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March 27, 2005

Why is Boston hitless?

My former company, Upromise, is one of the few VC-backed consumer success stories out of the East Coast.  The company has over 6 million households as members and a strong brand in the college savings community.  That said, it's hard to name many others from Boston, whereas the West Coast is full of them, from Google to TiVo, from NetFlix to eBay, from Amazon to Yahoo - world class brands have been created left and right in the Valley these last 10 years.  And so many people in my travels ask me the question:  "Why are there no consumer hits out of Boston?"

The conclusion I've come to is that Boston simply lacks the key ingredients for a great consumer start-up.  All start-ups require the proper ingredients to succeed - visionary entrepreneurs, savvy professional managers and sharp VCs among them.  Whereas you can find these ingredients in abundance throughout New England for software, enterprise IT, bio-tech, data communications, you can't find it for consumer marketing.

When I was hiring Chief Marketing Officers at Upromise, the first three came from California, NYC and NYC.  Why?  Because there wasn't very much consumer talent in Boston.  In a meeting with CEO Larry Lucchino the other day, I pointed out to him that, arguably, the Boston Red Sox were the best consumer brand in Boston.  When Interbrand published their 2004 BusinessWeek article ranking the top 100 brands, only Gillette (#15) hailed from New England, and we know where the brains of that operation are heading post P&G acquisition.  The home of the other 99?  NY and CA were very well represented.  When the Fleet Center was looking for a new branded sponsor, no local ones could be found.  Sports area sponsorships are hot stuff throughout the country, but it took a Canadian company (TD Bank North), to care enough to name Boston's premiere sports arena.  When consumer-oriented entrepreneurs pitch me, they always start their pitch by saying, "Thanks for meeting with us.  No VCs in Boston seem to 'get' consumer plays".

On the flip side, Boston has done pretty well creating enterprise IT/software companies, although these companies do typically get acquired before they can really blossom into large, independent market-leaders.  In fact, other than EMC, you'd be hard-pressed to identify a world-beater as opposed to nice, nichey companies.  One depressing way to drive this home is to look through the Boston Globe's weekly "High Tech 50" - the list of the 50 most valuable companies in MA.  Only 3 are greater than $5 billion in market capitalization (EMC, Raytheon and Analog Devices) and 18 greater than $1 billion.  Akamai is the only one of the 18 to have been founded in the last 10 years.

Back to the consumer angle, I predict things are starting to change.  Investing behind consumer businesses is so attractive, and the general Boston-based start-up talent pool so strong, that I predict new, interesting projects will emerge that have a consumer flavor.  Marketing technology talent is rife in Boston (Digitas and Hill Holiday are great feeders, as well as all the CRM software companies running around route 128).  So let's hope, like the Red Sox's infamous 86-year slump, the consumer start-up slump ends for Boston soon!  I'm eager to help fund that next winner!

Comments

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I don't see a nationwide, Boston-originated consumer hit ever happening. The reason? Cultural-group/heritage-group intensity of consciousness and identification is a difficult-to-shake characteristic of the Boston area, and it doesn't play in too many major markets West of the original 13 colonies. This is not a bad thing; it just is.

Another way of understanding the situation is by viewing it through the lens of the 2000 NJPS (National Jewish Population Study). Statistics indicate that active, religio-culturally particularistic identification by Jews as Jews drops as one moves from East to West in the US; correspondingly, the out-marriage rate (Jews [defined as such by traditional/legal matrilineal descent] marrying non-Jews) goes up as one traverses the country from the Atlantic to the Pacific. Some Jewish political activists have likened the Jewish people globally to the proverbial canary in a coalmine where human rights and democratic freedoms are concerned. In the US, there's a similar case to be made about Jews' self-identification levels geographically correlating with consumer-market hit potential.

By the time you get to California, you run into an amalgamated American "identity" that can pretty much play in any major consumer geography East of the Sierra Nevada. Sure, some of politics in the Bay Area can rightly be dubbed as radical and California-specific. But in the main, consumer culture there has successfully managed to take everything that drifted in from the East, run it all together into a bland agglomeration, and sell it back to the rest of the country. This geography is destiny, and I'm sorry to say it but Boston will continue to struggle despite the towering inspiration provided by the Olde Towne Team.

Jeff, excellent start on your blog! This is a very interesting post -- the title does sounds like you are talking about all kinds of hits, not just consumer oriented stuff.

Jeff, excellent start on your blog! This is a very interesting post -- the title does sounds like you are talking about all kinds of hits, not just consumer oriented stuff.

At least in consumer technology, a lot of that stems directly back to the fact that in SF you had HP, while in Boston the mini-computer companies all died. If you want to see consumer technology pedigree in Boston, the only space the survived was in audio (Cambridge Soundworks, Bose, B&W, Lexicon).

