Tuesday Apr 20, 2010 by Brian Balfour - Co-Founder, Viximo and Co-Founder, POPSignal
VentureFizz note: this blog post was originally posted yesterday on the POPSignal website. This is a very important topic, so we are publishing this post on VentureFizz to get some additional feedback. If you are interested in contributing, please read through all the threads and provide your thoughts in the comments section at the very bottom.
POPSignal maintains a LinkedIn group, where recently a POPSignal member, Adam Marchick of Bain Capital Ventures, posted a very interesting, and thought provoking question of “Is Boston Short Angels, Or Good Companies?” The result was a flurry of insightful responses from some of the best Boston entrepreneurs, angels, and vc’s.
The thread contained great information that we felt would benefit the broader Boston startup community, so with permission from all contributors, we have formed the following blog post to summarize some common themes and conclusions and the full thread itself. Please continue to contribute to the thread in the comments.
The full thread is posted below, but is a little lengthy so here are the primary bullet points of the discussion. If you have the time I highly encourage you to read it in its entirety.
Some comments have been edited or deleted at the request of the contributor.
Jay and I were talking on Friday, and he wisely suggested I submit this question to the group.
As a caveat, I am a newbie to Boston (nine months in). At BCV, I have spent a lot of time thinking about how to support more great companies being started. I sponsor/support Dart Boston, Greenhorn, Babson, Harvard, MIT, MITX and MOST IMPORTANTLY PopSignal. I am working with a number of lawyers to support their clients, etc…. you get the point.
I am happy to admit my flow of young start-ups is not on par with Dharmesh, Desh, etc., however so far there has been one Boston company I have seen that (in my mind) should be funded and so far is not: PeerTransfer.
Jay’s take (Jay please correct me) is that there are many many more ’should be funded’ people out there, just a lack of Angel capital.
Which side do you take? To prove Jay’s side, what other people/companies fit in the ’should be funded’ camp?
Once we know the root cause, we can figure out a solution.
I think there are some great folks in Boston with a lot of potential that have the beginnings of a great idea. But that they get somewhat stalled because of lack of a) guidance from veteran entrepreneurs, and b) some initial seed capital ($25-50k) which is relatively quick to secure to test their idea and assumptions to get it to a stage where it does become “fundable”.
Adam: Honored to be mentioned in the same sentence as Desh (who is in a whole other league).
One issue, I think, is partly that private/independent angels tend to often back people in their immediate network (or one degree removed). I’m as guilty of this as anyone. This makes it hard for budding, first-time entrepreneurs to really get early help/capital. Many entrepreneurs are introverts and are not good at building those connections (I can relate, because I’m totally that way).
I’ve been meaning to do a blog post around this topic (I’ve been asked by a couple of entrepreneurs in the last few weeks to explain the angel & VC market around town).
I tend to agree with Dharmesh. Most of the pre seed funding and mentorship that I see comes from either a) people in the entrepreneurs immediate network, where the “bet” is on the person and less so on the business; b) domain experts that live and breathe the problem that the entrepreneur is seeking to solve, and therefore can relate deeply (emotionally and intellectually).
With (a) the extent of an entrepreneurs network varies greatly. I’ve seen some whose networks are extensive and therefore can “easily” raise money very quickly and build a great mentor team; others who have really struggled on both fronts. With (b) I’ve tended to see that domain experts are open with their time and rolodex, but many are not necessarily angel investors.
In general though, I think there is a good shift that has happened in Boston over the last 24 months, and while funding is hard, the willingness and availability of mentors seems to have increased.
Good post Chris. This sounds like it points to the Angel funding being the issue. However, can we as a group think of any companies that in our mind are ‘under-funded’? I suggested one in PeerTransfer. If we can’t, it seems to point to the lack of start-ups being the root cause given this group is pretty tapped in.
To the original question “is it a lack of seed funding or a lack of good companies.”
