Bowstreet Burns Through $140M, Gets Another $7.7M

There are certain companies that seem unable to scare off investors.

Bowstreet Inc., a Tewksbury, Mass.-based Web services provider, is one of them. How else to explain a $7.7 million funding deal, which is expected to be announced today, after the company has already burned through $140 million in prior backing?

The new round is listed as a Series A recap, with new investor IDG Ventures joining existing backers Matrix Partners, Charles River Ventures, Pequot Capital Management, Azure Capital Partners and Kleiner Perkins Caufield & Byers. No valuation information was disclosed, but it’s a safe bet that term sheets were below the $64 million pre-money mark Bowstreet received for its Series B round in 1999, let alone the $573 million valuation it got for a $50 million Series D round just one year later.

Chip Hazard, a managing general partner of IDG Ventures, acknowledges Bowstreet’s troubled track record, but he says that executive changes made in late 2002 have turned the company around for the better.

“One of the things that convinced us to do the deal was the significant progress that the new team has made from a sales and marketing perspective,” says Hazard, who joined the Bowstreet board in conjunction with the funding. “I don’t think they added a single new customer in 2001, but they added 16 new customers in 2003.”

When Bowstreet was founded seven years ago, its goal was to provide J2EE – and, later, portal – infrastructure solutions to e-commerce companies. A major problem, however, was that the company essentially made competitors out of companies that would have made better partners, such as IBM and Sun Microsystems. Predictably, the bigger players crushed Bowstreet.

In a last-ditch attempt to salvage a once-promising business, Bowstreet hired Boston tech veteran Michael George as CEO in November 2002. He strengthened a burgeoning relationship with IBM, and began to disengage from the J2EE application server market. Instead, it refocused on its core technology, which involves engineering such applications so that they can be changed on demand.

George says that the company should hit cash-flow break even later this quarter, and that the latest VC funding will be used to initiate a new program. He says that none of the firm’s 32 existing institutional investors were technically washed-out as part of the recap, although those who didn’t participate saw some substantial preferred ownership downsized to new relatively insignificant junior notes.

Bowstreet is not planning to raise another round of private capital funding, although Hazard and George carefully remembered to “never say never.”