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2 posts from July 2012

July 22, 2012

Why Hasn’t NYC Produced More IPOs (While Boston Has)?

Over a year and a half ago, I did a two-part blog post on the East Coast IPO malaise – one focused on Boston (Massachusetts more broadly), another focused on New York.  In these two posts, I expressed optimism that there was a strong pipeline of companies that would result in public offerings if the macroeconomic environment was stable enough.  And in assessing the two markets, my conclusion was that the New York market had a stronger pipeline of pre-IPO companies that would be attractive to the public markets than Boston.

On the heels of the successful Kayak IPO, I thought I would do a retrospective look back.  In doing so, I realize I was dead wrong.  In the last 18 months, Boston has produced far more IPOs than New York, and the remaining pipeline in Boston seems to be quite strong (see Boston Business Journal's IPO Watch), arguably stronger than New York for the next 6-12 month window.

There have been eleven Boston-based technology IPOs since my blog post, including:  Brightcove ($430M market cap), Carbonite ($240M), Demandware ($740M), EXA ($130M), Kayak ($1.2B), Merrimack Pharma ($730M), Synageva Biopharma ($1.2B), Tesaro ($360M), TripAdvisor ($6.0B), Verastem ($210M) and Zipcar ($730M).  A few of Boston-based the companies that I highlighted as potential IPO candidates in 2011-2012 have chosen to sell instead, including Endeca ($1.1B, Oracle), Kiva ($775M, Amazon) and ITA ($700M, Google).

Meanwhile, not a single New York technology IPO has taken place.  Maybe I'm mistaken, but in reviewing the data, I couldn't find a single one.  There was one big exit from my list of NY IPO candidates – Buddy Media ($700M, Salesforce.com) – but no others.

11-0 in IPOs and 3-1 in big M&A in favor of Boston?  What’s going on here?  Is this a law of small numbers or a fundamental issue?

I’m not sure of the answer, but a few theories have surfaced as I talk to others:

  • The IPO culture hasn’t fully permeated NYC?  There are only very few public technology companies based in NYC:  I count AOL as the only one with > $1 billion market capitalization, whereas Boston has 30-35 innovation economy companies with greater than > $1 billion market capitalization.  Perhaps Boston CEOs, CFOs and boards feel more pressure to go public sooner and/or are comfortable with the IPO process because they community has done it so many times.  Honestly, this theory doesn’t totally resonate with me as NYC is the heart of Wall Street – all the relevant bankers, accountants and advisors are there.  If any technology hub can build a strong middle market public company ecosystem, it should be NYC.
  • NYC’s tech sectors are out of favor with public markets?  This theory suggests that the sectors that NY is particularly strong in – consumer, advertising technology, media – are out of favor for some reason.  Perhaps the poor performance of the Facebook IPO soured Wall Street on the consumer sector and advertising-based business models?  But then why have consumer plays like Boston-based Kayak, TripAdvisor and Zipcar done so well?  As for the adtech sector, why did DC-based Millenial Media, a mobile advertising network, have such a strong public offering if the sector is out of favor?  Again, I’m not sure this theory holds water.
  • NYC companies are more sizzle than steak?  This theory is that because NYC companies are so heavily covered in the mainstream media, they are perceived to be ahead of where they really are in terms of actual business progress.  E-commerce companies like Etsy, Gilt Group and Rent the Runway get a lot of ink compared to, say, Boston-based Wayfair and RueLaLa.  But if you objectively examined their financials in terms of actual revenue scale and profitability, who is really closer to being ready to file their S-1?  This theory resonates somewhat with me.  For example, there is no TechCrunch reporter in Boston, but a number in New York and Business Insider is a strong local publication that does a nice job cheerleading for the local sector.

My firm, Flybridge Capital, operates with both offices and portfolio companies in both cities.  We are seeing amazing things going on in the NYC start-up ecosystem and are investing heavily there in 2012.  My summary view is that the outperformance is due to a more vibrant seed and Series A environment in 2003-2006, which is when many of these companies were started.  Given how strong the seed and Series A environment has been in NYC for the last few years, the results should even out over time.

Unfortunately, I can’t say the same for my Red Sox this year...

July 10, 2012

Big Idea vs. Lean Idea

“Seems niche.  How many people want to tell everyone randomly what they’re doing and how many really want to look at it?” 

- My entry for Twitter, as recorded in early 2007.

This entry in my "deal flow" journal records my first, inauspicious impressions of Twitter when I initially heard about it.  Today, It is obvious that I totally missed the power of the service, which I now adore and admire.  But what is less obvious to me, and therefore I assume many others, is how to distinguish between a Big Idea that simply starts small -- consistent with Lean Startup methodology -- as compared to a Small Idea that will always remain a Small Idea.

