Greylock’s Henry McCance on Why the Firm Moved Its HQ to Silicon Valley and How Boston Must Find Its Google

7/26/10Follow @bbuderi

Greylock Partners is one of the world’s premier venture firms and a hallmark here in New England, so it was no small news in May 2009 when the storied firm announced it was moving its headquarters from the Boston area to Silicon Valley—giving New England yet another reason for Valley envy.

I recently sat down with legendary investor Henry McCance, now Greylock’s chairman emeritus, in the firm’s new Boston-area offices at One Brattle Square, just across the alley from Casablanca restaurant in Harvard Square, where it moved late last year from Waltham, MA. It was a rare interview for McCance, and we covered a lot of ground, backed up by some follow-up e-mail exchanges. McCance gave his own take on why the firm moved its center of gravity, his views on Boston’s innovation and startup scene (and hopes for a resurgence thereof), and, perhaps most interestingly, the four things great VCs can do to help startups (and therefore also the four things startups should look for in a VC). I’ve laid out my writeup in two parts. Today: what happened and how Boston can grow again. Tomorrow, McCance’s four-point list of what great VC firms do and some philosophical principles to guide them.

First, some history. Greylock Founder Bill Elfers, McCance told me, had been the No. 2 employee at American Research & Development, which was formed in Boston in 1946, right after World War II, and is widely considered the world’s first professional venture firm. But ARD operated as a public company, and when Elfers started Greylock & Co. in October 1965 with $10 million of capital, he created what was possibly the first venture firm that operated as a limited partnership, now the typical structure for venture firms.

“He [Elfers] had no template,” McCance says. “He was offered the entire funding by one family, which was the model used by the Rockefellers and other families, but he declined, preferring to raise the initial fund from six roughly equal limited partners.”

A second fund followed in 1973, and last November, what’s now called Greylock Partners announced it had closed the $575 million Greylock XIII (in contrast to the ever-smaller funds you mostly see these days, the 13th fund was bigger than the $500 million Greylock XII, which closed in 2005).

download_lowres_mccanceA rundown on all the star investments Greylock has made since its founding could by itself make up an entire article. But here is a very short list that spans tech and life sciences: Continental Cablevision, Teradyne, Prime Computer, Apollo Computer, Mentor Graphics, Tellabs, Stryker, Ascend Communications, Xircom, Spyglass, Raptor, Red Hat, Avid Technology, Data Domain, Vertex Pharmaceuticals, Millennium Pharmaceuticals, United Healthcare, Genetics Institute, Wise Technology, Constant Contact, LinkedIn, Facebook, Zipcar. Suffice it to say that, in the eyes of many, Greylock has been the premier East Coast venture firm, on a very short list of the world’s best, along with firms such as Sequoia, KPCB, and Accel.

Greylock has long maintained an office in Silicon Valley (right now it’s in San Mateo, but next month the firm is opening a new headquarters in Palo Alto). But given its roots here in New England, and its legacy, how could it move its headquarters there?

McCance’s basic answer won’t surprise anybody: it has to do with critical mass. But he still provides a lot of great perspective, and the insights of such an informed investor and builder of companies are important.

“We’ve concluded that the Boston area has not been as successful in spawning and sustaining great companies,” McCance sums up. He then ran through the last quarter century or so, comparing New England to the West Coast as an incubator for stellar companies in important fields. Take enterprise computing software: The biggies of Oracle, Peoplesoft (later acquired by Oracle), Microsoft—all are on the west coast. CAD/CAM software leaders like Cadence, Synopsis, and Mentor Graphics are also out west. Same thing for semiconductor leaders like Intel and personal computing/mobile computing leaders like Apple. Ditto for data and communications, where the leaders are companies like Cisco and Juniper. Then there’s the Internet: Amazon, eBay, Google, Facebook…You get the drift. “Even…in biotech,” McCance says, “Boston would come in second to the left coast.” And all too often, he says, Boston area firms in these same areas “merged or sold out.”

All of this fed into the Greylock decision to move its headquarters to the Valley. Of course, there are exceptions. McCance points to storage (where EMC is a world leader) as a notable one. And it isn’t that nothing happens in New England in other areas. But, he concludes, “You got to fish in the pond where the fish are, and there haven’t been many big fish in New England in the last 25 years.”

I asked him what he thinks happened to cause this situation. Part of the reason, he says, might be a more conservative culture than the Valley. But the turning point, says McCance, was the shift away from the minicomputer, which had been dominated by New England firms like DEC, Data General, Prime, Apollo, and Stratus, to the PC. “When the technology moved to the personal computer, we overstayed the mark as a region,” he says.

“The thought leadership in tech companies, as the minicomputer sun set and the personal computer rose, moved to the West Coast.” That, he says, created a kind of virtuous cycle that exists to this day. “When new companies formed, they were formed out of new thought leaders.”

