Boston vs. the bay

February 18, 2008

MIT/East Coast Overview

Timothy B. JonesSloan Fellow 2007

© 2007 MIT Sloan School of Management

Agenda

Boston vs. Silicon Valley comparisonsHybridization of Risk CapitalMIT Organizations and InstitutionsMIT Innovation Update and Regional Deal MetricsOpportunity areas


Regional Advantage

As predicted by Dr. AnnaLee Saxenian, Rte.128/Boston lags Silicon Valley in

– Sustainable Innovation– Job/Company/Wealth Creation– Serial Entrepreneurship

The Regional differences in performanceare increasing not decreasing in the Post-Bubble Environment:

…But WHY?


Boston vs. The BayRte. 128– Distance from innovation– Vertical Integration– Proprietary Development– Intolerance for failure– Case Study approach– Talent Flow: OUT– Result: Inertia

Silicon Valley– Geographic proximity to deals– Network-Centric– Open Innovation– Try, Try, Try again– Life is the classroom– Talent Flow: IN– Result: Acceleration

VS


Observation #1:Different Post-Bubble ActivitiesIn SV: – Unsuccessful Entrepreneurs went to work for large companies, but

kept building business plans– Successful Entrepreneurs took vacation, retrenched, then went

back to the garageIn Boston: – Unsuccessful Entrepreneurs went into consulting, banking, or

consumer products– Successful Entrepreneurs took vacation…then went into real estate

Notable exceptions: – Jeremy Allaire, Brightcove


Observation #2:Insufficient DiasporaIn SV, successful companies created a Diaspora, an emigration to new ventures while maintaining ties to previous companies as collaboration partnersIn Boston, successful companies created tighter vertical integration and control over complementary assets…but not new spin-off firmsWhere are the successful spinoffs of:– Akamai– NetGenesis– Sycamore Networks– EMC– ATG– ?


Observation #3: Angel Ossification

Boston Angel community splitting into two distinct groups– Professional Angel Funds (Common Angels, North Shore Angels)

funding deals in $250k-$2M rangeCompanies only requiring up to $20M, so little life sciences orenergy investingMedical Equipment dominant sector followed by software1-2 investments/quarter; invest in 1 of every 100 deals

– HNW individuals trolling MIT Enterprise Forum doing deals in $25k-$100K range

Not enough deals being done with sufficient funding to create a vibrant early stage community


Observation #4: Cultural Resistance in Venture CommunityThe last 4 years of internet-oriented investing focused on consumer-driven activity, enhanced collaboration, and social interactionThese are precisely the weaknesses of New England’s regional cultureAs a result, few new media, Web 2.0/consumer internet, Open Source, etc. deals. – missed the “boomlet” in returns post bubbleWaiting for next Telecom, Enterprise SW (via Appliances) capital spending cycle => dormant for last 6 years


Result: A Growing Lead for SV

Silicon Valley has 3x the deal execution of New EnglandSilicon Valley still provides more funding than the next four table entries combined, by dollar volume as well as deals executed

Source: PWC Money Tree Q4 2006


New Risk Capital in later rounds

Private Equity and Hedge Funds– 9000 Hedge funds with over $1T in

capital– 15-25% Side Pocket funds – search for

Alpha– Decision cycle in days-<1Month– Convertible Debt, Convertible Preferred

vs. Participating Convertible Preferred– Particularly appealing to cash-dependent

biotech firms– Actively recruiting GP’s from east coast

firms to run venture portfolios– Key Players:

DE ShawTPGFortress Investment

– Key Deals:Microbia ($75M)Merrimack Pharma($65M)

London Stock Exchange - Alternative Investment Market (AIM)

– No minimum company size, capital raises comparable to B and C rounds ($10M +)

– $1M in compliance costs vs. $3M(SARBOX)

– Fidelity Investments (largest shareholders) driving Fidelity Ventures to pursue these exits

– Alternative to later stage venture capital for existing VC-backed firms

– Alternative to VC for closely held private firms

– Aggressive Nominated Advisors (NOMADS) cold-calling CEO’s of East Coast startups

“it takes just as long to fly to London as it does to SF”


Changing MIT Institutions

Desphande Center– Up for funding review and renewal

Only one exit (Brontes, $95M on $8M Series A)Resistance to deep diligence

Technology Licensing Office– Low Profile

Life Science Labs stealing the limelight, talent and the funding– MIT changing requirements to include life science in core– Whitehead, Broad

Media Lab– Frank Moss replaces Nick Negroponte– Less focus on whimsy, more on corporate return– Increasing emphasis on mobility- (eLens project)


MIT Deals

Visit TBJ Investments Cambridge Techwatch: http://tbjinvestments.typepad.com/Notable– Timothy Swagert, Lemelson Prize Winner 2007

Explosive Detection Sensors using Optical Fluorescence– Erich Ippen – EECS

Polarization-resistant photonic circuitsDiligence being conducted by Ralf Faber (SF ’07, sold NetOpix to Corning for $2.1B)

– Tomaso PoggioVisual Recognition using neuron simulation

– Michael StonebrakerMorpheus Project: Data Transformation

http://tbjinvestments.typepad.com/


New England Deal composition

2:1 Advantage of Biotech over Software in $’s, Software still leads in # dealsIndustrial/Energy overtook medical devices in last year to become 3rd place sectorDespite the fact that 70% of US economy is consumer driven, Consumer-oriented product/services are 3rd lowest category

Source: PWC Money Tree Q4 2006


Interesting Areas

Enterprise 2.0– Google, Convera, Oracle, et al moving inside firewall with search– Replacing Enterprise software with Web 2.0 Generation Technologies– Google Apps taking on Microsoft on the desktop– Jeff Immelt, GE – Concern about how to manage blogs/internally

generated contentSemantic Web– Tim Berners-Lee and Decentralized Information Group (DIG)

Convergence of Digital and Physical– Center for Bits and Atoms (Neil Gershenfeld)

Life Science overlay on multiple disciplines– Computational Chem/Bio


Thanks for your time!

http://www.pmg.csail.mit.edu/~anjali/tp/albums/boston/images/The MIT dome.jpg

Boston vs. the bay

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