The Exchange is part of an ongoing series on The Hive tackling the questions facing Boston’s entrepreneurs, investors, and innovators. This week, we ask participants: Are angels and VCs in Boston too stingy, and is that hurting the ecosystem?
Below Jean Hammond, co-founder of LearnLaunch.org, argues that Boston venture capitalists and angel investors need to be more generous with their investments or the region risks losing locally-based start-ups to places like New York and California. LearnLaunch.org plans to hold a conference focused on education and learning start-ups in New England on Feb. 1 and 2.
Are Boston Angels and VCs too stingy?
To be blunt – yes. Our current strategy results in many angel and VC investments being too small and this is hurting our ability to grow more successful ventures in Boston. Many articulate entrepreneurs in Boston go to New York City or California and, sure enough, come back with a higher valuation and price, a faster deal, and a lot more money than was being offered by Boston investors. And they tell everyone about it.
So, yes, in comparison to NYC and California, Boston VCs and angels are too stingy and, if our investment community doesn’t change, an increasing number of the very best deals will go elsewhere.
Let’s look at the overall numbers to get a baseline. The six New England states represent 6.2 percent of the national GDP. For Q3 2012, New England VCs invested 12.75 percent of the total US VC investment. Angel numbers are harder to find, but the recently published Halo Report has New England at 14 percent of the national total of Angel Capital Association groups that reported. Of course, 80 percent of the angel sector does not report, but this is a reasonable estimate. Thus, New England angels and VCs invest at a rate much higher than the average over the entire country. So it is not an issue of total investment, but we are not competitive for some of the most interesting deals.
Today, a lot of significant innovation is delivered over the Internet, with the ability to gain access to huge markets faster than ever before. To compete, companies need to get to market fast, experimenting simultaneously with several strategies for market capture and penetration. If backed by investors who wait to see traction before investing the necessary capital for fast market entry, these companies will be slower than their competitors.
New England is rich in tradition. First, the heritage of Boston investors is “Yankee pricing.” Second, the Boston venture infrastructure was built around hugely successful computing and networking “box” companies and other infrastructure. These have resulted in an investor bias for companies that start at a moderate speed and require a relatively steady and easy to predict level of funding. Add in entrepreneurs who want to give up less of the company in each financing, which leads to relatively frequent, small fundings. But, if we combine those predictable steady bites of funding with Yankee pricing, what do you get? Not the speed of innovation and market entry that today’s high potential companies need.
Investors in other parts of the country have a different history. NYC and California have grown up with media, movies, consumer product “fads” and consumer electronics – all with much the same potential for explosive growth as today’s high growth consumer opportunities.
In summary, even lean Internet start-ups need serious money to grab market share. Boston needs more of the investment community to jump on the hot deals, accepting some consumer adoption risk and investing sufficient money to carry out sophisticated market entry trials. There will certainly be some busts, but hopefully many successes.
Some change is needed. But the Boston investment community has lots of characteristics that are great. We are seeing real success in serious “heavy lifting” start-ups in areas such as robotics and big data. New England’s angel groups lead the country in syndication follow-on rounds, often raising a millions to cover growth of their investments. And we should watch and learn from the entrepreneurs with recent successes in Internet companies, who are now giving back to the start-up community by becoming the next generation of investors.
So, yes, New England needs to change to match the need of companies innovating today. We need to be less stingy.
This week’s exchange was compiled by Sanjay Salomon.