Seemingly overnight Boston has become the new startup capital of the state’s tech community, with entrepreneurs moving here for the same reasons many newcomers do: It’s a compact, busy city with convenient public transportation, good restaurants, and lots of people like themselves.
Last year, in fact, Boston accomplished a previously unheard of feat in the tech world by having more venture capital deals than Cambridge — for years the center of gravity of the startup scene in Massachusetts. And a large number of those deals went to companies located outside the Innovation District, in neighboring business zones such as the Financial and Leather districts and Downtown Crossing.
“If you went back even a couple years, it would have been unthinkable,” said Jean Hammond, a longtime backer of startup companies in the Boston area. “The parts of town where you never thought you’d see startups are now working for them.”
One factor driving the shift is that for all its pricey real estate Boston is still less expensive than tech-centric Kendall Square, where office rents have been at the stratospheric level for several years. Moreover, despite all the efforts of former mayor Thomas M. Menino to create an irresistible environment for startups, going so far as to rename the city’s Seaport area as the Innovation District, it turns out entrepreneurs are often drawn to Boston by the basics.
“There are more subway lines, and it’s a little hipper in the downtown in many ways because there’s better food,” said Raj Aggarwal, chief executive of Boston startup Localytics, which relocated to Boston from Kendall Square in late 2012. “Even if the prices were the same in Kendall, we would stay downtown.”
In 2013, companies located in Boston closed 97 deals for venture capital financing, compared with 66 the year before, according to CB Insights, a data firm that tracks the venture industry. The amount of money flowing to Boston companies is also on the rise, some $593 million last year compared with $508 million in 2012.
The entrepreneurial community in Boston will soon be much larger as the machinery behind the startup phenomenon expands throughout the city. For example, the Cambridge Innovation Center is preparing to open a Boston office in the Financial District that will house some 300 startups.
Among the tech startups that raised funding last year was Objective Logistics, which in 2012 moved from Kendall to Boston’s Leather District, located between Chinatown and South Station. The highly affordable neighborhood also met chief executive Phil Beauregard’s more prosaic criteria for choosing a startup office: “Is it close to the Red Line, is there food around, and is it safe?”
Meanwhile last year, both the number of deals and the amount of venture money invested in Cambridge companies dropped from the year before, according to CB Insights; the same trend is true for the tech-heavy suburbs such as Waltham.
Collectively the suburbs continue to rake in large sums of venture capital as the Route 128 corridor remains a large and important anchor of the state’s technology community. But the type of tech companies located there are different than those taking root in Boston: Most are older and larger — well beyond the startup phase — and generally their work revolves around the giant computer systems used by corporations. They are often also at the stage of needing a larger amount of money to finance their growth than the smaller Boston firms.
For example, Actifio is a data-management software firm in Waltham with 280 employees. In March, the company received $100 million in funding, an amount that valued the firm at a hefty $1.1 billion.
Actifio’s chief marketing officer, Mike Troiano, said Waltham is an ideal location to recruit software engineers who have lengthy experience with large, complicated systems, which generally means older workers who have already settled down.
“If your sweet spot is 35 and down, you’re probably more concentrated toward the city,” Troiano said.
Boston, by contrast, is at the other end of the scale: mostly very small companies, with only a handful of employees. Their work is focused around mobile devices and Web businesses, and the money they raise from venture firms is typically much smaller.
And Kendall Square, meanwhile, is evolving into a much more diversified business district with tech companies of all sizes and stripes, not just startups or the university and research shops that anchored it for decades. Cambridge remains the nerve center for the region’s sizable biotech industry, home to giants Biogen Idec and Genzyme as well as six of the biotechs that went public last year, for instance.
And the city still boasts a sizable startup community operating out of the many shared office spaces, such as the Cambridge Innovation Center. These companies are so new, or so small they are not yet ready to pick a more permanent home of their own.
But perhaps the biggest change for Kendall is that major, established technology companies are now located there, too; Google, Amazon.com, and Microsoft have opened or expanded offices in Kendall Square in recent years.
While those additions have made Kendall a more fully-rounded business district, they are also why Cambridge has gotten so expensive that many newborn tech companies that got their start here can no longer afford to stay. Rent for Class A space in this part of Cambridge jumped 7 percent during the first quarter, to $57.85 per square foot, from last year, according to commercial real estate firm Cassidy Turley. By contrast, Class A rents in Boston’s Financial District stayed flat during the first quarter at $48.39 per square foot.
“Kendall Square was the place to be, even for young fledgling companies,” said Beauregard, whose restaurant software startup moved to Cambridge in 2011 before leaving for the Leather District a year later.
Meanwhile, the Innovation District is suffering some of the same growing pains as Kendall, becoming so popular that the kind of companies Menino intended to move there can’t afford it, either. Class A rents in the Seaport were $52.94 per square foot last year, nearly on par with East Cambridge’s rent at the time, according to Cassidy Turley. Several large, deep-pocketed companies have commissioned new office buildings in the Seaport neighborhood, including Vertex Pharmaceuticals Inc., PricewaterhouseCoopers LLP, State Street Corp., and the law firm Goodwin Procter LLP.
Some entrepreneurs note that the Innovation District isn’t as convenient for public transit as downtown. Polina Raygorodskaya said proximity to multiple subway lines drew her travel-booking startup, Wanderu, to Downtown Crossing a few months ago. Most of the 15 employees at her startup do not own cars, herself included. And the company isn’t alone in the importance it affixes to the subway: Demand by the startup community for late-night T access has been among the reasons cited by officials for offering the service, which debuted last weekend.
The overall migration to Boston also applies to the venture capital firms that finance so much of the startup activity in Massachusetts — and can likely afford to work anywhere they want. A decade ago, many of the region’s premier venture funders were located in the suburbs, especially along Route 128 in Waltham. Then a few years ago a number of them relocated to Cambridge when Kendall Square became hot.
Now, those that did not join the Cambridge flight are instead moving to Boston. Battery Ventures moved from Waltham to the Innovation District in December, and North Bridge Venture Partners, also in Waltham, is now considering a move to Boston this year — most likely to the Innovation District or downtown, said general partner Michael Skok.
Meanwhile NextView Ventures practically qualifies as a pioneer: When it launched in 2010, the firm chose to base its office in the Leather District.
At the time there was little tech presence in the small neighborhood of old brick-and-beam buildings. Now, NextView is an investor in nine companies that are located just a short walk from its offices, while two prominent programs that help startups, Techstars Boston and Startup Institute, recently relocated to the Leather District.
“It happened fairly quickly,” said NextView Ventures partner David Beisel. “Just like how artists congregate around each other, startups are the same way.”
This article appears on page A1 of the Boston Sunday Globe on April 6, 2014, with the headline: How’s this for starters? Boston edges out Cambridge for new tech firms.