McCance says “there was no compelling reason (like proximity to semiconductor companies) for the consumer e-commerce companies to all be in Silicon Valley, other than thought leadership. But that was enough to have Google, Yahoo, CNET, Facebook, MySpace, YouTube, LinkedIn, Amazon, etc. all locate on the left coast. Many founders, like Mark Zuckerberg, were even in Boston at Harvard when they started their company, but located in the Valley because of the virtuous circle. Boston has virtually no important entrants in arguably the most important information technology segment of the last 20 years, in spite of the preeminent universities of Harvard and M.I.T.”

(An aside on the matter of Facebook. It is widely reported in New England that East Coast VCs passed on this deal and therefore lost us the chance for it to be located here. McCance seemed to dispel at least part of that story. His firm, of course, did make a small investment in a later round of Facebook. But Mark Zuckerberg was not going to stay in New England anyway, he says. “In my opinion, he could not, he would not, start his company here, because he needed to be in the heart of the action.” And the same remains largely true today, he says. A young entrepreneur comparing the climate in New England to that of the Valley will still find the energy and action greater out there.)

The good news is that the situation can change, McCance says. “All of those things [that caused the shift] are correctable. All of those things are not fatal by any means.” For starters, he says, places like MIT and Harvard, which are proven engines of startups, aren’t going away. “At the margin, there are small things that can be done to make the climate more attractive for startups. An example is to change the non-compete laws that are much more restrictive and enforceable in MA than in CA. ‘Hot’ engineers don’t want to worry about ending up in lawsuits and court if they leave one company to start or join a new company.”

As far as other, bigger factors go: “I’m no expert here. However, it seems to me Boston needs to gain the thought leadership role amongst entrepreneurs in important future sectors of economic growth. We have done it well in biotechnology, although Silicon Valley is still arguably number one with Boston a close second. Possible future segments will include cleantech and alternative energy. There always is luck involved. The key is some ‘winner circle’ companies need to be built and stay independent (not acquired) in these new segments for the world to see the new thought leadership. If you look at the Globe Technology top 25 market capitalization list, published every week on Tuesday, it is really an unimpressive list except for EMC. None of the other companies would be in Silicon Valley’s top list.

“Most entrepreneurs want to be independent, that is why they are entrepreneurs,” continues McCance. “The large amounts of private equity, now available for later stage and secondary investments, may permit the next generation of Boston companies to stay independent. A revived IPO market, of course, would also help.

“It will take time to change, but Boston must have its Google.”

Bob is Xconomy's founder and editor in chief. You can e-mail him at bbuderi@xconomy.com, call him at 617.500.5926. Follow @bbuderi

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  • Doug

    What about Akamai ?
    They invented the CDN space and currently dominate it.
    I believe that Akamai can be Boston’s Google.

    If VCs continue to believe that the Valley is the only place for startups, soon it will be the only place for startups.

    This is very disappointing.

  • http://www.3dvia.com David

    Fantastic article…the conservative culture here is probably going to be the hardest thing to break here if there is a hope to establish a market for real tech startups.

    @Doug – there is the other issue that has always been a problem here. We are just not good at the tech PR for the region. There are actually quite a few interesting startups and established businesses here but we just have not been able to self promote correctly (not sure if Akamai is Google level but it’s big and a start).

  • http://www.i-nalysis.com Drew

    Important article for New Englanders- we have work to do, and opportunity to make things work here. It will take the individual efforts of lots of people to fix, improve, and advance in each of the many areas mentioned.

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  • http://thyagav.tumblr.com Thyaga

    Henry McCance said “Boston must have its Google”. It made me to think, did he mean a start-up which match the characteristics of google ? That is
    1. A business model which is highly scalable
    and profitable. Until Google, Microsoft was the yardstick. So it took 20-30 yrs for a dominant company to emerge.
    2. Highly committed & competent founders and early stage employees. Google’s founders got out of school and continued to build the business leveraging their phd work, ie 3-5 of work. I also guess they had not accumulated too much student debt.
    3. Highly competent management team to execute vision. It is very difficult for anyone with 15-20 yrs experience to bet their whole career on a start-up. They will also be risking their family’s economic future. Massachusetts residents are quite conservative, they will not agree.
    4. Google did ride on a new and emerging trend – the internet at it’s infancy. There has not been such opportunities in recent years, closest was the RFID which faded out in few years. Infact, Boston area was leading in RFID start-ups.

    My opinion: No one can expect to see a company like google emerge in next few decades. Boston area has a least chance to do so.

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  • Bakhus Saba

    Dear Henry

    Just wanted to share this caregivers song with you, if you can get behind this song in anyway please let me know.
    Good song for Tim McGraw to sing and be an advocate for Alzheimer’s, pass it on to him if you know him or can get it to him

    Here’s the link to the video Still a Child
    http://www.youtube.com/watch?v=WuY2_8DWqtA
    If you can post it on your site, facebook or pass it on to your friends
    it would be great

    Thank you
    Bakhus Saba
    Cell 519-322-6866