Other than that, it's nothing but anomolies (temporarily Gilette, Reebok, what's left of Poloroid, Monster, etc).

But I would argue much of the infrastructure exists but lies dormant. Jeff you spoke to the marketing side, but the technology side also exists. Just look at resumes of many of the consumer heads out west or in NY and you'll see MIT and HBS all over the place. The key is some of the other elements to keep them here (namely, smart VCs and a few feeder companies). No easy task.

N

PS- A study done a couple years ago out of Ohio Univ. pegged the number of comments on a blog directly to the likelyhood of a blog continueing. So consider this a vote for keeping up the good work.

Brightcove (www.brightcove.com) looks like it could be one of the new breed. The end customer of the digital video content will be the consumer. How they distribute still remains to be seen.

I agree that with all of the interactive agency expertise here in Boston that should provide us with an advantage in developing properties that deliver the kind of users/impressions that would be attractive to advertisers.

Jeff-

Very interesting post. You may be interested in the cover article from the April 2nd "Economist". It arguably delivers the second half of the argument.

Andrew

Very interesting post for me personally, as I've been a part of several consumer-focused Valley startups (PayPal, LinkedIn) and recently moved back here to the Northeast. There have certainly been a handful of tech companies here which "coulda been a contender" in consumer sectors, but petered out after reaching some prominence. Think Lycos circa '97-98 or how Segway was going to be the next big thing at the end of 2001. Other consumer tech trends arguably started here, for instance Peapod was up & running well before Webvan's first truck roll.

The comment about culture/demographics is a thoughtful one, but in my estimation it's a much simpler & narrower issue. Beyond the usual factors favoring the West Coast (e.g. more startups overall), I think the consumer successes are due in large part to a preponderance of early adopters. In the Bay Area, the majority of people are either personally fascinated by or professionally interested in consumer technology. Whether it's gadgets (TiVo) or services (Netflix, eBay), a consumer startup experiences a virtuous circle there. The early customer feedback breeds better products, traction & buzz help funding, and exposure makes it easier to get in the door w/ key partners. For example, I doubt Netflix would be where it is today if they'd put their first fulfillment center in Worcester (which currently serves our area) rather than San Jose.

There's a critical mass of early adopters here in the Boston area, but we're certainly not a majority. For example, broadband penetration in coastal cities is now fairly even (55-65% range), but 5+ years ago the Bay Area was way ahead. Overall, the smaller early adopter crowd here leads to fewer consumer-focused startups as well as a more challenging path for those that exist. Doesn't mean it can't be done here (I'm excited about the prospects actually), but does make some initial and intermediate hurdles a little higher.

As a Boston-area VC with a consumer/media background myself, I’ve thought a lot about this question, too. Jeff concludes “that Boston simply lacks the key ingredients for a great consumer start-up. All start-ups require the proper ingredients to succeed - visionary entrepreneurs, savvy professional managers and sharp VCs among them.” At fist read, his basic argument makes sense: the best talent around Route 128 lies in the enterprise IT/software realm, so that’s where the strong companies emerge.

But I think that the reasoning runs much deeper than available talent. I believe that it rests on the foundation of Boston culture. California’s roots are in the risk-takers who left their original situations on a “hunch” that a better life could be found out West. I think that this theme bleeds into the mind-set of the rest-coast entrepreneur, willing to bet their company on a belief in his or her intuition of consumer adoption. It’s an “all or none” proposition. By contrast, Boston’s strong heritage lends itself to entrepreneurs who take calculated, formulated risks – more akin to the step-wise function of the early adoption of big enterprise customer sales. It is this cultural difference, coupled with the available human resources, which creates a self-reinforcing circle. Enterprise companies are started, VCs and the talent pool develop domain-specific expertise, and the cycle is further perpetuated.

Regardless of the complex and subtle reasoning for why this situation exists, I agree that the situation is ripe for change. It is true that the talent that has immigrated and emerged here in the past ten years, which will provide a solid base for innovation. But more importantly, the current economic landscape dictates a shift away from innovation in enterprise information technology. The fact that the demand for such technology has severely declined leaves Boston-based entrepreneurs and VCs no other choice but to look elsewhere. With corporate IT spending expected to grow at just 4-5%, how can that industry support a supply of new innovation at return prices that venture capitalists expect? It seems very difficult to me. The upcoming demand for consumer-centered technologies (including the infrastructure to support them) nearly requires that Boston (at least partially) shift its focus towards away from enterprise IT in order for it to survive as a viable region for entrepreneurial innovation.

So I for one am personally looking forward to an upcoming consumer hit coming out of the Cambridge/Boston area.

http://www.genuinevc.com/archives/2005/04/why_is_boston_r.htm

Jeff,

Great blog topic. The lack of Boston-based, VC-backed consumer brands/offerings is something that has bothered me for while. So much so, that as an online consumer marketer and brand developer I ended up relocating to Chicago (home to a host of big consumer brands such as McDonald's, Kraft, Sears, Ace Hardware). Let me know when Boston turns the corner and starts to invest and foster consumer-facing entreprenurial ventures - "I'll be back!" Keep up the great work.

