I attended a panel last night nominally on the topic of whether the local startup ecosystem was best seen as the M&A feeding grounds of big west coast technology companies. Because it was an interesting group of panelists, we wandered a bit and never really dug into the core question of whether this is true and what its implications might be for the overall technology industry in Cambridge and Boston. Having been Twitter taunted by Scott Kirsner to come prepared for a fight, I was disappointed we mostly avoided the topic.
The short answer is that while we do indeed have plenty of liquidity events tied around large technology companies from the west coast as acquirers, we could use more to ensure an even healthier ecosystem and that as such I think we should be thrilled to have more companies exit to the big tech companies of out west, not stressed. While there is one nuance about what we are missing today (particularly when it comes to web companies), overall this is a good thing.
First, my take on the necessary virtuous cycle of the startup ecosystem:
It starts with "founder material," the engine of the entire machine. As a general rule, New England has always done well in producing founders but a macro trend which has helped us disproportionately in the last five years has been the plummeting age of the typical founder, a factor which plays very well in a university-rich geography. Whereas the 1980s saw the median founder coming out of a minicomputer company on the 128 riviera, today that founder is just as likely to be 22 and fresh out of MIT, Harvard or any of the sixty odd colleges and universities in Massachusetts alone.
To get the engine started, most founders need a little fuel in the form of a few hundred thousand dollars, something which until this latest boom in seed activity was a weakness of our region, or more likely, a unique strength of Silicon Valley. Back in 2001 when the venture dollars dried up, the only place one could get money at this scale in Boston ($100-1000K) was from one of a few rather onerous angel groups. However, using the new StartupDataTrends (a very cool new tool I highly recommend you try out for what it achieves in terms of startup funding transparency), you can see the differences in average seed round amount raised and valuations below:
|Location||Avg. Amount Raised||Avg. Valuation|
Once the engine has started, the startups that find product/market fit then often go on to need scaling capital, the job of traditional early stage investors and a segment where New England has been over represented on a per capita basis for a long time, so we certainly have no problems there. Entrepreneurs may argue that VCs are too conservative or don't get the Internet but it's hard to argue that there are too few of us, and more importantly, not enough dollars in this geography.
Where we have suffered a bit, especially in this latest wave of Internet companies has been in finding "scaling employees," or the folks that, trained at large companies in a similar sector, can quickly ramp a few hundred thousand dollars of run rate revenue or unique visitors into millions and tens of millions. In the 1990s we didn't have this problem because everyone was new to the web and we were all making it up as we went but over the last 10 years there has been a legion of middle managers that have gone from Yahoo to eBay to Google to Facebook (and a few other relevant chains) and learned how to skillfully scale engineering, sales, marketing, operations, etc. for ever larger web businesses. My mental image of this is a set of Russian dolls surrounding the same core group of management talent with each subsequent generation of a "pole tech company" being more massive at scale than the former (e.g. Yahoo->Google->Facebook).
While we've got some of those folks here (hidden away at companies like TripAdvisor, VistaPrint and Kayak), the density is too low for all of the interesting startups that need this type of talent. This is the one place where not having the big pole companies in the web (unlike say systems companies in networking and storage which we've got plenty of) has hurt us. Though again, time and success should fix this.
Finally, a lot of liquidity is necessary to recycle founders (who will swing harder the next time), create new sources of startup capital, and most importantly, provide a way for startups that won't ever be able to turn into billion dollar standalone companies to find a home, thereby releasing raw materials back to start the cycle.
This last point on too much "selling out" was meant to be at the core of last night's panel and my core argument was going to be that we need more not less of it and that by having companies like Google, Microsoft, VMWare, and Amazon, establish meaningful presences (not just sales offices) in Cambridge, we were likely to see more of this type of activity.
I believe Scott Savitz said it best last night when he talked about the key metric being the number of "at bats" that we get as a region to create monster companies here. No matter how you think of it, accelerating this startup ecosystem virtuous cycle— be it in e-commerce, mobile adtech, infrastructure software, robotics, ed tech, or any other of our emerging tech clusters— can only help that particular statistic.
Postscript: In a related sign of the virtuous cycle being accelerated, Brad had a very nice piece after his visit here this week on entrepreneurial density that is worth reading.