The ultimate answer is BOTH. Its a cyclical problem that feeds each other. The more available seed money is, the more entrepreneurs you are going to pull out of the wood work in Boston(and other cities). But the way to break the cycle is solving the funding issue.
I hate to say it, but most startups will go where they can find capital. I went through this with Viximo where we were willing to go wherever we felt like we could get the best deal. Ironically it was here in Boston, but we got lucky and are a very rare case.
I know of 3 companies right now looking for seed funding in Boston who are all weeks away from moving to SF or NYC. They have commits from at least one investor in those other areas, but not enough people in Boston are committing to complete a round.
The amount of seed funding available needs to be drastically raised, and the process to get it needs to be made immensely more efficient. Then we need to SHOUT IT FROM THE ROOFTOPS!!!!! Let it be known that it is available here in Boston. It has to be more then a press campaign, but back it up with some real investments. A stereotype is growing on Boston for being difficult at the seed stage of funding and its going to take some large, loud moves to break it
There are two funding gaps that need to be filled in Boston. The $25K -$50K range, and the $250K – $1M range. Both are incredibly difficult to find, but essential for creating the next round of technology startups. The cost to scale a company remains. But the cost to prove assumptions has come dramatically down and that is the gap that needs to be filled.
I love that VC’s are willing to support PopSignal and other initiatives. But no offense to you Adam, or any other VC, but I think that gap can’t be filled by traditional VC’s. VC’s are great at taking companies that have proven assumptions and are near/ready to scale.
But the skill to prove assumptions quickly and efficiently is different. One that experienced entrepreneurs have which is why this funding gap has been primarily filled by successful entrepreneurs turned Angels.
Whew….I have a lot more but I’ll leave it at that
It’s all about VOLUME. The reason there aren’t more “good companies” here is because there aren’t enough companies getting started in general.
If you agree with this line of reasoning, then the only conclusion is that Boston is short early-stage money. While there is a solid group of individuals (e.g. Dharmesh), groups (Common Angels), and incubator-types (TechStars, DogPatch), Boston is still lacking the sheer volume of early stage capital to get crazy ideas to launch.
In the consumer web world, $25-50k is enough to get a product built and launched, and potentially iterated on once. With that small of an entry point, it’s crazy to NOT fund a bunch of ideas and see what sticks. Nobody can pick the next Twitter or Facebook at the seed stage, it’s impossible. But they need to get built to even have a shot.
Adam postulates that if we can’t think of good under-funded companies then the it must mean there is a lack of start-ups. But this logic is faulty at the core (no offense). We don’t know which “good companies” are under-funded because they probably didn’t make it past the ideas stage in the first place. And the ones that make it to a point they can be called “good” already have gotten at least past the initial phase, so it’s a self-fulfilling prophesy.
Another key is that seeding a high volume of companies creates a stronger pool of product and engineering talent, gives first-time entrepreneurs a start, attracts individuals from all over the country (potentially world), and provides a higher likelihood of creating great companies.
I’m glad there’s been a lot more discussion about this issue in the Boston community, and that people are thinking about how to solve it.
So if I allocated $100K to make four investments of $25K each, would that help at all?
Or do I need greater volume, i.e. $1M to make forty? That sounds like CommonAngels to me? Isn’t MassChallenge structuring this, but taking the funnel approach and only funding the last few.
Now that we have identified the problems, let’s figure out a solution.
While $1M would certainly not hurt, to have a true effect on long term growth of the Boston community the volume needs to have much higher then that. The goal would be to create enough companies where eventually a few of them hit to create large enough exits that would create another round of Angels to keep the community going.
At the $25K – $50K stage I think you are talking a 1% – 2% conversion to the big hits. There will certainly be other smaller successes but we need to create $1Billion+ exit.
If you assume that conversion rate I think we need enough money to create 100 – 200 companies ($10M initially). And then there needs to be more follow on capital in the $250K – $1M+ range to make those companies who pass the $25K – $50K stage stick in Boston.
