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Innovation economy

Some sell out, while others think big

New England needs more acquirers, fewer acquirees

Email|Print| Text size + By Scott Kirsner
December 16, 2007

Last month, EqualLogic Inc., a New Hampshire data storage start-up, was just days away from its initial public offering when Dell, the Texas-based computer maker, floated a formal offer to buy the company.

The price tag was $1.4 billion in cash. It was great news for EqualLogic's employees and its venture capital investors, which included Sigma Partners and Fairhaven Capital Partners in Boston, and Charles River Ventures in Waltham.

Only a Scrooge like me could look at the EqualLogic deal and see the eggnog mug as half-empty. But to me, every sale of a promising New England start-up to an out-of-state entity makes our region feel a bit more like we're running a farm team, rather than playing in the majors.

I understand the argument that big acquisitions, like September's $430 million deal to sell Waltham-based Adnexus Therapeutics to Bristol Myers-Squibb Co., return profits to venture capitalists they can in turn invest in new start-ups and allow newly wealthy entrepreneurs to go off and try something else - maybe even a riskier idea.

But we also need to build the next generation of "pillar companies" here - companies like EMC Corp., Genzyme Corp., Boston Scientific Corp., Hologic Inc., and Nuance Communications Inc.

These companies employ hundreds or thousands of people. They're acquirers, not acquirees. They lead industries, set the agenda, and attract the attention of media and Wall Street analysts. Smaller companies cluster around them.

Right now, acknowledges Steve O'Leary, an investment banker with Jeffries Broadview, New England "is a net sellers market, as opposed to a net buyers market." O'Leary, who earns a living by selling tech companies, says, "I'd like to see more of a food chain, from the big companies on down."

Venture capitalist Paul Maeder, a cofounder of Highland Capital Partners in Lexington, concurs. At a recent salon on the topic of building big, independent companies in New England, Maeder said, "We sell too soon. The reason California has so many big, billion-dollar tech companies is because we built about half of them by selling them our companies."

At that same event, Michael Greeley of IDG Ventures in Boston said his firm's best investment outcome of 2006 was a Lexington start-up, Brontes Technologies Inc., which was acquired by 3M Corp. for $95 million.

IDG had invested only about $3 million in Brontes, which makes a 3-D scanning technology to allow dentists to make crowns and bridges without plaster and molds.

Greeley said, "We could've invested another $20 million and tried to build the billion-dollar company. This kind of risk aversion is almost intractable."

Greeley added that he'd just returned from a trip to California. "Every company, every entrepreneur, every VC there thinks what they're doing is worth a billion dollars plus," he said.

So what might New England do to cultivate a new crop of big, independent companies?

Major companies tend to get started when industries are being born. In the 1970s, Boston Scientific was among the first to spot the opportunity for less invasive medical procedures; today, a start-up developing an innovative medical device naturally gets scooped up and plugged into the product lines of a Boston Scientific or a Medtronic before it has time to develop its second product and lay the foundations of a lasting business.

The regional innovation economy here supports a lot of "incremental improvement" companies, building products that are slightly cheaper, smaller, or more powerful than those that already exist. But the next generation of pillar companies is going to come from surprising corners.

They may not make sense, at first, to investors, or fit into an existing box. iRobot Corp., which makes robots for consumers and the military, could be one of these nascent pillar companies: Few venture capitalists felt it was a good bet in its first few years of business and the company scraped along on government research contracts. It's now publicly traded.

E Ink Corp., a Cambridge company that makes the paper-thin electronic display used in Amazon's new Kindle e-book reader, is another company working in a sector that was still hazy in 1997, when the company was founded.

A decade later, E Ink has 120 employees and it does the bulk of its manufacturing locally.

"If you build a company that you know is the type of company that Cisco or eBay will buy, that's a smart investment," says E Ink chief executive Russ Wilcox. "It's a well-worn path. But if you go out into a whole new field, it'll take a few more years to get the venture off the ground, and you'll have to do more market development."

Still, the long and winding road can be worth it: E Ink's display technology is now being integrated into store signs, cellphones, and watches.

Three other changes might help foster new pillar companies.

Executives and entrepreneurs who've been involved in building today's pillar companies need to be resources for the next generation. Playing golf and doling out donations are wonderful things, but speaking, mentoring, and serving on boards is even better.

"They need to tell their stories again and again, so new entrepreneurs can taste the prize," Maeder writes via e-mail. "The successful owe it to society to become visible role models."

Second, venture capitalists need to be more willing to hold on for a longer ride. In a way, the EqualLogic deal could help change their "invest to flip" attitude.

The company nearly accepted a $35 million acquisition offer in 2002, according to the blog VentureBeat. Instead, it kept trudging toward profitability, and in the quarter preceding its acquisition, booked $37 million in revenue.

The last thing required is entrepreneurs with an unshakable vision of building an enduring entity.

EnerNOC cofounder Tim Healy says, "I don't ever remember having the slide titled 'Exit Strategy' in our early days. Maybe we did, but I recall that it was always about becoming the world's leading energy management company."

EnerNOC, a Boston company that helps utilities encourage their customers to use less power at times of peak demand, went public in May and now has a market capitalization of $900 million.

"Maybe our egos are so big that we think that only we can change the world in the way that we're envisioning," Healy says. "And because of that, we've guided the company toward being independent."

Big egos are perfectly excusable, if they lead to a new generation of pillar companies.

Scott Kirsner can be reached at kirsner@pobox.com.

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