Oct 4, 2013 · 12 minutes

It looks like Boston is in a rut. The city that once clearly held the mantle as America’s No. 2 tech town, behind only Silicon Valley, is slipping in the rankings.

Gone are the glory days of its enterprise might, when many of tech’s earliest kingpins, from Digital Equipment to Computervision, established themselves on Route 128, which forms a semicircle around the city. Gone are the days when Boston’s venture capitalists could fill their entire portfolios with telecommunications companies and sit back to watch the cash roll in. And gone are the days when it was assumed that the engineering and business talent emerging from MIT and Harvard would by default outgun programmers and company builders from any other city.

In recent years, entrepreneurs, investors, and startup types have been more excited talking about New York or Los Angeles than Boston. Indeed, late last year a Startup Genome report, which assessed cities according to output, funding, performance, funding, and mindset, ranked Boston at No. 6 on the list of the world’s best regions for startups, behind not only Silicon Valley, LA, Seattle, and New York, but also Tel Aviv.

In April, the National Venture Capital Association released figures that showed Boston-based venture firms raised the three largest funds in the first quarter of the year, with Battery Ventures, Third Rock Ventures, and Spark Capital closing funds valued between $450 million and $650 million, helping Massachusetts to a collective haul of $1.88 billion.

But even that apparently good news came with caveats. As Sarah Lacy pointed out, the Boston firms stood out, because the quarter happened to be one of the weakest on record in terms of firms raising new funds. And the area’s most talked-about firm, Spark, has had its biggest wins from New York and the Valley, thanks to investments in Tumblr, OMGPop, and Twitter. In fact, Spark has been paying much more attention to New York than its home city.

When asked to name large, enduring public companies, Boston’s tech sector can only point to EMC and Akamai in the $10 billion-or-above category (and Akamai’s market cap is actually hovering around $9 billion), and then a host of mid-sized companies, such as Brightcove, Nuance Communications, Carbonite, DemandWare, Kayak, and Verastem, all of which have gone public in recent years.

Unlike so many places in the world, the problem in Boston isn't finding talent. It’s keeping it.

On the other hand, several Boston companies that looked like they might go on to big things instead sold early. Kiva Systems went to Amazon for $775 million. Quattro Wireless was acquired by Apple for $275 million. Bluefin Labs and Crashlytics were both picked up by Twitter, for $67 million and $38 million in stock respectively. Litle & Co went to Vantiv for $361 million, ITA Software sold to Google for $700 million, and Nuance paid $200 million for each Transcend and Vlingo.

When Endeca joined Oracle in a $1 billion deal, the Boston Globe’s Scott Kirsner was moved to tweet that Massachusetts should be producing more of its own Larry Ellisons, “not more VPs who report to SVPs who report to Ellison.”

Which brings us to the talent question – still a sore point in Boston. You see, unlike so many places in the world, the problem in Boston isn't finding talent. It’s keeping it. And in this city, that problem has a prominent face: Mark Zuckerberg.

That Zuckerberg started Facebook while at Harvard and left to build the company in Silicon Valley still stings, even though the billionaire founder said two years ago that if he were starting the company now, he wouldn’t have left. That the same thing happened with Dropbox and Drew Houston, who graduated from MIT, worked for Bit9, and started a different company in the city, hurts even more. While people in Boston will tell you the city is doing a better job of retaining its talent and its startups, their stats are a bit squishy.

One venture capitalist told me he thinks about 25 percent of the graduates who come out of the major universities end up staying in the city, but of course it’s hard to prove that. What’s not difficult to prove is that startups are still leaving at a pretty steady clip. Recent high-profile departures include TaskRabbit, Locu, Ginger.io, and WePay, not to mention Y Combinator.

Redistributing an ecosystem


By all objective measures, Boston has to concede that it has lost ground to New York and even Los Angeles, where Snapchat fever has spread to a host of other hot startups, including OpenX, SpinMedia, Whisper, and OUYA. Boston is no longer a lock for America’s No. 2 tech city. Now it’s about stopping the slide.

Outside appearances, however, can be deceiving.

What might look like a rut from Silicon Valley looks a lot different once you see what’s happening on the ground in Boston. Investors and entrepreneurs in Boston say that the startup ecosystem has been thriving for the last three years, and accelerating in the last 12 months. The two dozen people I spoke to during a week of reporting in Boston were all on message in selling the benefits of the city’s ecosystem, which range from access to talent, the emergence of a network of angel investors willing to invest in tech startups, and a slew of potentially large companies in gestation. (More on all of that later.)