So ideally we are talking a $25M – $30M capital infusion as a start. Compare that to the amount of seed money on the west coast (maybe even NYC) and its still small…but it would certainly have an impact.
We also need to think beyond this. We are talking about one of the major issues in the Boston community, but lets be honest, its only one. For example, we have 5X the number of universities here in Boston then the bay area has. But yet I only see regular involvement from two (MIT and Harvard) and one of them (Harvard) is 90% of the time useless because they are feeding MBA’s into the community when we need to be feeding engineers, life sciences, etc.
Lets think about this more broadly and ask, what are the biggest hurdles to starting a company? A starters list:
- Finding Seed Capital and follow on capital
- Finding Capable Co-Founders
- Finding additional talented startup employees
- Finding awesome advisors and mentors
- Curating the university talent early (beyond MIT and harvard and beyond the b-school students) and capturing them in the startup ecosystem early.
Boston needs to step up their game in every aspect to really create an awesome, long term, self sustaining eco-system.
Just like any big idea/startup, I think one of the only ways this happens is if someone (or a group) owns this and makes it their mission. There are a lot of people talking about this subject and doing small things (i.e. PopSignal) but no one is really driving and leading it.
So maybe the question isn’t what we need to do, its who is going to do it?
Thanks to everyone for a great Saturday morning read.
I’m in total (and equally passionate) agreement with both of Brian’s posts. The problems (and, to a certain extent, the solutions) are pretty well documented–but most of the current efforts feel like a drop in the bucket. It’s time for a redesign–a coherent, well-coordinated, holistic attempt to build and rebuild the systems and structures necessary to sustain a healthy startup ecosystem.
Who is going to do it? I have no idea, but I’d like to help out.
Great posts! Although doesn’t change usually happen from a bunch of actions that come together to make a difference, vs. a “a coherent, well-coordinated, holistic attempt to build and rebuild the systems and structures necessary to sustain a healthy startup ecosystem.”
i.e. sounds like a standards body vs. an organic movement. When starting a company, none of you asked for coordination and system compliance, correct? You just started the thing and saw what happened.
Alex, this is in no way a knock on your post, just playing devil’s advocate.
$25-30M, sounds like Launch Capital and Founder Collective, no? Anyone else that comes to mind that could help fill this gap?
I do agree that it’s more likely for this type of significant change to come from multiple sources working together (whether or not significantly coordinated as long as they have the same goals). However it’s much stronger to have a galvanizing force especially because we don’t have the large tech companies (HP, Yahoo, Google) or a very entrepreneurially aggressive university (Stanford).
The Founder Collective analogy works for fund size, but there are two key differences:
1 – They make investments all over the world, meaning the impact on a particular region is bound to be small.
2 – They make larger investments over the life of the company meaning they can’t have the same type of volume we’re talking about (they say they’ve invested $20m in 31 companies, or $640k each).
A fund of the same size that focuses on a certain tech hub (e.g. Boston/Cambridge) and limits the amount of funding to ensure a certain target volume of seeds can certainly have a strong impact on the community, more so than the funds based here but investing all over the world.
Great thread Adam, loving this.
A few comments.
1. PeerTransfer looks interesting. Have they been funded yet?
2. There’s a huge cap in early stage funding in Boston ($25k-$250k range) IMHO. There’s a lot of great former entrepreneurs stepping up and making some investments now, biggest issue here is that they’re mostly disconnected from current trends both b2c and b2b.
3. We’re very fragmented. “Dart Boston, Greenhorn, Babson, Harvard, MIT, MITX” is a very short list of the events/resources in Boston. Most of them operate in isolation with very little overlap between events/locations.
4. We need more modern day role models and make them accessible to everyone. This is what I’m trying to do with Performable’s Customer Development lunches, free and focused on bringing role models to town. We have so many role models here that we’re not celebrating. Stanford does an amazing job of this compared to MIT/Harvard locally.
