The Boston Tech Start-Up Ecosystem Is Making A Strong Comeback

It has been a tough decade for tech startups (businesses driven by information and physical technologies) in Boston (1). This seems odd because Boston has enormous core strengths in tech derived from MIT, Harvard, and other universities and a long history of computer science technology development.

You can see the struggle in tech startups most clearly in the exit data: exits are the main pay day for entrepreneurs and their investors. In the last five years there have been just 17 tech exits valued above $200 million with a total value of $10 billion in the Boston tech sector. Only three of them were “unicorns” valued above $1 billion. The total US market saw 246 tech exits valued above $200 million, with a total value of $326 billion, and 37 unicorn exits (2). Boston tech investing was only 5% of the action. The lack of exits has re-shaped the venture capital industry in Boston. Many firms have reallocated their staff and capital to either their west coast offices or to life sciences investing. Several Boston tech focused firms have had difficulty raising new funds.

Source: Pitchbook database.

Beyond a focus on business customers, the Boston exits lack a shared driving force. The biggest exit, Wayfair, a consumer-facing e-commerce company, is not a typical Boston tech company. Computer science is a diffuse underlying theme, taking in Endeca, Trusteer, Vertica, Dynatrace, and Aveksa, about 1/3 of the exits. But these companies’ specific technologies are diverse. There are a couple of deals is rising areas — Amazon Robotics (fka Kiva) in robotics, Care.com and HealthcareSource in healthcare. The rest are scattered across the tech map.

This is quite different from Silicon Valley, where the web and social networking are pervasive driving forces for innovation with many companies in each category, or the Boston bio-tech ecosystem, which is powered by new understanding of disease processes at the gene and protein level, and the application of big data to healthcare. Silicon Valley is a big market so the number of companies in any category there is likely to be bigger, but this speaks to the need for smaller markets to have focus, and that is what Boston has achieved in biotech, where it leads the world in startup activity.

Source: Pitchbook database

The pace of venture capital investment is now rising again strongly in Boston, as you can see from the chart above. The boom in life sciences investing is driving a large part of this resurgence. But there is good growth in tech investing as well.

Source: Pitchbook database

The rising tide of mobile and SaaS based businesses is the biggest driver of tech growth. This reflects nationwide strength in investment driven by the mobile ecosystem and SaaS business models, and Boston is getting a good share. On top of that, businesses driven by Intelligent Systems (including Robotics, & New Manufacturing) and Digital Healthcare are showing good growth, and FinTech, EdTech, and Internet of Things have long term potential but are still small. These areas more than offset the decline in E-Commerce and Marketing businesses, which are maturing, and CleanTech and NanoTech, which have never delivered on their promise.

The good news for Boston is the surge in innovation in an area where Boston is strong: Intelligent Systems, embodied in both the cloud and physical systems at the edge of the network (i.e., robots). This wave has been building for a long time, going back to the founding of the MIT Artificial Intelligence Lab in 1959. The recent victory of a computer over a human champion in the very complex game of Go marks a threshold and indicates that the business opportunity in intelligent systems is now real. And the major tech companies are putting huge effort in this area, which will carve out part of the market for them but also drive a great deal of technology development and spin-off.

A recent mini-conference at the Google office in Kendall Square showed how much is happening now. [Kendall Square is in Cambridge, Ma, bordering MIT. Some argue it is the birthplace of Intelligent Systems.] The conference showcased a series of startups that are building out infrastructure for Intelligent Systems, or pushing it to practical applications:

  • Sentenai is providing data capture APIs for machine learning. Availability of large amounts of machine-readable data on the web is a key reason that machine learning is taking off.
  • Nara Logics “does recommendations”: they are pushing Intelligent System analytics into practical decisions for business.
  • Neurala is creating software brains for robots: a complete usable system for self-driving vehicles, drones, and sophisticated toys.
  • Talla is building Siri for business tasks, initially marketing and HR: “Siri, what is the maximum HSA deduction in 2016 for a couple both under age 50?”

The roboticists are part of the scene, too. In a sidebar conversation Helen Greiner (an iRobot founder) pointed out that robots are “embodied intelligence”: intelligent systems that can take physical actions independently. Many of the practical applications require independent action, e.g., self-driving vehicles, or the robotic spacecraft the Air Force is building to repair satellites in high earth orbit.

Rob May, CEO of Talla, remarked that Intelligent Systems are hard to sell to the popular imagination: “Artificial intelligence has a 0% click-through rate”, as he put it. But the recommendations we receive on Amazon and Netflix are based on sophisticated machine learning. We buy the results and don’t pay attention to the technology behind them.

Boston is due for a tech resurgence. All the pieces of the ecosystem are here with good quality and scale. For a decade we have needed a big market driver on which Boston can focus and attain leadership. Intelligent Systems are a natural opportunity. But, the west coast is also working hard on Intelligent Systems, so time to get a move on. Entrepreneurs, take note!

Notes:

  1. “Boston” refers to the greater Boston area, much as “Silicon Valley” usually refers to the San Francisco bay area.
  2. Source: Pitchbook database.
  3. I am a partner in NAV.VC, a venture capital firm. Neither NAV nor I have a financial interest in any of the companies mentioned in this post. We do invest in similar companies.

Originally published at www.forbes.com on April 8, 2016.

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