For Startups, Is Friction Always Bad?

12/17/10Follow @wroush

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venture funding from August Capital in Menlo Park, CA, and Google Ventures in Mountain View. (Google Ventures is known for putting Google’s resources at the disposal of its portfolio companies, which is a pretty strong inducement to move closer to the Googleplex.) Other recent self-exiles from Boston to the Bay Area include e-mail reminder service Baydin, crowdsourced errand-running service TaskRabbit, and children’s clothing swap site thredUp.

If you talk to the entrepreneurs inside these companies, they’ll all tell you the same story: when it came time to raise money and seek business-development help, the barriers were simply lower in the Bay Area. Just this week I met in San Francisco with another Cambridge, MA-based Web startup, Traackr, that’s likely California-bound. CEO Pierre-Loïc Assayag said he was here in town to meet with potential investors and to scout for office space for the company, which analyzes social-media streams and provides information to marketers about the most influential online voices around specific topics or markets.

Being based in Cambridge—halfway between Harvard and MIT, in fact—has been great for Traackr up to now, Assayag says, since it has meant that “we can snatch any kid off the street and they can code.” But after bootstrapping the company for four years, it’s time for Traackr to really fuel up, and “this is where we have felt the shortfalls of being in Boston,” Assayag says.

It isn’t that Traackr couldn’t raise the money it needs from Boston-based venture firms, he says. It’s that it’s too much trouble. “The approach seems to be very analytical,” Assayag says. “The investors we talk to on the East Coast have all been asking us for tons of paperwork and due diligence. It takes a tremendous amount of time just to entertain the relationship.” Assayag says that when he did the math—calculating how much time he’d have to spend building spreadsheets to satisfy the East Coast venture firms and how much equity he’d have to give up to get their capital—it turned out to be safer and cheaper simply to pour the same resources into sales and new business development.

But of course, there’s another option: going west. The Bay Area investors Assayag is meeting with this month “are really looking at the handful of things that make or break a business,” he says. “They know that everything else can be fixed. It doesn’t matter if your five-year financial plan is not great. It can be changed. The conversations we’ve had here so far are about, ‘Show me the product, introduce me to your team, show me a client.’ That’s it. That gives them enough information to gauge whether or not this business has legs.”

Traackr hasn’t won funding yet, and its move to the Bay Area isn’t a done deal. I quote Assayag because he’s willing to go on the record with his comparative findings, and because he’s got an outsider’s perspective—he’s a Frenchman who studied philosophy at the Sorbonne and ran IT projects for Peugeot-Citroen. When he first moved to the U.S., Assayag says, he was impressed by how easy it is to start a business here. “Your social security number is also your employer identification number, by default!” he marvels. But San Francisco operates at another level entirely, he says. “Every person is his own startup; everyone is working on something on the side. It’s sad [for Boston], but it’s like going to LA if you’re a script writer or an actor. No matter what you say, that is where the ecosystem is.”

Now, the comparison to LA is an interesting one. It’s safe to say that if California enacted full-employment legislation for all of the actors currently waiting tables in Los Angeles, a lot more lousy movies and TV shows would get made. (New Jersey must have done something like this; can there be any other explanation for Jersey Shore?) Similarly, there’s something hallucinatory, even hazardous, about a city where everyone is walking around with their own startup idea. The danger is that … Next Page »

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • http://www.startup-book.com herve

    As someone helping entrepreneurs in a European university, I could not agree more! In Europe the friction is huge, probably the difference you observe between Silicon Valley and New England is the same but between Europe and New England. However one of the (American) entrepreneur I help here is very skeptikal about too little friction (or too much support). Let me quote him:

    “I think that there is too much talk about “help” for entrepreneurs, and access to structured aide that will not be beneficial to the entrepreneurs and their projects. [...] The entrepreneurs need to learn how to stand on their own two feet, and when lacking a certain skill they should be able to attract someone to complement them if the project is interesting enough. Too many aides, organized events, etc. will not create independent serial entrepreneurs. It just creates people that complain about not having enough help… Also, the networking and isolation aspect is entirely the fault of the entrepreneurs, and not the system nor European culture. If you want to meet someone in this country it rarely takes more than two weeks to set something up. Furthermore, hanging out at every single entrepreneurial/Venture/innovation event like I did for five years gives you a chance to meet anyone you want (even billionaries, even managers of family offices).”

    This may not be exactly what you talk about, your friction was more about the frictionless web, but still I think it is related. Too little friction is not good at all, I agree with you!

  • http://www.xconomy.com/author/wroush/ Wade Roush

    @Herve, thanks for your comment. The American entrepreneur you quote sounds to me like a classic conservative/libertarian — the same sort of person who would say that governments shouldn’t provide poor people with food assistance. I agree with him that there’s only so much that agencies can do in the way of structured aid to startups; if teams aren’t truly entrepreneurial, all the aid in the world isn’t going to help. But my impression is that in Europe, the cultural barriers that entrepreneurs have to overcome are so high that the aid that does exist is useful and necessary.

  • http://traackr.com/ Pierre-Loic Assayag

    Great article, Wade!
    Though Traackr is at a stage where a relocation to the Valley seems very likely, starting in Boston in 2008 (worst possible time to raise) was the best thing that happened to us as it forged our identity, tested our resiliency, and forced us towards a stronger product vision and revenue. So I would absolutely agree with you that friction is essential to building strong businesses.
    Our location has started to become a liability rather than an asset very recently: once we found our path and needed more financial resources to fuel the business. Boston’s rather conservative investment community* makes great decisions when it comes to funding continuous innovation, tapping into existing markets where data is available to predict success; the same analytical methodology leads to terrible decisions when it comes to funding disruptive, market defining, ventures as very limited data is available.

    (*) Note that there are exceptions to the rule of course (Spark, one of Twitter’s early investors is afterall based in Boston) and several early stage funds have gotten started recently in New England.

  • http://www.masschallenge.org John Harthorne

    Very interesting and thoughtful article, Wade. We miss you out East.

    I would like to reinforce a point you make early in your article: that friction has been decreasing steadily in the Boston startup scene over the last few years. I would also note that it seems poised to decrease further still.

    Local angels are actually talking “bubble” and I can’t say I disagree entirely. Early stage funding isn’t yet “frothy”, but it is very active and appears to be accelerating quite steadily.

    Take this as one data point: in the last 2 months alone, ~10 MassChallenge startups have raised a total of over $4M in private funding (on top of the $1M we distributed). The vast majority of that funding came from within Massachusetts. RelayRides is actually the only exception of which I am aware — and we’re very proud of them and ecstatic that they received such great support, regardless of it’s geographic origin.

    At the end of the day, there is no denying that Massachusetts will remain at the forefront of innovation and entrepreneurship in the years to come. Based on the data I have seen from the 100+ startups we’ve been accelerating at MassChallenge, friction is decreasing rapidly and MA is actually well positioned to expand it’s dominance in entrepreneurship.

    If anyone out there wants to connect with funding or other startup resources in MA (or elsewhere), please email us via contact@masschallenge.org

    We are an independent non-profit, and there are no strings attached to our support or award money. We just help entrepreneurs win!

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