This question has been on my mind because recently, when I talk to entrepreneurs, I’m seeing too many Small Ideas.  In the last few weeks, I’ve spent time at Techstars, MassChallenge and ER Roundtable.  I love the passion the entrepreneurs are exhibiting in all of the venues and the education they’re getting by being a part of these programs.  And I love that the toolkit for startups is getting sharper and that techniques like the Lean Start Up methodology and terms like "hypothesis testing" and "MVP" are becoming common place.  To be clear, I am a lean startup acolyte.  The class I teach at Harvard Business School, Launching Technology Ventures, dedicates a large portion of time applying the lean methodlogy that Eric Riess so ably outlines in his book to start-ups. 

Yet, I fear that the success of the Lean Start Up movement risks leading entrepreneurs to pursue Lean Ideas rather than Big Ideas.  I'd like to see that trend reversed, by pushing entrepreneurs to distinguish more carefully the differences between Lean Ideas and Lean Start Ups.

First, a few definitions.  Lean Start Up methodology teaches that young companies should view the start-up as a laboratory for experiments, where a minimum viable product (MVP) is created to test the most critical initial hypotheses in order to inform the direction of the company, and whether the value proposition will be compelling enough to build a compelling product, and therefore compelling company.  A “lean idea” is a concept that is small, niche, incremental.  It might be better served as a feature in someone else's product.  Or a point solution in someone else's product suite.  But it is not substantial enough to form the core of an entire company, never mind start-up nirvana, which is to become a platform on top of which other companies seek to build (see chart below, which should have "Platform" as the rightmost point of nirvana for the inventor). 

Today, Facebook is a platform.  The Facebook API set is one of the hottest areas of development on the Web and some even equate Facebook with an operating system, in hushed tones of awe that previously were reserved for Microsoft (oh, how the mighty have fallen...).  But the initial service that was formed and launched in the Harvard dorm room, coded up in a few weeks, was simply a minimum viable product that allowed students to look each other up.

So as an entrepreneur, never mind an investor, how do you know whether you are working on a lean idea will never be anything more than a feature, or a Lean Idea that will evolve into a Big Idea over time, just as Facebook and Twitter did?  I don't have a definitive point of view here, but a few rules of thumb have begun to take shape in my mind:

  1. Don't Settle For Anything Less Than "The Wow".  Declaring something a Big Idea, or a Big Vision, is a lofty moniker.  Set the bar high when you consider whether your idea really is as massive, disruptive and game-changing as you think it is.  When you bounce the Big Idea off your friends and colleagues, do they nod politely and use words like "interesting", "cool", "neat" as opposed to widening their eyes and declaring, simply, "wow".  When I first heard about Square (also a Jack Dorsey production), I thought "wow".  Turning every mobile device into a payment acceptance platform - that's game changing.  Look for the wow.  Don't settle for anything less.
  2. Swim in the Ocean, Not a Pool.  If your company is operating in a massive, massive market area, with plenty of interesting adjacent markets, then you know you are pursuing something that could be really big.  DataXu, a Flybridge portfolio company, initially started focused solely on bringing real-time bidding and machine learning techniques to display advertising, at the time a $10 billion market - large, but not wow, particularly because the solution only worked if the advertising inventory was available to bid on through one of the exchanges.  So let's call that market pool-sized - or perhaps even lake-sized, but not ocean-sized.  The ocean-sized market was the bigger vision that CEO Mike Baker had - that all advertising (display, video, mobile, social) would be addressable through real-time, digital techniques.  And that a system could be built that was so fast, that thousands of data points could be poured in to inform the decision as to which ad to put in front of the consumer in real-time.  That was the wow that is driving that company to be as successful as it is today.
  3. Great Teams Find the Wow.  For decades, VCs have debated whether to focus on great teams or huge markets.  Will great teams operating in a small market outperform mediocre teams operating in a huge market?  Although there are case studies that cut both ways, to transform a Lean Idea into a Big Vision, I would submit you need a great team.  Benchmark's Andy Rachleff's bias, as reported in a Marc Andreessen post, is that the #1 company-killer is a lack of market.  Therefore, he concludes, in the debate between team vs. market, markets rule.  That said, I would submit that in order to transform a Lean Idea into a Big Idea, you need both.  A great team will find a way to expand that initial MVP into a huge market opportunity.

Company-building is never neat and linear.  Did Mark Zuckerburg or Jack Dorsey imagine at the point of creation that Facebook and Twitter could become veritable movements (that most transcendent state for a service - where it is beyond a platform but instead a cultural institution)?  Probably not.  Sometimes a Big Idea grows organically out of a Lean Idea.  But often, that combination of big vision, big market and great team can be seen in the DNA of any idea that morphs into a Big Idea that leads to a Big Platform.

So, when you are formulating your own start-up idea, make sure to distinguish between a Big Vision that begins with a Lean Implementation, and a Lean Implementation that is a reflection of a Lean Idea.  As Jordan Cooper recently wrote in his provocative blog post "Rise Strange Thinkers...We Need You", we need more Big Visions, as strange and outlandish as they may initially sound, to drive this ecosystem forward.  Just because you want to embrace the Lean methodology, doesn't mean you should settle for a Lean Idea.