Welcome, my name is Roy Rodenstein and I love helping entrepreneurs. With this blog I aim to share what I've learned to help others start, and win. My hope is to develop how2startup into a wiki for the startup community.

5 Reasons Startups Move to Silicon Valley, and 5 Things Boston Can Do to Keep Them

October 20th, 2010    Share

Galen Moore, tech & finance journalist at Mass High Tech, recently asked for my views on why startups leave Boston for the Valley. While the topic comes up every few months, I think several factors are a bit different than what I usually hear discussed, and having done angel investments in both places now I think I have additional perspective.

Today MassHighTech published my comments, and I’m posting them in their entirety below as well. Look forward to feedback whether here, on MHT.com or Twitter!

The common knock on Boston is we don’t have enough angels, they don’t move fast enough, and they don’t invest in consumer Internet startups. That’s not really true.

There are some awesome angels here. I have co-invested with several, and they can move fast and add real value. Speaking for myself I feel like I have enough contacts and pull that I could get any solid company funded here.

That said, the reality is entrepreneurs do leave Boston to relocate in Silicon Valley (TaskRabbit, Baydin, WePay, etc., in recent memory). Here are five legitimate reasons why they’re doing so:

1) Number of Consumer Angels
There are about 30-40 active, fast angels in Boston with interest and/or experience in consumer. Not a small number, but probably about 10 times lower than the Valley. What Boston exit has resulted in a well-known, formalized group of angels coming out of it?
Since fundraising is to a degree a “game of chicken,” time and effort can be a barrier when entrepreneurs (especially first-time founders) can realistically only gain quick access to five to 10 angels.

2) Dollars/(Control+Speed) Ratio

Most consumer entrepreneurs these days, anywhere in the country, have read about and follow the ‘Lean’ startup mantra. Thus they want to maintain as much control as possible early on – e.g., not giving up a board seat or blocking rights for a sale – rather than rushing to VC money. Individual angels typically invest about $25,000, and with rounds commonly being $300,000 to $1 million, you can’t realistically fill that with 20 individual angels.
This means getting money from super-angels or micro-VCs.
And the number of well-known, easily accessible super-angels and micro-VCs in Boston is…roughly 1 – Founder Collective. NextView Ventures will be great, but they’re still fundraising. Many Boston VC firms are open to doing seed-stage investments, but Chris Dixon has (largely rightly) warned founders of signaling issues with those deals.

But bona fide, Boston super-angels or micro-VCs who will say “I’m in for $150,000” after one phone call, are near zero. Out west I can roll off Dave McClure/500 Startups, Ron Conway/SV Angel, Chris Sacca/lowercase, Mike Maples, Jeff Clavier, Eric Schmidt’s fund, etc., off the top of my head.

3) Not enough frequent investors
As a corollary, there are few angels or micro-VCs here doing investments with enough speed and volume that they treat them as calculated bets. There are examples of companies with a great idea but limited traction, or with big traction but a first-time founder, that are interesting enough for West Coast folks to place some bets on because they are doing 30 or 50 deals a year. For individual investors (like myself) or the scant superangels/micro-VCs here doing 10 deals a year, each one has to be thought through more fully.

4) Valuations and terms
As another corollary, founders are often in the driver’s seat these days when it comes to negotiating terms, and West-Coast investors are much more lenient. I think it’s again because when you do 30+ deals a year, any single one isn’t worth haggling over, but when you do five or 10, it can make a difference. The larger number of angels and small funds in the Valley makes greater competition for deals. This, combined with the higher tolerance for risky bets, means valuations can be double in the West versus the East. This isn’t always entirely good for entrepreneurs, as overly high valuations can come back to bite in a very bad way, but if all goes well and the company keeps growing, it’s great.

5) The Skynet Factor
To paraphrase Terminator II, the Valley is an order of magnitude closer to being self-aware, and evolving at a rapid pace as an innovation ecosystem. Chalk it up to the weather, social personalities, whatever the reasons. When I was working at PARC – Palo Alto Research Center – I started using Google when it was just a research project at Stanford. By the time other parts of the country started to try it, Google was an innate part of the fabric out West. This phenomenon happens in every consumer area. Whether it’s Y Combinator’s special access to Facebook’s latest private-beta APIs; knowing about 10 stealth but highly innovative startups; or sharing secret tips over beers on what viral or SEO or marketing technique worked for Quora, Mint or Tagged, there is a big knowledge-sharing and access advantage. Like having better information in the stock market, that makes a material difference in decision-making.

