Fundraising System Dynamics in Boston

In the last month or so I have interacted with a large number of folks in the early-stage tech company ecosystem in Boston. While the data I’ve collected is hardly a large enough sample to draw conclusions from, I find the following theory interesting to ruminate upon.

A. I’ve spoken with on the order of half a dozen early-stage tech CEOs who had absolutely no interest in raising institutional venture capital. They’re all Boston-based folks. In my estimation most of these companies are potentially VC-fund-able businesses. The CEOs (some first-timers, some old-hands) are actively looking at alternative capital sources ranging from large angels to corporate money to hedge funds, and so on.

B. I’ve spoken with two or three early-stage companies who are raising institutional vc and each had many term sheets on the table – in one case, six.

C. I’ve spoken with one vc (and one does not a pattern make, though I know of other firms behaving likewise) whose firm historically does A and B rounds but is now actively adding seed/incubation into the mix. Why? One stated reason is that valuations are getting too high for the A and B deals and they want in earlier.

Is it possible that the early-stage capital gap in Boston lasted (or has lasted, depending upon whom you ask) long enough to start materially screwing with the system dynamics of early-stage funding in the area? Not enough seed deals were being done; entrepreneurs started looking elsewhere en masse; the early-stage companies looking for capital are inundated with offers since the pipeline is too small; and deals get priced too high due to the small supply. Obviously A and B are at odds – but that could be the gross inefficiency of information flow in the market (?).

As I said, it’s anecdotal data of a volume too small to draw conclusions, but it’s an interesting theory to ponder.

One comment

  1. Pete Bishop

    Well, its damn well about time. When I first moved to Boston in 2004, I shopped an idea around the community (through my admittedly, at the time, weak network) without even a nod. By the time I finished b-school in 2006, I was attracting interest by VCs who were sitting in on my end of year project presentations. Needless to say, I stayed away from the vultures…

    I think the shift in economics of starting a business, along with current bubble-like valuations are combining to break down the traditional system. In the era of micro-lending and all the web 2.0 cliches (ugc, social networking, et al) it is just simple supply and demand at work.

    The comment about VCs and post-seed rounds is interesting. If valuations keep the vultures away, we may begin to see a capital gap starting to form as the pendulum swings too far back the other way. Possibly making acquisition by one of the mega-caps the only real viable exit strategy for a emerging business.

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