Fred Destin

The Boston Surprise

 Now that I am leaving Boston I can talk about its startup ecosystem in all candor.  

When I came over 4 years ago, it was essentially as an act of belief in my partner Jeff and in myself. To be frank, I did not expect much. Talk was of dreary winters and a boring town full of boring VCs with not much happening. For that was the perception of the region from afar.

I could not have been more wrong. I am starting to measure the progress that was made in the last four years, too.

When Oculus VR was sold recently, I know many people were surprised to hear Boston mentioned in connection with the company. Surprised to see the smiling face of Matrix Partners’ Antonio Rodriguez sporting an early prototype next to the press articles. I think most people assumed the company was based in California (surely, it must be from California).  

antonio oculusIsn't he a dashing VC ?

As a remarkable IP powerhouse Boston always has and will continue to produce hard tech innovation that produce meaningful outcomes. Greater Boston is, generally speaking, an incredibly educated and high quality ecosystem full of remarkably smart people. Machine learning, robotics, data science etc. The area shines because of its remarkable technology thought leadership.

Every city, and Boston is no exception, struggles somewhat in retaining its young people and keeping them away from the West Coast vortex.  With the move back into Kendall, South Boston or the Leather District, the younger crew can now look forward to working in warehouses in close proximity to coffee shops. Living the urban life instead of the office park one; step inside of the new Bocoup Loft  or Redstar and you will know immediately what I mean.  Steampunk is back.  If you can avoid the South Boston hoodsies swerving in their Dodge Neons you might even make it to your next birthday.

With the urban revival, the ecosystem has been improving on all dimensions (except for rents, but let's blame biotech). With more density, we’ve seen co-working spaces spring up, restaurants & bars populate once empty shop windows on 3d Street and a myriad specialized tech events, from big data at HackReduce to Mobile Mondays.   Unless you have to endure the Pike or make your way from A-Town every morning it's really become a great place to live.  Mind you, I'm not 25 and dating so I can't speak for everyone.

Culture matters, and here in Boston the startup culture has been building fast.

Whilst Boston is a natural choice for the experienced entrepreneur in fields like infrastructure, anything big data or machine learning related or specialized fields like robotics or computational genomics, we’ve also seen a diversification in the type of successful companies, with the rise of some serious ecommerce players, more and more fintech startups and even (god forbid) social apps. As the 2012 Startup Ecosystem Genome Report identified, Silicon Valley and Boston are the two truly diversified startup ecosystems.

The support infrastructure for less experienced entrepreneur has also been booming. From Techstars Boston to the CIC, from BOLT to Blade, younger entrepreneurs find themselves enveloped in an environment of support and mentorship that is proving transformational for many. The arrival and growth of Google, Paypal, Amazon and others also changes the game, from providing a great training ground for young graduates to putting acquisitive eyes and ears close to the ground.

Even the media side has seen dramatic evolution. When I came over Scott Kirsner was a lone voice documenting the startup scene and working the pavement to meet every company in the field, whilst Xconomy did excellent expert coverage but for a niche, knowing audience. BostInno had just started (Chase was what, 16 ?) and the BBJ had fairly thin coverage. Fast forward to today and we’ve just seen the Globe move into hyperdrive with Scott K, Dennis Keohane andy Kyle Alspach at BetaBoston figting BostInno step by step for breaking news and BostInno stepping up their game and a furious flow of breaking news and in-depth commentary.

If you're new here you best bet remains Rob Go's Hitchhiker Guide.

It’s not a renaissance so much as a deepening, broadening and cultural shift. With a long list of potential IPO candidates and some companies with obvious standalone potential (Hubspot, Veracode among others) we might also finally have the next generation of software giants that we need to really mark the Boston comeback.

If anyone talks us down, it’s probably because they haven’t spent enough time here. I have, and I know. Even the weather is much nicer than I expected. I will sorely miss every aspect of it.  

Now if you'll excuse, I have to head down the Cape in my Maserati.  That's how we roll, us VC folks. (PS / Cue: irony.  I don't drive a Maserati).

boston magazine marathon cover
Run hard everyone !

Fred Destin

Why Series B is usually the hardest

 Tom Tunguz and Danielle Morrill both came out with data suggesting Series B are hard.  Tom calls it the "hardest round to raise", based on his numbers.  Let me try to address why that is.  

Let's assume we're in a B2B SaaS company with a solid technological base.  You started four years ago and you've raised a $1M Seed and a $5M Series A.  You're searching for the best way to scale commercial when Series B comes around the corner, faster than you thought with that $300K burn that crept up on you.

Series B is hard for a simple reason: suspension of disbelief fades and is replaced by an increasingly cold, hard look at milestones and progress.   Series B is the round where the rubber meets the road, where the promise has to be met with numbers and projections.  Series B is the round where hard nosed investors drive ownership up before your company really starts to scale.  Series B is the unloved valley of slow progress that precedes scaling.  It's the no-man's land of the startup build phase.

Series Seed is raised on vision, on slides, a prototype and a team.

Series A is raised on hope.  This is a blessed time where product is built, early progress demonstrated, and the world is our oyster.  We've pushed product out and have enthusiastic early adopters, and the future looks bright.

Series B is raised on mostly one thing: your ability to instill confidence.  When you to go raise your Series B, you've driven burn up as you needed to fully staff engineering (these damned "enterprise" features...), start hiring a commercial team that takes its time scaling, get a few hires wrong usually to top it off and have hired a full layer of VP's to show that you have the basis for scale.

This makes the company particularly fragile.  Your revenue numbers are low, you're dripping a ton of red ink and show a plan reliant on achieving serious revenue progress right when you're about to run low on cash.  There are no excuses for not having a rock solid execution plan, because that's usually all you have.

To top it off, most investors don't like Series B.  They'd rather go really cheap and risky on the Series A or back a Series C that is scaling, even if that means paying up.  This is the famous Barbell strategy.

At Atlas we used to refer to the three stages as Prove -> Build -> Scale.  If Series A is about product market fit, Series B is usually that painful phase when you are "Building" team and product (i.e. spending a lot of money industrializing your company) but are still quite a ways away from Scale.

So there you have it: a tough risk profile, a tough financial plan, and a lukewarm funding market.  Series B in my experience truly separates the boys from the men in terms of fundraising ability.  

It's amazing to see folks like Christopher Ahlberg at RecordedFuture or (on the younger end) Hardi Meybaum at GrabCad power through Series B round with only early signs of traction and a big ambitious business plan.  They breeze through what should be a tough fundraising exercise because they instill confidence and sell the larger opportunity beautifully.

Experienced investors understand that it takes time to build a serious business (read this fab rant from Kirill Sheynkman : Traction, shmacktion) but in a world where everyone is obsessed about early traction raising your Series B has never been more intense.

Or put it a different way: in startup financing land, it never really gets relaxing... 


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Fred Destin

Pro-rata rights: the good, the bad and the ugly

 Fred Wilson posted an article to explain the concept and value of pro-rata rights, with his usual elegance in making the concept clear.

Pro-rata rights are incredibly valuable for a simple reason: most startup companies fail, but pro-rata rights are your way to ensure that you can keep investing in the ones that make it.

Think of it another way: like a good trader (and contrary to human nature), you should cut your losses early and keep investing in your winners. The nature of the venture capital game, when played at a very early stage, is that one or two bets will generate most of your returns. When you see those (and I will address in a separate post the very imperfect ways in which you can try to identify winners early), then you should double down.

Ah, if only reality could be so readily pliable...