startups leaving Massachuesetts VCs college graduatesBy Randy Giusto- I’ve spent a lot of time attending Boston area innovation and entrepreneurial events over the last two years. Events held by the Bay State’s VC and angel community and others driven by startups and serial entrepreneurs.

At large conferences, developer meetings, and small meetups, the mood on the surface is one of frustration while side discussions are very visceral. Boston is losing its entrepreneurs and its college graduates. Half of Massachusetts’s graduates leave the state, especially in technology-related fields. Some people in the Boston area lay the blame at the foot of the VC and angel community, the colleges themselves, and state government. There’s a lack of coordination between entities to create an ecosystem that fosters entrepreneurism and building companies that become great brands and stay in the community. Boston has entrepreneurial and innovation communities, but its investment entities are too focused on the short sale.

The mood wasn’t any different at Foley’s recent Emerging Technology Conference. The recession’s hit entrepreneurs hard with an investment shortage, but Boston’s VCs and angels appear to have cut back too far, raising the bar too high- business plan, channel strategy, cash burn rate strategy, existing (substantial) subscriber or revenue base, list of partners, and an exit strategy, before you can get a term sheet. There have always been discussions in VC circles about “why can’t we be more like the Valley?” I’ve sat through them countless times. But smaller markets like Boulder, Seattle, and especially New York, which until a few years ago had a very small technology startup community, are quickly overshadowing Boston.

 

Lack of B Round Investments

 

Foley’s recent data underscores the issues. Boston’s VCs over the past year have focused more efforts on smaller A rounds followed by C and D rounds, skipping B rounds almost entirely. If you’re a Boston-area startup who’s worked through your initial funding, god help you if you are seeking a B round from your own backyard. Even A rounds are more difficult as VCs and angels are giving less and less. Most entrepreneurs I’ve talked to over the past two years are more successful getting A rounds and seed money out of the Bay Area, which means that many eventually leave Boston, which is sad.

 

Boston VCs are Still Focused on the Quick Sale

Foley’s data showed that M&A’s are still the preferred exit strategy, with time periods slipping from two years to over three years mainly due to the recession. Seventy two percent of those polled by Foley said that exits were taking over three years, while 24% were still executing them in 1-2 years. This has been the fundamental problem in Boston for years. VCs are too quick to turn over their portfolio companies and sell them fast to big brands like IBM, HP, Cisco, Microsoft, and Goggle, who may have a presence in Boston but are not headquartered here. Boston VCs simply don’t let startups grow long enough; let them establish their own brand as VCs in the Bay Area do. Startups there have a better chance of lasting five years and building a brand, and have a better chance to IPO even in this environment. This again leads to a lot of Boston entrepreneurs leaving the area.

 

The Very Public Face of Boston VC Conservatism

Boston VCs have publicly talked about their image, saying “Boston is just more conservative” than other investment communities. Foley’s data bears this out as 80% of investors polled this past year either preferred or strongly preferred quick, safe investments, shifting to smaller more predictable A rounds with less capital, and C and D rounds with less capital but safer returns. They have little appetite for new ideas and demand proof of concepts.

I’ve run into entrepreneurs at MassInnovation Night, Mobile Monday Boston, the Future M conference, MITX and HBS events, Ultra Light Startups, MIT’s Boston Innovates, developer meetings, unconferences, and other events around town and the side talk is always the same- the Bay Area, Seattle, Boulder, and even New York are doing more for entrepreneurs with good ideas, especially graduates coming out of our best colleges. Contests from the various associations around the Bay State are trying to drive a high profile that we’re doing something, but we’re coming up short after the award money runs out.

A large number of Bay State entrepreneurs have now turned their backs on Boston’s VCs and angels. They are instead bootstrapping their startups with friends and family or individual investor money because they don’t want to give up so much control to VCs, and spend their next two years solely focused on an exit strategy. They want to build their brands, and are increasingly looking outside of Boston when they do need that next investment. This is also is leading to more firms and talent leaving Massachusetts when firms reach a certain size.

 

Take Social Media For Example

 

I found that sitting through the “Speaking Without Talking: How Social Media is Changing Product Development and Marketing” discussion at Foley’s conference especially frustrating. I felt like I was sitting in a time warp and it was three years ago. On the panel were Bill Phelan of Carbonite and Dan Smith of go2media.

Carbonite uses social media as a tool throughout its product development lifecycle, to monitor, listen, plug in, and bring people in interactively as they develop concepts from ideation all the way to delivery. They’re creating APIs to integrate with Facebook and Twitter and looking at Gowalla and Foursquare next. They’re engaging both existing and target customers to recognize who their audience really is, and doing checks and balances. But they hire external writers to moderate social discussions and have not invested in tools.

go2media uses social media “to connect to people to do fun things.” They mainly use it for marketing purposes, and haven’t invested in tools either. They’ve found that untargeted ads on YouTube work just as well as outbound marketing, and their most effective marketing tool is the “Like” button on Facebook.

But it was the audience at the session, mainly made up of investment community people or those that serve that community that seemed totally clueless about the merits of social media. There were the time warp questions-

  • How do you deal with people who are saying bad things about your brand?
  • How do you police your employees, ex-employees, or competitors if they’re saying bad things about you?
  • Why don’t you just use LinkedIn?
  • Isn’t social media just another bubble that’s going to burst?
  • What’s Techcrunch? What’s Mashable? What’s VentureBeat?
  • Why wouldn’t you just deal with someone on the telephone for customer support?

I spend a lot of time in the Bay Area, Seattle and New York. I stopped hearing those questions three years ago, especially at investment conferences. This again reflects Boston’s conservatism and technology naïveté. One attendee said to me that Boston’s investment community’s unwillingness to learn about what’s going on in tech and myopic focus on safe investments is keeping them out of the game, allowing more great ideas and great people to leave the area. And it’s true.

 

What If You Held a Conference on Emerging Technology and No Entrepreneurs Showed Up?

The luncheon session at Foley’s Emerging Technology Conference was entitled “The Care and Feeding of Venture Capitalists: How Successful Entrepreneurs Educate and Partner With Their Investors,” and I kind of scratched my head. Shouldn’t the title be the other way around? I could count the number of entrepreneurs in the room of 300 on two hands. Most who claimed to be entrepreneurs were really serial entrepreneurs or angle investors trying to find the next place to put their money.

The most revealing and honest discussion about what is wrong with the Boston VC, angel, and entrepreneur community came up in the gaming discussion at Foley’s conference. But I’m saving that discussion for my next Post.

– Randy Giusto

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