Is The Valley Better For Software Startups?
I want to start out by saying that this is one of the more troubling articles that I’ve written for this blog.
The topic is something that is near and dear to my heart (i.e. Boston as a center of software entrepreneurial activity). As much as it pains me to say this, there seems to be increasing evidence that Boston (and New England in general) is losing further ground to the West Coast as the place to be to start an exciting new software company.
I’ve long accepted the fact that Silicon Valley has the edge when it comes to the necessary ingredients to foster the right kind of entrepreneurial energy for high-tech startups. They’ve got more VCs and angels. More successful serial entrepreneurs that are putting their cash back into new companies. More startup employees that made money on earlier startups and going back and doing their own thing. Generally speaking, The Valley has much more of the right stuff to spark a ton of exciting new companies. I’ve known this for a while, but was reminded of it today when I came across an article titled “Capital Between The Coasts” in the Mercury News. If you’re involved in startups on the East coast (either as an investor or an entrepreneur), you should read it. Hopefully, it’ll keep you up at night, like it will do for me. Another article (which cites the original) that I didn’t really agree with is the one from Venture which claims that the east coast loses the modesty game too. Hard to believe
I want to get on the record that I love living in Boston. My wife does too. We wouldn’t rather be anywhere else. We love the culture, the academic institutions and the overall energy of the city (we’ve lived here for about 7 years now). I’ve been an active member in the startup community here, invested in a few early-stage companies and have co-founded a new startup of my own in Cambridge. But, the evidence is mounting that Boston may not be the place to be for software startups (particularly world-changing software startups). A number of people for whom I have great respect are beginning to convince me that the Silicon Valley edge is large and growing. From the above cited article, Harvard Professor Josh Lerner says “There’s considerable evidence that except for biotechnology, where Boston has a strong advantage, the advantage of California is becoming more pronounced.”
What’s Wrong With Startups In Boston?
Here are some random thoughts and ideas I have on the East Coast vs. West Coast theme.
- Where did we go wrong? On a relative basis, Boston is still the second best place to be if you’re involved in startups (of the software kind). There’s no decision or moment I can point back to and say, “There! That was moronic, we shouldn’t have done that” Reality is, we still have lots of the right ingredients here too (just not as much as what can be found in the valley).
- As an entrepreneur that has bootstrapped two prior companies (and working on my third), I think one of the biggest “costs” of raising capital is not dilution, but distraction. I wrote about this in my article “Fatal Distraction: The True Cost Of Venture Capital“. Though not specifically targeted at Boston, I think the problem is worse here than in The Valley. We simply take too much time and energy to get early-stage companies funded. Instead of spending time building companies, our entrepreneurs are spending too much time raising capital.
- As investors on the East coast, we are too careful. As entrepreneurs, we are not careful enough. This is the point that keeps me up a lot, because I think I’m part of the problem. Or, more accurately, I’m not enough a part of the solution, and so I’m part of the problem.
- In my own small way, I’m trying to change this. Last year, I made three early-stage investments (and when I say early stage, I mean early-stage). The average due diligence for each of these investments was < 24 hours. Actually, to call what I did due diligence is a grave distortion. I really didn't do any due diligence at all. I tried to understand the idea (as best I could), I tried to understand the entrepreneur (as best I could), and I made my bets. That was it. For those deals I said no to, I said so quickly and convincingly. At some level, I think that's how it should work. This is why I have a fair amount of respect for Paul Graham and Y Combinator . You may not agree with their investment thesis, but I think it’s closer to what entrepreneurs actually need. [Interestingly, the smart folks at Y Combinator actually divide their time between both coasts].
- This year, I joined CommonAngels (a local angel investment group here in Boston with a great reputation). There are a great bunch of folks involved in CommonAngels, and they are certainly moving in the direction that I think early-stage investing should go, but we’re still not quite there yet. It simply takes too long. It doesn’t matter if the startup doesn’t have financials to ponder or customer references to check up on. It still takes months to get a deal done. That’s too long. But, it’s changing for the better and I’m encouraged by this.
- As for the entrepreneurs themselves, I think many of them are not understanding the reality of the mindset here. Sure, you might have a game-changing, paradigm-shifting, belief-shattering idea for a consumer Internet play. But, you’re going to spend a couple of months finding the right people to talk to, another couple of months educating these right people and the last couple of months (if you make it that far) convincing them to invest. At the risk of alienating a lot of the people I know in the investment community (and even a few entrepreneurs), I’ll give you my sound-bite: Many software entrepreneurs may be better off moving to the west coast than dealing with the pain of trying to get funded on the east coast. There, I said it. I’m going to walk around for a little while now because I feel so traitorous. pause As much as I hated to do it, I think it needed to be said.
If I sound frustrated, I don’t really mean to. I think I’d sound a lot more frustrated if it weren’t for the fact that I’m not really looking to raise large funding for my own startup, HubSpot, which is in the online marketing for small business space. I’m fortunate in that I can bet on myself and keep writing checks until the money runs out, sanity runs in, or the idea itself succeeds. Let’s see what happens there. But, not everyone else can do that, and there are lots of entrepreneurs here in Boston/Cambridge that have ideas and would possibly make great startup founders.
For all of you budding software entrepreneurs (and the investors that invest in them), am I off-base? Is the East Coast actually closing the gap (instead of widening it) when it comes to being a great place to launch an exciting new software startup? Is raising money even necessary now for software startups? Can’t most people just bootstrap? Would love to hear your thoughts in the comments. This is one of those cases where I’d really, really like to be proven wrong. I really like it here in Boston. Go Sox!!
Dharmesh Shah is a serial software entrepreneur. He is the author of the
widely read startup blog OnStartups.com which focuses on advice and ideas
for startup founders and management teams. Dharmesh is also the co-founder
of HubSpot.com, a software company building applications that help small
businesses transform their website into a marketing machine.