4. Biggest problem IMHO is how disconnected venture guys, angels and experienced entrepreneurs are from the future entrepreneurs that are currently attending our schools. I want to be more connected to the undergrad community here to find the next wave of entrepreneurs, marketers and engineers. This chasm is *incredibly large* between these future entrepreneurs and venture guys and angels here, most vcs/angels that I know have heard my rant on this one multiple times but don’t admit there’s a problem so far.
Thanks for great discussion, let me know how I can pitch-in help.
Balfour said everything I was going to (seriously), so I’ll just double down on his remarks…
1. The 50K gap is interesting. It’s much less of a problem in the Bay Area because more people can afford to not work and try to get something off the ground. There are so many folks who have made a little money working for successful companies and cashing out on options that the thought of taking 6 months to a year to build something isn’t too unusual. But here, there has been a less wealth created and so fewer peopel with the financial freedom to take shots on goal.
2. One of the biggest challenges to starting a meaningful company is identifying a meaningful problem worth solving. The more people we have solving interesting problems, the more folks we’ll have that become aware of problems to solve. We’ll also have more mentors around town to support those efforts. There is a snowball effect, and although things aren’t great here now, I think that things are brewing and the momentum is shifting.
3. In terms of under-funded companies. I can throw out a few (these typically aren’t well known because they never reach escape velocity). But a couple are:
3. RunMyErrand (funded in SF)
5. Crimson Hexagon
But I think there are many others that never hit my radar screen.
Great discussion. We seem to agree that the lack of small early stage investments is hurting the ecosystem, so how do you convince people to place more bets? And is there an unsaid issue that many successful Boston entrepreneurs don’t reinvest in the community?
I also wasn’t sure why Boston had so many students, but lacked any cohesive way to help undergraduate entrepreneurs. So I recently became a mentor at BU’s new Venture Mentoring Service. It’s still a very new program, but they’re willing to experiment. David, if you (or anyone else) want to get involved, let me know and I’ll put you in touch with them.
Wanted to continue the thread by posting my current list of seed sources. The Individuals and ProfSeed were taken from the PopSignal list with a few adds. The Angel Group list is thanks to Jeremy Halpern. Follow up questions to come.
Bill Sahlman, Shikhar Ghosh, Guli Arshad, Dave Balter, Steve Kane, Andy Payne, Dharmesh Shah, Brian Shin, David Cancel, Don McLagan, Scott Griffith, Don Dodge, Ed Roberts, Bill Warner, Jean Hammond, Sheila Marcelo, Josh Kushner, Joe Caruso
Professional Seed Investors:
TechStars Boston, CueBall, LeadDog Ventures, Bantam Group, Launch Capital, Founder Collective
Common Angels, Launchpad Venture Group, Walnut, Hub, Boston Harbor , eCoast, Golden Seeds, Angel Investor Forum, Bay Angels, Beacon Angels, Boston Harbor Angels, Boynton Angels, Cherrystone Angels, CommonAngels, eCoast Angels, First Run Angels Group , Golden Seeds, Granite State Angels, HubAngels, Investor’s Circle, Launchpad Venture Group, Maine Angels, Monadnock Angel Investors, New Hampshire Breakfast Club, North Country Angels, Northeast Angels , Racepoint Capital, Revolutionary Angels, River Valley Investors, Sound Angel, Vermont Investors Forum, Walnut Venture Associates
MassMed Angels, Mass Medical Angels, Angel Healthcare Investors
Connecticut Angel Guild, Landmark Angels
Follow up questions:
1. Which one of these should be removed as Not Applicable? The goal is get a trusted list we all respect and recommend to others.
At the end of this process, it will be fun to tally up available capital from ‘good’ people and see just how much seed funding is currently available in Boston.
2. If you were looking for seed funding in Boston, who is the 1st angel or angel group you would go to?
- Bonus points of you add good tags like ‘Consumer focused, Marketing focused, <$50K, etc.'