The most visible and profound positive change in the ecosystem, however, comes down to geography. The city’s tech center of gravity has undergone a radical shift in the last three years, with startups turning their backs on the suburban 128 corridor and instead building their companies downtown and in Cambridge, near MIT and Harvard.

Where the startups have gone, the venture firms have followed. Cambridge and downtown Boston, which are so close together they’re effectively the same place, are now home to Highland Capital, Atlas Ventures, Bessemer Venture Partners, Charles River Ventures, Matrix Partners, and Spark. Polaris Partners is soon moving its headquarters from Waltham to the “Innovation District,” which just a few years ago was a wasteland of parking lots.

Coworking spaces, incubators, and accelerators have also established themselves in the city, including the four-year-old mega-accelerator MassChallenge, Techstars, Dogpatch Labs, the Cambridge Innovation Center, Space with a Soul, and an impending incubator code-named Blade, started by Kayak co-founder Paul English. PayPal offers startups free work space in its downtown offices, as does BzzAgent, the word-of-mouth marketing company that in 2011 sold to Dunnhumby for $60 million.

Increasing rents are a sure sign of the thickening density of Boston’s startup cluster. Kendall Square, on MIT’s doorstep, is now at close to full capacity, with rent prices now hovering around $40 per square foot. The Innovation District is now a mix of refurbished warehouses and shiny skyscrapers, attracting big law firms as well as tech companies. Luxury condos are going up. Because of the squeeze, MassChallenge, which houses 125 startups per class, has been forced to move out of its 14th-floor headquarters in the shopping mall-like One Marina Park Drive and into 25,000 square feet of free space in the Boston Design Center.

The universities are in on the act, too. The Boston area has an embarrassment of riches when it comes to its high-level talent factories, which come in the form of MIT, Harvard, Olin College, Northeastern University, Boston University, and even the nearby Rhode Island School of Design (Airbnb founder Brian Chesky’s alma mater), to name a few.

The schools have long provided access to a deep talent pool, which is why Google, Microsoft, Amazon, Facebook, and Twitter have all established prominent bases in Cambridge. And they’re instituting various programs in an effort to get some of the upside from their entrepreneurial graduates. Most prominently, Harvard has established a university-wide initiative called iLab, which provides startups with work space and seed money, and The Experiment Fund, formed in collaboration with partners from Accel, Polaris, and NEA.

Boston is now a more fertile environment for creative cross-pollination than ever

The effects of the new density are positive and self-perpetuating. There are now startup-related events in Boston on a daily basis. You can get more meetings done in a day, and there’s more serendipitious collision between people and ideas. Founders no longer have to slog through traffic to pitch VCs. Consumer companies butt up against ad-tech companies and Big Data shops. In short, Boston is now a more fertile environment for creative cross-pollination and innovation than it has ever been. It feels more alive, and it has mirrored Silicon Valley’s migration out of the suburbs and into San Francisco.

“It’s really been the last three or four years that the ecosystem has had a nucleus, a soul,” says Jeff Fagnan, a partner at Atlas Ventures, who has been living in the area for 14 years. “It took people coming in to Boston and Cambridge.”

The ecosystem is also becoming more diverse. Where Boston’s core strengths have long been in infrastructure, networking, and security – the “plumbing of the Internet” – it is now marrying its expertise in complex math with its knack for sales in developing an ad-tech cluster that is starting to gain serious market traction. That cluster includes rising stars such as:

  • Inbound marketing company Hubspot, which last year raised a $35 million round in preparation for an IPO and is said to have annual revenue in the region of $50 million;

  • Video analytics company Visible Measures, which has raised more than $65 million in eight years and, according to its CEO, is close to Hubspot in revenue;

  • Social media marketing company Brand Networks, which in June secured a $68 million cash injection from private equity firm AEA Investors and is expanding globally.

Other names on Boston’s math-marketing watchlist include predictive performance marketing company Nanigans, programmatic marketing startup DataXu, which was recently named the fifth fastest-growing company in the Inc 500, mobile loyalty platform SessionM, and app analytics provider Localytics.

On the consumer side, a traditional weakness for Boston, the city can also fairly claim strength in travel, being home to Kayak, TripAdvisor, ITA Software, and startups like Hopper, which relocated from Montreal, and Dashbell.