There are more wrinkles, but to me these are five key factors that are not discussed as often or as clearly in the coastal conversations.

What can we work on here in Boston? Five things.

1) Get some more consumer(-ish) exits and encourage more angel investing.

2) Build real channels to the Boston higher ed system, which, other than MIT (and to a degree, Harvard) is very disconnected from the venture community.

3) Do a better job guiding local founders on the options and routes for success in Boston. There are fantastic events here, but not as many focused on practical, actionable advice. I think what many founders want is no-attitude, frank answers from peers they can trust.

4) Continue encouraging New York (and hopefully San Francisco) micro-VCs and super-angels to invest in Boston-based companies. For example, I just co-invested in a Boston company with a top West Coast micro-VC and there was no pressure to move.

5) Be more transparent with Boston founders and acknowledge that the Valley has a lot to offer them. We lose credibility by not doing so. At the same time, more effectively provide access to all the key related areas where we excel, like mobile, SaaS and analytics.

photo credit: David Paul Ohmer

Author: admin | Filed under: Uncategorized | View Comments
  • Anonymous

    Well said. #2 on “What can we work on here in Boston” is a big one for me. Not only should we recruit more people out of college to do startups, but we should also encourage them to give it a go while they’re in college. Jason made this point very nicely on Greenhorn earlier this week. When you’re in college it’s easier to take risks, it hurts less to fail, and at worst, it provides experience to draw on when you do it again later in the “real world.” Full post is here: http://greenhornconnect.com/blog/10-reasons-you-should-start-your-first-company-college

  • http://www.greenhornconnect.com Jason Evanish

    Roy,

    Thanks for writing this…you’ve cut through all the “Grass is Greener” and got right to the facts. It’s refreshing to have a frank discussion about it.

    As for action items, I think it’s exciting to see what some of the new efforts can do for college students, whether it be Shutup and Startup Weekend by BostInnovation this weekend, a College Hackfest that is coming in February or past events like DartBoston going to various schools or the Career Combine. We need to build a bridge to our universities and think about how we can engage students. Hiring interns at all our startups would be a great start: http://greenhornconnect.com/blog/how-we-can-improve-new-england-startup-ecosystem-hire-more-students

    Also, I love your 3rd point. We need more EDUCATION in our ecosystem! It’s sorely lacking amongst the sea of mediocre to bad panel discussions and related events. It’s something we are going to push for harder on Greenhorn and elsewhere in coming months.

    Thanks again. Boston needs more great people like you who can tell it like it is.

    -Jason

  • http://www.leehower.com leehower

    Roy – thanks for the shout out to NextView. Good post and broadly agree w/ your points here.

    A corollary to points #1 & #3 on what we can do better is to highlight some of our entrepreneurial successes. Because tech (both startup & big cos.) dominates the Silicon Valley economy, there’s a culture of celebrating successful entrepreneurs. We’ve got ones even in consumer space around here from companies like Kayak, CSN Stores, Rue La La, et al.

  • http://twitter.com/tchae Tim Chae

    Thanks for this post, Roy! I think you hit every major difference in what makes entrepreneurs move out West.
    I would even like to add that going out there seems “sexy”. Just like VCs look for companies playing in big markets, entrepreneurs naturally want to be where they have the greatest chance of success – meaning the largest source of actively moving money.

    Also, just like what freerobby talked about, #2 is absolute key. I think it’s important to encourage the startup mentality in the higher ed system. I sort of touched on this topic with my recent post i wrote yesterday on Why I Came to College http://www.timchae.com/2010/10/why-i-came-to-college/ (not trying to self-promote i swear!).

    Being from Babson and really being one of just a handful of kids here at Babson who are actively trying to get plugged into the scene is frustrating. I would really like to see some VC sponsored events happening on campuses all throughout Boston’s entrepreneurial campuses including Harvard, Babson, and NEU.

  • http://twitter.com/menegay geoff menegay

    Outside of startups, Boston lacks the sex appeal and quality of life of other places. A lot of kids who went to college there are ready to leave, kids who didn’t need to weigh the career potential of SF, the glitz of NY, the skiing in CO, etc.

