Following the money is one way to monitor the health of the Massachusetts innovation economy. And with local startups collecting $7.4 billion in funding this year — a 30 percent jump from 2014 — we’re in much better shape than the Patriots starting lineup has been for much of the season.
That $7.4 billion figure is higher than any year since 2000, when dot-com mania pushed investment in Massachusetts startups above $10 billion, according to the financial data provider PitchBook. A single company in Cambridge, Moderna Therapeutics, announced a $450 million funding round back in January — the biggest private funding infusion for a biotech startup ever.
But beneath the eye-popping sums were five stories about what’s changing, what’s not, and what there is to look forward to in 2016.
1. Investors’ love affair with Massachusetts biopharma companies accounted for an amazing, $772 million surge in funding from 2014 to 2015, according to PitchBook. At the same time, the consumer goods and energy sectors saw diminished activity. “We should be great in at least one thing,” says Michael Greeley, a venture capitalist at Flare Capital Partners in Boston, “and we are great in life sciences.”
Investing in the tech sector was on the upswing this year, but there’s concern about what the future could hold. In September, for example, North Bridge Venture Partners, one of the state’s most active investors, said it would stop trying to raise money for its next investment fund, and several partners left the firm.
“The Boston market continues to be a shrinking market of potential funders” for tech companies, says Jo Tango, founder of the venture capital firm Kepha Partners in Waltham. “It’s not the story we all want, but that’s the reality.” If fewer local VC firms are supplying money to tech startups, he adds, more “people are going to vote with their feet ” and decamp for New York or California. Entrepreneur and investor Steve Papa observes that the center of gravity of many VC firms that were previously Boston stalwarts has shifted to California. “Their ability to do interesting things and their [deal] volumes here shrink as a result,” says Papa, currently CEO of Parallel Wireless in New Hampshire.
2. Boston mutual fund firms like Fidelity Investments and Wellington Management in 2015 funneled money to fast-growing tech and biotech firms that wanted to forestall an initial public offering and remain private. These late-stage funding rounds created many so-called “unicorns”— private companies regarded by their investors as worth $1 billion or more, such as transportation app Uber and lodging marketplace Airbnb.
But mutual funds occasionally reassess the value of their holdings, and that can make for bad publicity. Fidelity slashed the estimated value of its stake in the photo-sharing app Snapchat by 25 percent in November.
Mutual fund managers “were buying a seat at the table, for when these companies went public,” Greeley says, but initial public offerings were few and far between in 2015. “The quick 12- or 18-month flip that the mutual funds were anticipating just didn’t materialize.”
Will some unicorns to live up to their purported valuations? That’s a big question for 2016, as is mutual funds’ willingness to continue playing Daddy Warbucks. (A Fidelity spokesman told me earlier this year that most of its funds don’t invest in private companies. For those that do, the holdings represent 1 or 2 percent of assets, limiting exposure for people who own the funds.)
3. Despite endless discussions about the need to employ a more diverse set of individuals to make investment decisions, not much changed at venture capital firms in 2015. While women represent roughly 6 percent of venture capitalists nationally, the figure at Boston firms is just 3 percent, according to angel investor John Landry. The industry has “no plan and no goals” on diversity, Landry says. Having a predominantly white, predominantly male group of investors deciding which business ideas deserve money “is a big suppressor of innovation in the US economy, and it’s even worse here in Boston,” he adds.
4. Presenting ideas to wealthy individuals who are part of an “angel group” that meets monthly has become less relevant to entrepreneurs. Now, it’s easy for investors to screen investment opportunities on the website AngelList, and they can round up deep-pocketed friends to join them when they decide to back a company. On AngelList, groups of investors working together “gives entrepreneurs access to investors they wouldn’t ordinarily have access to,” says Joe Caruso, an angel investor in Westwood. One of the most active Boston investing collectives on AngelList, the BOSS Syndicate, made 22 investments this year, up from 16 last year.
5. The year ahead could see many more people becoming angel investors, as new rules from the Securities and Exchange Commission allow “crowdfunding platforms” to register with the federal agency beginning in January. The rules would allow individuals to buy stock in private companies through crowdfunding sites within certain limits: if you make $80,000 a year, you’d be able to invest $4,000 through platforms such as EquityNet and Crowdfunder. (Previously, angel investing had been limited to “accredited investors” with a higher net worth.)
The idea is these platforms might help someone in your town raise $150,000 to open a restaurant on Main Street — and you’d be able to brag you were one of the investors. There’s also the lure that a friend from college might tip you off to the next Facebook, and you’d get in early on a massive financial success.
There also are lots of risks. “P.T. Barnum would’ve loved crowdfunding,” says Caruso. “How do you tell the difference if someone is just a good promoter, or actually good at execution, without having sat down and met the team? How do you judge that?”
Greeley wonders if crowdfunding sites might serve as the “investor of last resort,” after entrepreneurs have tried unsuccessfully to extract cash from venture capitalists, established angel investors, banks, and perhaps loan sharks, too.
But we live in a world where it’s easy to drop $1,000 on lottery tickets or spend hours in front of a slot machine, with no one verifying your income or net worth. So why is it a bad thing to let people lose money while trying to support entrepreneurs who want to build businesses?
Scott Kirsner writes the Innovation Economy column every Sunday in the Boston Globe, in which he tracks entrepreneurship, investment, and big company activities around New England.
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