Wednesday, December 22, 2010

How I See It

Boston, aim to build big companies, not big exits

By Joe Caruso, founder of Bantam Group

In recent years, there has been a lot of talk about how vibrant the environment for technology startups is in Silicon Valley compared to Boston. We hear how “they” have a much more active venture/angel infrastructure and how “they” build great companies, while our startups sell out in their infancy.

People in the high-tech community lament that Boston used to be THE center of high technology success — Digital, Data General, Wang and others of a bygone era are frequently mentioned wistfully — but in the last 20 years we have stopped growing major companies… while “home run” successes like Microsoft, Cisco, Google, Amazon, eBay and the like have been limited to the West Coast. In fact, we do have EMC, Analog Devices, Staples, Akamai, Biogen, Boston Scientific and emerging successes like Constant Contact, A123, LogMeIn, ACME Packet, EnerNoc, ZipCar, iRobot and others. We have lots of companies to be proud of, but apparently not as many world-renowned companies as Silicon Valley has created.

While much of the Silicon Valley/128 comparison is factually correct (there are more venture capital dollars in Silicon Valley; there are more deals; there have been more IPOs, etc.), the tone of the discussion makes it sound like Boston/128 has failed. I call it the “Rodney Dangerfield” effect: The Massachusetts technology community just doesn’t get any respect anymore.

I’ve been an angel investor for a number of years, and I have heard lots of commentary and seen many shifts in strategy and mindset in the venture capital and angel communities. It is time for another shift. I have a simple solution to the dearth of “home run” successes in Boston. I propose that we eliminate the question “What is your exit strategy?” from all investor interrogations of startups. Instead, let’s concentrate on how one builds a successful business.

I’m not sure where the emphasis on exit strategies from the get-go began. It was probably an MBA course that said all business plans must explain how investors will achieve liquidity, or perhaps it was from a period when venture capital funds had a heavy mix of 8-year-old illiquid companies. Somewhere along the line, describing your exit strategy before your company really got started became a must. But think about it: How many successful exit strategies are there?  Go public or sell the company. Are there others?

Here’s the problem. If we aim for an exit from the start, we’re likely to get what we aim for: an exit, often through a sale to another company, perhaps one from the West Coast. On the other hand, if we aim to build great companies, we’re more likely to build the kind of company that does the acquiring. 

The metaphor of “exits” is an apt one.  If we’re thinking about exits when driving on a highway, then we slow down each time we approach one, asking “Is this the right one?” However, if we’re driving across the country focused on a goal of, say, seeing the Grand Canyon, we fly by the exits along the way, eager to reach our larger goal.  If we hear reports that the road to the Grand Canyon has developed a lot of potholes, we can turn off along the way. But let’s not have our goal be to turn off along the way.

Like all metaphors, this one is not to be taken too literally. There often are companies not designed to go all the way to the Grand Canyon, but if we plan on only driving a few exits, we’ll end up designing a lousy car, one that’s not reliable, not designed to go long distances, and one not capable of high performance.

As a longtime angel investor, I’m not insensitive to the need for liquidity.  I just think that focusing too much on liquidity too early on can sell our startups short. Let’s try this for a few years. Maybe we’ll find we stop wistfully talking about the good old days, and start talking about all the great, world-class companies that are growing in Massachusetts — once again. 

 

Joe Caruso has spent 15 years helping entrepreneurs build companies.