  • http://graysky.org graysky

    Great post. This topic is over-covered in general, but under-covered in the specifics, and this is a good diagnosis & proscription for improvement.

    Do you think that with the advent of tools like AngelList will help flow investments from SV/NYC angels to Boston? It seems like it has already acted in the reverse direction a bit.

  • http://how2startup.com/ Roy Rodenstein

    I agree. I have some ideas/thinking about that area.

  • http://how2startup.com/ Roy Rodenstein

    Yeah, Shutup & Startup looks awesome.

    Thanks for the feedback, I also fel that more education/practical advice was lacking but I’m not the target customer. I am thinking of some ideas, will definitely run by you when more formed.

  • http://how2startup.com/ Roy Rodenstein

    Good point. My bud Gabe Weinberg recently made a great site along those lines, http://foundedinphilly.com/

    I wanted to make one for Boston too but haven’t had time. Happy to collaborate if a reader wants to help :)

  • http://how2startup.com/ Roy Rodenstein

    Yep, definitely some of this. Although in my experience most founders leaving Boston don’t do it as much for the sex appeal (re: NY/CO) but more for the potential (re: SF).

    Interesting theory though, Jason et al would be interested in your thoughts.

  • http://how2startup.com/ Roy Rodenstein

    I agree it’s over-covered in general, that’s why I wanted to dig deeper at least on my views. Glad they are creating some discussion that’s different from the norm.

    I love Nivi/Naval and I think AngelList can help reduce the need to relocate/give founders more choice. That said many if not most angels still are geo-sensitive (I am not) in their investments.

  • http://how2startup.com/ Roy Rodenstein

    Love your post, Tim, and good luck on your Thiel application! And don’t get me started on the educational curriculum. I think we need to teach kids/people much more PRACTICAL skills in school. Much of the crash and recession would be ameliorated by more education on things that actually are useful and people will encounter in life vs. esoteric materials that only specialized students will need.

    That aside, totally agree with you. One or two random events for college students are great but I have ideas (not time or money tho ;) for real, sustained, “broadband” connections to university entrepreneurs. Will try to put some into practice…

  • http://twitter.com/pgrous Paul Grous

    Thanks for your post.

  • http://www.twitter.com/jamesiii James O’Connor

    Roy, nice analysis. I’ve enjoyed reading your blog despite this being my first comment.

    As you detailed in the first 5 bullets, the West Coast pull is undeniable both for founders/entrepreneurs as well as the tech workforce. The tech workforce is an important point to capture in this dialogue as well I think. I can list a handful of friends and acquaintances in the Boston area who have heeded the advice of “go West young (wo)man.” There are simply more opportunities in the Valley than there are here in Boston. You could have the world’s best founders right here in our back yard but if there is a vacuum in the talent pool, entrepreneur’s ideas will stay ideas since there won’t be people to help execute on them.

    To your point about building better channels to Boston’s higher education community, I’ve really liked the work DartBoston has been doing in pulling the student and young professional crowd together. This is a great example of how we can go about strengthening our community.

    Other successful avenues the this end have been business plan competitions. MIT’s 100k and Mass High Tech Challenge have been great, but I notice how neither puts ALL of Boston’s schools into the spotlight. What if there was a competition exclusively for Boston area students and not limited to just MIT or HBS?

    I don’t think there is any question that there has been progress made here. Even in the two years that I’ve lived in Boston and been involved in the startup community, I can note changes. Scott Kirsner’s article in response to comments from Governor Patrick describes them pretty well: http://www.boston.com/business/technology/innoeco/2010/09/attention_all_you_crusty_old_d.html.

  • Johnson Brand

    Official bankruptcy
    papers

    http://officialbankruptcypapers.com/

    Order copy of Official bankruptcy papers
    obtain official papers, Bankruptcy discharge papers $10.99, bankruptcy
    creditors listing $27.99 and complete file for $36.99 at lowest cost on
    web. 

  • http://amzn.to/ABCbloglink Daniel Milstein

    That is so true. As an author and business man, I can relate to how you said “For individual investors (like myself) or the scant superangels/micro-VCs here doing 10 deals a year, each one has to be thought through more fully”. I hope more people discover your blog because you really know what you’re talking about. Can’t wait to read more from you!

blog comments powered by Disqus