Reading your blog regarding why "Boston is hitless" is in line with what a couple of students in the MBA community here in Boston have been thinking over the past year. I have come from the West Coast and have interacted with VCs from both the coasts. Further, I have also had the opportunity to meet a lot of Professors, PhDs, Post-Docs from MIT and Harvard. Some of my reasons why things dont work here in Boston are as follows:

1) Its not just the consumer space that Boston is weak in. Its all around tech space. I think you try to deflect the issue a little by highlighting the consumer space alone.
2) The attitude of the VCs here is a little too pedantic and old-school. Dont get me wrong, the West Coast VCs are also arrogant, but they just seem more flexible.
3) The West Coast (WC) VCs are more hands on than the East Coast(EC) VCs. I have yet to see EC VCs working with a bunch of PhD students explaining to them the importance of having product managers.
4) EC VCs want to be associated with Professors. If you look at a lot of hits on the WC, they have not come from Professors, but from PhD students. Here, especially at MIT, a PhD student is happy to complete his PhD rather than risk starting his own venture. Time and again I have seen this risk averseness.
5) I hate to say it but I think one of the biggest factor is the entrepreneurial community in the EC is not as competent when compared to the WC. I am amazed by the quality of the C-level execs in the EC versus the execs on the WC. There seriously is a shortage of talented C-level people here in the EC.
6) There are too many people on the EC who have had their own one-hit wonders and now strut around as if they own the place. In the WC, such a person is one of many!!
7) At MIT you hear of Akamai as if thats the only one hit that MIT has produced in the 90s. At Stanford you hear about Google, Yahoo but you also hear about smaller players - players who can disrupt current incumbents. They are the sexy companies to join!!

This is total Porter's Diamond stuff. http://www.quickmba.com/strategy/global/diamond/

Most people are talking about Factor Conditions, but like Lee Hower says, Demand Conditions also plays a big part. It pays to look at the system as a whole.

Great blog! Can't wait to read more.

Very interesting post, Jeff! I think this meme has been spreading lately, I had been having similar conversations with several friends so I was happy to see such a clear analysis, and great comments following it.

I too believe that the potential is there and I think there are other positive indicators as I discussed today- http://www.heyletsgo.com/blog/2005/05/east-coast-vs-west-coast.html

East vs. West vs. Nothing in the middle

I have been involved with start-ups on both the west coast (Forte Software, AltaVista, Napster) and east coast (Bowstreet, Groove Networks) and with VC's on both coasts. There are differences in size and scale, but not much difference in innovation or talent.

East Coast Consumer Winners - Lycos was a very successful east coast consumer company. Monster is very successful as well. Groove Networks was successful as well, and will see more success as part of Microsoft.

Hybrids - It should be noted that Napster started on the east coast in Shawn Fannings Northeastern dorm room. FaceBook was started in a Harvard dorm room. Both have taken the consumer (college) market by storm...and both relocated to Silicon Valley for VC money, talent pool, and lifestyle reasons. But, the ideas were hatched here in Boston. It could be argued that AltaVista has Boston roots as well given that it came from Digital Equipment, but the real invention happened at the DEC Research Labs in Palo Alto.

West Coast Winners - There are lots of them; Google, eBay, Yahoo, etc.

Observations
1. The vast majority of high tech companies, money and talent is on the west coast or east coast. There is very little more than 30 miles inland from either coast. Amazing and sad.

2. The west coast is probably 4 times bigger than Boston in terms of high tech companies and investment, and Boston is probably 4 times bigger than the rest of the country...combined. It is just a matter of scale.

3. Boston has a history of hardware, networks, and bio-tech. Silicon Valley has a history of microprocessors, software and consumer companies.

4. Talent migrates to where other talent is concentrated. If you want to do country music you move to Nashville. If you want to do movies you move to Hollywood. If you want to do theater you move to New York. If you want to do internet consumer stuff you move to Silicon Valley. Hardware and bio-tech is best in Boston.

5. There are exceptions to every rule or trend...but not many.

I know I'm a little late but I just had to put in my 2 cents.

I know there are people who may think that this is not a big deal, but I personally cannot understand how you can ignore the basic human desire for nice weather. I have lived and worked in Boston for about a year and as great of a place Boston is, it was extremely hard to be innovative and productive when you're fighting weather most of the year. Whether it's the heat or the blizzard, I simply could not do it. Of course I'm originally from Los Angeles so maybe I'm just not "used to it". I realize that this isn't a problem for lot of people, but I can't believe that it does not effect everyone on some level.

Anyway, that's my 2 cents.

informative site!!!

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