At the outset of my career I had the great fortune of working with Bruce Wasserstein on Wall Street who made his reputation imploring CEOs that they should “dare to be great.”
Now as President of the New England Venture Capital Association (and a General Partner at IDG Ventures) I am focused on why we VCs don’t dare to be great and consistently, predictably build billion-dollar companies in New England. This “billion dollar dilemma” has many root causes and the solutions will be complex but I applaud Xconomy for at least providing a forum to debate these issues. This is a problem which needs our attention to ensure long-term viability for this region.
I see two fundamental cultural biases at work here. There is strong bias against failure—the scarlet letter is F. I see it when VCs consider candidates when recruiting for portfolio companies—boards and investors struggle to look past a failure notwithstanding other successes on the resume. My guess is that West Coast investors are more forgiving. Out there, unsuccessful entrepreneurs dust themselves off the next day and get back in the game.
The other bias which I find disturbing involves risk tolerance. My East Coast colleagues—I fear—have a stronger aversion to investment risk than my friends out West. Most successful venture funds will write off 20 percent of the capital they manage. In fact if you are not losing enough money you may not be taking enough risk—and our investors pay us to take calculated risks. While unbounded optimism is dangerous, there is a pervasive sense among West Coast VCs that all their portfolio companies will be enormously successful and have a chance of “returning the fund.”
Ironically, investment-returns data from Cambridge Associates suggests that performance by East Coast VCs over the long term is actually better than that of West Coast firms (nearly 150 percent Internal Rate of Return for New England-based funds versus 85 percent IRR for California firms over the last ten years). Results over the last five years are quite different, though (-4 percent IRR versus 6 percent, respectively). My fear is that we are not backing as readily the “out of the box” opportunities which become the companies that establish new industries. Facebook was started by Harvard students yet was backed primarily by West Coast VCs and is now resident in the Valley—that is very disturbing.
There are a number of structural issues at work as well but I will highlight just a couple—and it is not all about how bad the weather is here. The proliferation of “non-competes” makes it exceedingly difficult to recruit for early stage companies and fosters an environment which shuns startups. These employment terms are much less prevalent out West, underscoring the West Coast entrepreneurial culture. New England is also in some sense saddled by its historic industrial successes. Old line industries have been challenged to retrain workforces and reorient business models in the face of new technologies. New England was dominant in the data communications industry yet today many of the new Internet-centric businesses are based elsewhere.
New England continues to be dominant in one particular industry—the life sciences. Arguably there is no better place in the world to launch a life science company. The entire ecosystem surrounding these ventures is robust and improving. Governor Patrick’s recent billion dollar initiative will help to support future vitality. The continued health of the hospital systems and strength of the academic centers are crucial. And our ability to attract major R&D labs of multinational pharma companies will ensure the health of the ecosystem.
Arguably there are important parallels between life sciences successes and the next great wave of innovative companies in the “cleantech” field. These businesses share long product development timelines, important chemistry and biology innovation, the need for creative sources of funding and partnerships, and complex distribution and customer relationships. As much enthusiasm as there is in cleantech, there is also keen investor debate as to whether this will be a near-term profitable investment area. There is no doubt that the overarching trends are real and the needs for innovative solutions are acute; but will these early companies be good investments? Not clear yet.
But what is clear is that New England needs to support this field. Arguably all of the regions in the country started at some level of parity earlier this decade. But there are troublesome signs that the cleantech ecosystem out West has rallied quickly to foster a very friendly startup environment. It would be a tragedy, given the historic dominance of the life sciences, and the strengths of Harvard and MIT, if New England was not able to maintain a position of leadership here.
So we need to dare to be greater. I fully accept the solutions are difficult to identify, much less implement. For instance, I would like to see New England retain more of its young technical talent (we should offer more affordable housing to all recent grads who want to work in the high tech and life science industries). I would also like to see greater support for commercial infrastructure. I would like to see Harvard be more accommodating to its faculty and students who want to start companies (probably another column altogether).
Maybe I will finally draw up that VC Christmas wish list this year…
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