It remains true, however, that Boston lacks giant, defining tech companies that anchor the region. There’s no Google, Amazon, Oracle, Facebook, or Salesforce in town. But the picture might look different in 10 to 15 years. The city has several IPO prospects, short term and long term.

Ecommerce conglomerate Wayfair, for instance, is on track for revenues of close to $1 billion by the end of the year, building on $600 million in revenue from 2012. Rethink Robotics, a five-year-old startup backed by $62 million venture money, boasts a humanoid robot that costs about $20,000 and competes with low-wage workers. Hubspot, Visible Measures, and Brand Networks are building giant ad-tech businesses. And Veracode, backed by $74 million and which pulled in close to $40 million last year, is shaping up to be cloud security mainstay.

Even if Boston were measuring the success of its startup ecosystem on the strength of recent IPOs, it would have plenty to talk about. In fact, while rival New York has seen only one major tech IPO since 2010 – Shutterstock – Boston has seen more than 10, including Foundation Medicine, which went public just last week and saw a pop in its share price, Brightcove, Carbonite, Demandware, Tesaro, and Verastem.

Born-again Boston


Boston’s challenges are real and unresolved. Those giant, pillar companies are going to take time to build, and until they are finally entrenched there is still going to be a role-model vacuum at the top of the ecosystem.

The city still has something of a culture problem, with some traditional and conservative venture capitalists being too focused on numbers and unwilling to take big risks. One founder told me that local VCs tend to go for singles or doubles at the expense of home-runs. In meetings with VCs in Boston, the founder said, the first question is about business models or revenue. With West Coast VCs, the first question is always, “How are you going to become a giant company?”

TaskRabbit founder Leah Busque had similar things to say earlier this year, when she told Sarah Lacy that she moved from Boston to San Francisco for a reason. “I pitched everybody in Boston,” Busque said. “They didn’t get the model. So I moved out to San Francisco, and I found awesome investors out here who got it.”

While Boston is home to a wealth of talent, it is still trying to get over a legacy of non-competes and NDAs that have in the past have kept that talent locked inside companies and dissuaded spin-offs and entrepreneurial activity. Investors say that is changing, but it will take more time for the stain to be completely washed out.

Founders and investors also speak enthusiastically about the emergence of a network of angel investors who are willing to invest in tech startups, with their time and money. Kayak’s Paul English and BzzAgent’s Dave Balter are good examples of that. But I also heard that this pool of angels doesn’t run deep, topping out at about 30 or 40. Boston has not enjoyed anything like the level of recycled capital and web of experienced entrepreneurs that is seen in Silicon Valley.

The buzz that emanates from Boston's collective refound optimism is permeating the entire ecosystem

And while startup activity is being taken out of the suburbs and consolidated in the city, Boston still has some way to go to convince many entrepreneurs that it can provide them with all the capital, mentorship, and growth support that would otherwise be found in the Valley. This weak spot is most apparent when it comes to consumer-oriented startups. While Runkeeper, CustomMade, LevelUp, and Boundless are flying the flag for consumer companies in the city, it can’t afford to lose many more TaskRabbits or Ginger.ios, let alone Facebooks or Dropboxes.

But even as Startup Genome, much of the venture community, and the media these days look more favorably on New York and Los Angeles than they do Boston, there remains much to recommend the city’s startup ecosystem. With the gravitational shift to downtown, rising rents, the groundswell of grassroots activity, some major funds from more adventurous VC firms, and a few big IPOs in the pipeline, Boston has some tangible proof points of a thriving ecosystem. Perhaps just as important, however, are the intangibles.

Boston is today a city of startup believers, and the buzz that emanates from its collective refound optimism is permeating the entire ecosystem. That feeling might be difficult to quantify, or codify, but it is apparent in every discussion with stakeholders in the city’s tech community. That feeling can also be self-fulfilling. New York saw a similar effect at work before it had anything to show for it. We’re seeing the same dynamic at play in Los Angeles, which, arguably, has Snapchat, entertainment tech, and a whole lot of question marks about subscription commerce.

So while Boston is no longer a clear winner for that No. 2 position on the list of America’s top tech cities, it is in the process of bolstering a robust ecosystem strong enough to stop its slide down the rankings. Perhaps it will even climb back up.

[Images via Thinkstock and The Innovation District]