On Selling East Coast Companies and the Startup Ecosystem Virtuous Cycle

In the ongoing debates over how the east coast and west coast startup ecosystems stack up, one common assertion is that our local ecosystem here on the east coast is best seen as the M&A feeding grounds of big west coast technology companies. And those making this assertion then go on to say that this has troubling implications for the overall tech industry in Cambridge and Boston.

I don’t see it that way.

We should be thrilled – not stressed – to have more companies exit to the big tech companies of out west. In fact, we could use even more to ensure a healthier, more vibrant ecosystem. The question is how can we drive even more of these liquidity events?

First, let’s start with 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 accurately was 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: Cambridge Avg. Amount Raised: $981K Avg. Valuation: $2,868K

Location: Silicon Valley Avg. Amount Raised: $854K Avg. Valuation: $3,363K

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 or – more importantly – not enough dollars in this geography.

Where New England has suffered some (especially in this latest wave of Internet companies) is in finding “scaling employees,” or the folks who, 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 along; 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. Think of it as 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).

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 startups that won’t ever be able to turn into billion dollar standalone companies a way to find a home, thereby releasing raw materials back to start the cycle.

This last part of the cycle (the “selling out” phase) is a key to the success of the New England tech ecosystem, and we need more – not less – of it. By having companies like Google, Microsoft, VMWare and Amazon establish meaningful presences (not just sales offices) in Cambridge, we are likely to see more of this type of activity.

To echo the words of Scott Savitz, CEO of Shoebuy.com, the key metric should be the number of “at bats” that we as a region get 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.

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