Boston Software, Post-Bust

A lot has changed since Lehman Brothers declared bankruptcy in 2008.  The shrinking pool of money and lack of proven returns has resulted in the drying up of venture capital funds.  Top-tier companies that once raised $1B+ funds are now content with raising $250M funds.  The result is clear: there are fewer venture investments and venture-backed startups in the Boston area.  In Q2 2010, there were 86 venture deals transacted in Massachusetts for a total of $558M.  Compare this with Q1 of 2000, the height of the boom, when VCs transacted 211 deals for a total of $2.8B in Massachusetts.

But all is not lost.  The Massachusetts economy grew at 6.4% in Q2, a full four points above the national average.  We've been buoyed by the diversity of our economy, which has health care, biotech, internet, software and services all in a compact geographic area.  We've also seen changes in venture investment, with organized angel networks coming up and competing with traditional venture capitalists.

But more importantly, if there is one simple truth about entrepreneurs, it's that they don't wait for a good economy to start their companies.   There continue to be a lot of exciting new companies to watch in Boston, including Carbonite, Nasuni, CloudSwitch, Backupify, Sonian, Unidesk, and RatePoint.  Startup incubators like TechStars continue to produce interesting new companies, and angel networks like Hub Angels and Launchpad continue to fuel new companies.

I often like to compare what we are seeing to 1994.  After a difficult recession, the pace of innovation had clearly accelerated in Boston, fueled by an emerging new technology: the internet.  But the truth is, this is not 1994, and we are almost certainly in a new normal.  Yes, gone are the days in which an idea and a nine slide presentation could getting you VC funding.  Back are the days in which the fundamentals - a strong management team, experienced board, and real customer value - are required to succeed.