3. What good companies in Boston have gotten seed funding from one of these groups? My example is Carbonite, who Common Angels funded. I led the B round when I was at Menlo.
Obvious other examples are the people in this group! Jay, David, etc. all!
As someone that recently went through the fund-raising process, I think I can add some value to an already great discussion. First, I found that angel investors names don’t really float around town the same way as they did in SF (was out there for 5 months doing YC) – as mentioned above, we lack many pseudo-celebrity role models with whom everyone aspires to close a deal. However, a quick Google search brings up blog posts by Rob Go and Don Dodge which, in combination, cover most of the investors listed above. Anyone with a drop of initiative can find the right people and groups.
Once we found the names, finding introductions and scheduling meetings was no problem. If there is a deficiency of checks being written, it does not seem to be matched by a lack of willingness to meet young entrepreneurs. Even just going to a couple DART events puts you within a degree of separation between most angels here.
Having now seen many companies win and fail at fund-raising on both coasts, I agree that many deals that are considered too haphazard here will close in SF. I don’t believe that there is a better breed of angel or early stage entrepreneur in the Valley. Most of the early deals done there look retrospectively foolish; but along with many more stupid investments come a few diamonds that we all marvel at years later. By now, I’m echoing the sentiment above: volume is the difference. In my view, impressive companies can get funded here, no problem. The ugly ducklings that could iterate and blossom with 50-100k (but probably won’t) are the interesting cases.
Adam, thanks for keeping the discussion alive.
If I were starting a consumer internet company in Boston today, I’ll tell you who my first calls would be (VC’s excluded)
1. Dave Balter, Shikhar Ghosh, Guli Arshad et al. Mainly because I worked for Dave, have a good relationship with him, and he has shown that he will bring together good syndicates for early stage companies.
2. Brian Shin, David Cancel, and Dharmesh. They all actually lead enterprise facing internet enabled businesses, but these guys really “get it” and are invested in the local eco-system in an amazing way given their limited bandwidth.
3. First Round Capital, Founder Collective, Maples, Harrison Metal, IA Venture partners. Yes, only Founder Collective is in Boston. Hmmm… I think there is a gap there, no? I think I could get an audience with FRC because I’ve been in Venture, but they haven’t made a ton of investments in Boston (but they have some – like Scanscout). Harrison Metal doesn’t typically do East Coast investments, but I worked for Michael so he’d at least listen. The others are good, but mainly active in NYC.
3a. CueBall is great for retail, brand, and information. They have done some good early seeds, but are more comfortable doing micro-growth investments. So it wouldn’t be quite right for my hypothetical example, but I’d definitely put them on my radar.
4. Techstars. Awesome program. Not right for me, but I do think that you get a lot out of it as a young founder beyond the capital. So I’d definitely say that they have a disproportionate impact relative to the dollars they deploy.
I’m a little late to join this discussion as others have already described the core of the problem but I’d like to add my 2 cents as an entrepreneur in Boston.
As a disclaimer I would like to say that I no experience whatsoever working with Angels, all my companies have been VC backed and I am a true believer in the VC model to fund companies because I think that if you have a ground breaking idea you should execute on it as fast as you can and with all the power you can get to make it work.
The main problem that I see and by reading this thread is with the VCs and not with Angels, there are very few VCs in Boston that are willing to take a chance on a team and the expectations from an early stage team are unrealistic IMO. According to what I believe VCs should invest in companies that have potential and not companies that have proof and these days most VCs in Boston prefer not to take risk and invest after the company has produced some proof.
This is why the VCs are expecting the Angels to fill this gap for them and fund the potential while they wait on the sideline to fund the proof.
As far as Angels go, I believe that the best Angels are ex-entrepreneurs or employees that have made a lot of money in startup companies. Unfortunately there aren’t a lot of companies like eBay, Google etc. in the Boston area that have produced millionaires that can be Angels and the majority of Angels here have made their money in other areas which makes it impossible for them to understand the start-up way. I know of several great companies that were funded by very wealthy individuals and have shut down their operations one day because the Angel decided he doesn’t want to invest anymore.
