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June 13, 2007

Building The Next Billion Dollar Company in Massachusetts

I'm participating in a panel this weekend at the TiE conference on the challenge in Massachusetts of building the next "billion dollar company". It's an interesting and timely topic, to say the least.

We seem to have an inferiority complex in Massachusetts on many dimensions beyond the historical trials and tribulations of our beloved Red Sox.  We stand in the shadow of New York City as a financial center, despite having a few strong private equity firms and hedge funds located in the Bay State, such as Bain Capital, Highfields and The Baupost Group. And we are a distance second to California in attracting job-creating venture capital, with $13 billion invested into 1,495 start-ups based in "The Golden State" as compared to $3 billion in 380 Massachusetts start-ups in 2006.  It’s not too shabby to be in second place to New York and California, considering we are only America’s 13th largest state as measured by population, but who wants to settle for second place?  With our mix of world-class academic institutions, hospitals, venture capital and technical talent, one would think we would have the potential to generate even more industrial horsepower. Our performance in creating industrial leaders is particularly discouraging, as we have produced a mere 10 of the country’s Fortune 500 companies that call Massachusetts their home state. Why haven’t we been able to create more billion dollar companies as opposed to numerous minnows that get gobbled up by the bigger fish out of state?

To analyze the situation, it is helpful to look at a few historical case studies of successful companies that have indeed broken out.  Two oft-cited role models who have "made it" are EMC and Boston Scientific. 

EMC is arguably the kingpin of the Massachusetts information technology scene.  Founded in 1979, the company has achieved enormous success in the information storage market, with a market capitalization of $33 billion, 2006 revenue of over $11 billion and 26,500 employees.  Boston Scientific holds a similarly exalted position in the medical technology market.  Also founded in 1979, the company’s success in medical devices has led to its growth to a market capitalization of $24 billion, 2006 revenue of $8 billion and 28,600 employees.

What do these two homegrown industrial titans have in common?  One interesting observation:  EMC and Boston Scientific were not classically venture-backed companies.  In both cases, the founders controlled the company through the IPO and had the fortitude to persevere throughout the early lean, start-up years without succumbing to the temptation to sell too early.  Patience in both companies on the part of investors and the entrepreneurs was a virtue.  EMC had its IPO in 1986 and hit $1 billion in sales in 1994, 7 and 15 years after its founding, respectively.  Boston Scientific had its IPO in 1992 and hit $1 billion in sales in 1995, 13 and 16 years after its founding, respectively.  In a nod to Jim Collins’ book "Good to Great", where he cites the importance of steady, consistent leadership, it is worth noting that the two founding leaders, Richard Egan and John Abele, were in their positions for 13 and 17 years, respectively. Another common attribute is that once they had achieved a strong position in their initial core market, both companies made bold acquisitions to maintain leadership and market supremacy:  EMC in the case of Data General and then numerous software companies, such as VMWare; Boston Scientific in the case of Guidant and numerous smaller device companies. In other words, the two companies did not rest on their laurels but instead took risks and aggressively sought to broaden their reach.

What are some of the inhibitors to replicating these two local success stories?  Beyond the lessons cited above, we would also observe that there are subtle differences in the way Massachusetts entrepreneurs and investors approach company-building as compared to our peer elsewhere.  Massachusetts entrepreneurs and investors prefer to push for early exits, exhibiting a predilection for taking their chips off the table early.  To be clear, none of us are beyond reproach here.  Beyond cultural conservatism, another driver of this behavior is the shallow pool of local senior management talent.  When Massachusetts boards consider selling or holding on, one of the key questions they ask themselves is, "Does my current management team have the horsepower to take the company to $1 billion in sales?".  In the absence of having numerous strong training grounds for executives to learn how to run operating units greater than $100 million, the answer is too often no.  You can’t swing a dead cat in Silicon Valley without hitting a high-tech executive with experience at an operating scale of greater than $100 million, but in Massachusetts there is a depressing dearth of such talent.

With the quality of our talent pool and the caliber of our business and political leadership, it’s not all doom and gloom. With home-grown powerhouses like Genzyme and Biogen leading the way, our position as a biotechnology cluster appears to have strengthened recently and we are increasingly attracting out-of-state employers who want to tap into the world-class scientific talent residing here. There are early signs of hope that we are well-positioned to lead in the nascent but potentially robust Green industry, with companies like Evergreen Solar and EnerNOC leading the way. And one of our most promising information technology "up-and-comers", Akamai, appears poised to achieve the magic $1 billion in sales in the next two to three years, dominating the Web content distribution market.

I am thus hopeful that we are on a stronger path in Massachusetts than ever before, so long as we have the continued leadership of the business, financial and political community to show the way.


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The problems are largely self-inflicted. Many of the great managers now living in California chose to move here from New England.

I think that you are on to something when you say that our investment climate is more conservative and therefore tends to favor singles and doubles over homeruns. However, I disagree about the depth of the talent pool argument— YouTube and Facebook, two great examples of success these days are nowhere close to being $1b revenue companies and don't need some senior manager from GE Turbines to come and run their businesses. In fact most web businesses that scale don't have that level of operational complexity. And while it is true that you can't hit a "manager" if you swing a cat on University Avenue, most of these managers are much more adept at building a company from 0-20 MM than they are managing complexity of sales and operations beyond $100MM.

I would encourage you to keep exploring this topic. I have my own theories that have some to do with a shallow bench— but it is not in management expertise but rather in creative thinkers (entrepreneurs and more importantly investors) that are willing to truly take big bold risks.

Rhode Island (Jan2008) and New Hampshire both have zero capital gains. Massachusetts has 6% which was previously zero in 2000/2001. I have a large transaction I'm deferring because of the change in the capital gains rate. I'm shopping for a house in Rhode Island and I'll move my residency there Jan2008. I am very unhappy with MA changing the capital gains rates and forcing me to defer my transaction.

Capital gains drives the startups over the border. My current startup is based in Seattle partially because of the tax rates.

Remind the tax and spend liberals in the state house that tax payers have feet and will leave the state.

Interesting. Israel has few billion dollar companies and shares some of the same attributes.

I agree with Antonio when he says:
"I would encourage you to keep exploring this topic. I have my own theories that have some to do with a shallow bench— but it is not in management expertise but rather in creative thinkers (entrepreneurs and more importantly investors) that are willing to truly take big bold risks." That has been my observation in dealing with West Coast vs. East Coast execs for strategic partnerships. The West Coast guys and gals just have "belief" that new, big, creative ideas can succeed. East Coast types are more likely to try and look smart by tearing down ideas.

Check out my article on the 50 Wealthiest Los Angelenos that I featured on my luxury blog, Good Luck Deluxe: http://www.goodluckdeluxe.com/2007/05/26/breaking-news-50-wealthiest-los-angelenos/

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