angel investment groups and seed stage funds to lower and earlier deals, just as more advanced venture capital firms have decided to focus on giving bigger money later on to lessen risk.

So thousands of U.S. venture-backed tech startup teams that got their first $250,000 of funding might disband if they haven’t built enough revenue or been acquired before they can attract a more established firm that might want to give $5 million or more toward a bigger company. For example, Fox Rothschild attorney Michael Harrington says it’s easier for him to get you $10 million than anything earlier on.

“A lot of these ventures want a fully developed business before they invest now,” said Martino. “That’s not risk, that’s not investment.”

Paul Martino.

This would seem like a market opportunity that would soon get flooded, just like seed stage investment nationally, but Martino says otherwise: “This is the most un-sexy startup investing you can do.”

“No one is running to do this middle stage stuff,” he said. You get the tech scene cred for being early, and you get buzz for doing the big deals later, “no one cares about what happens in the middle, but we’ll make plenty of money,” he said.

Martino hired a CEO replacement and left Aggregate in summer 2010 — not long after leading a post-investment “high wire” pivot from its initial recommendation service model to an adtech focus — and spent the next six months finding what would come next.

In December 2010, Martino and a host of Silicon Valley contacts joined together, to address the Series A crunch by investing in what they felt was most lacking. By way of friendship, former Phillies relief pitcher Chad Durbin became another of their limited partners.

“We told him that what we were doing for entrepreneurs is what he did for a starting pitcher: get them to the closer,” Martin, a graduate of Lehigh and Princeton universities, said. “So Chad said, ‘you should call it ‘Bullpen’ then.”

(State backed investor Ben Franklin Technology Partners of Northeastern PA is another limited partner with Bullpen, not Ben Franklin of Southeastern PA, because Martino had ties to the latter from his Lehigh days in Bethlehem, where he started a gaming company early in his career.)

In early 2011, the first Bullpen deal became a prototype of their model, Martino said.

• They followed San Francisco early-stage firm True Ventures to fund an expansion of social customer service startup Assist.ly.
• Less than a year later, Salesforce purchased the company for $80 million, after other later money helped shepherd that.

Last year, Bullpen raised their second fund, of $35 million, and has invested locally in Solve Media, Perceptual Networks and Grassroots Unwired, the mobile customer data tool based at Venturef0rth.

Like other bi-coastal investors in the Philadelphia region, Martino is on the road frequently, spending time each month in New York, Los Angeles and San Francisco, but this has always been home for the Lansdale native and North Penn High School alumnus.

So he’s experiencing the ‘rise of the rest’ expansion of new tech business corridors in a new way.

“Just because we’ve democratized the understanding of how to do this doesn’t mean every city has the capability now to do this, but Philadelphia has a lot of the right parts,” he said, going on to address how Silicon Valley and New York are separate conversations entirely. “But it sure is great for the country to have 10 third place tech regions.”

That popularity of tech as an economic development certainty is a warning sign, but it’s different than it was in the 1990s run up to the dot com collapse, Martino said.

“We are absolutely in a bubble, but it’s not in terms of real total dollars, it’s in the number of companies,” he said. When “large asset allocators” move back into tech investors and valuations get out of whack, then there’s real concern. For now, “I don’t know how this plays out exactly,” he said.

If Martino isn’t sure if something seismic or momentary is happening there, he is certain the conversation about technology leading a new urbanist movement is largely just bluster.

In the late 1990s, it was a shock when a San Francisco email software company called Critical Path went public, before some struggles, Martino said, because all the action was in the suburbs. Now in the Valley, the “hotter, younger” companies are choosing the city. It’s something happening nationwide.

It sure is great for the country to have 10 third place tech regions.

“This is fashionable, not inevitable,” said Martino, a lifelong resident of the Philadelphia suburbs. “All the cool kids are in the city right now, but I won’t be surprised if the next tech bubble in 2022 is in the suburbs.”

Remember that incubators and coworking spaces grew out of collaborative culture of the social web, not the “endless knife fight that is enterprise business,” Martino said, so while the “acceleration of learning by close proximity” is a real strength of dense urban corridors, having an explosion of shared work spaces may help Philadelphia business less in the long term than some may believe.

Rather than change what Philadelphia is, we should incorporate startup culture into what we already do well, build lean, light enterprise healthcare businesses that can impact a vital and monied industry, he said.

“We have to rely on what we’re good at, not just what everyone is talking about,” he said.