I also want to reiterate what Brian said about the universities – we find it extremely difficult to find good engineering talent coming out of the universities here and their involvement with the start-up scene is mainly from a management perspective, which doesn’t really help. I’ve also been reaching out to some of the top universities here to propose a research project and never even heard back where on the other hand I am getting unsolicited requests from universities in the west coast and England to perform the same research.
I’d also echo Justin’s comments. I think volume matters a lot. There are some deals everyone wants, some deals that no one wants, but most deals are deals that someone wants. In Boston, there is a very short list of folks you would go to, and if they say no, you are hosed. It doesn’t mean that any of those folks individually don’t “get it” everyone just has to make their own decision. Also, most of the Boston angels tend to invest as syndicates, so the true number of avenues to get to hundreds of thousands of dollars is smaller than even the list above suggests.
But I do think that more angel investors is good because it’s difficult to predict which ones emerge. Also, getting more enrepreneurs to have shots on goal creates a knowledge base that helps other companies or those same entrepreneurs when they go for their next company.
But what I would say is that in addition to quality, it’s also a profile issue. Operational credibility/help has a shelf life as one gets further removed from a business. So being able to take money from someone like Aaron Patzer should be more relevant to someone on the East Coast vs. another angel who’s customer acquisition experience looks more like enterprise software. There just aren’t as many angels here that have built web based online products, acquired millions on consumers online, or scaled meaningful properties using web infrastructure.
But, I think we are making major progress here… that’s what my gut is telling me at least. Also, I am pleased to hear that more VC firms are getting active. They may not do seed deals all day long, but they are going earlier. Spark definitely is doing this, but we’re not alone.
My issue with seeds, angels, or incubators is that there are really only two types of entrepreneurs that can benefit from it. Serial entrepreneurs who have sold something before and have the capital to bootstrap or scrappy young entrepreneurs who don’t mind eating beans and rice for a few months to get their company built. What you lose out on are all the seasoned entrepreneurs who have started companies and failed, learned a lot and are better for it. The guys, like me, have more responsibilities like mortgages or families.
I think there is a lot of potential in investing in more “mature” entrepreneurs who would need $250k – $1MM in funding because they have slightly higher salary requirements but may be better at executing and, in the end, make the money work more effectively. Back when I started kwiry, we told our VCs that we were going to take reasonable, but below market salaries. My reasoning was that, if the company is going to be your life, I didn’t want us to be distracted by figuring out how we’ll pay our rent or credit card bills.
I’m not sure if we’ll be able to convince many angels to invest that kind of money, but rarely is the company you invest in the company that ends up being built, so invest in the people.
Great thread. I’ll double down on everything Brian said. It’s a cyclical problem with several factors:
- access to seed capital
- connecting founders to cofounders and early hires
- cultivating entrepreneurship within our schools and helping student entrepreneurs build networks that will keep them here
- creating a culture of entrepreneurship where people think big, aren’t afraid to fail, don’t wall themselves off from the rest of the community, celebrate and share their successes, give back, etc.
- eliminating things like non-competes
We’re making progress on many of these fronts. But we still have a ways to go.
To help with the seed capital issue, I’m organizing an event called Angel Boot Camp for June 1 — the day before TechStars Investor Day — with the goal of growing the angel community here in Boston.
We already have some awesome people on board to speak, including a couple POPSignal alumni, and I’m hoping to line up several more soon, including some Silicon Valley and NYC angels. We’ll see.
But for this to be a success, we need to draw prospective angels out of the woodwork — people who’ve made their money and are in a position to be angel investors but for one reason or another are not. Maybe they’re retired, maybe they’re building another company. But they’re out there, and many of us know them. It’s on us to convince them and help them along the path to becoming angels.