Reality check overdue for start-ups that don’t fly
Is it possible that Boston is spawning too many start-ups?
That’s the question I’ve been wondering about lately, as I see so many people toiling at two-person companies. Maybe they’re relying on their own savings, or maybe they’ve raised a few hundred thousand dollars from angel investors. Some of them win admittance to programs that try to help young companies gain momentum, like TechStars Boston or MassChallenge.
But a lot of them were two-person companies last year too, and the year before that. At the same time, many of Boston’s most promising companies with 100 or more employees have a tough time hiring. Could too much of Boston’s talent be stuck in start-ups that are going nowhere?
“The inability to recruit enough bright software developers is definitely a governor on growth,’’ says Brian Halligan, chief executive of the Internet marketing firm HubSpot, which has 280 employees.
“It’s a constraint in Boston, and it’s a huge constraint in Silicon Valley,’’ he said. “Right now, the alternative to working for a company like ours is to go out and start your own.’’
According to a recent report from the investment tracking firm CB Insights, about $30 billion could be invested by venture capitalists this year - the biggest yearly figure in a decade. A growing chunk of that money is dedicated to seed-stage funding, which goes to tiny companies developing their first products. And in Boston, at least three new firms specializing in seed funding have sprung up in the last year. There’s also free office space available to selected entrepreneurs at places like Dogpatch Labs in Cambridge.
All that is good news for entrepreneurs, who are perennially convinced they’ve spotted an opportunity that no one else can see.
But whenever I talk to companies that have the potential to become new pillars in our state’s economy - employing thousands of people and perhaps becoming a publicly traded entity - they’re spending a huge amount of energy on hiring. And complaining about how difficult it is.
“A lot of the most talented people are going out and getting funded to start their own company,’’ says Matt Lauzon, chief executive of Gemvara, an online jewelry retailer that has 80 employees. “I was at the Starbucks in our building the other day, and the three tables around me were full of guys talking about the start-ups they were working on.’’
Lauzon acknowledges that sounds self-serving, especially since he and a Babson classmate started Gemvara right out of college. But he says graduating students ought to be more aware of the benefits of gaining a few years of experience at a small- or medium-sized company before going off to start their own.
WayFair, another Boston e-commerce company, tries to make the same case as it heads toward 1,000 employees, many of them hired fresh out of school. Right now, it has 30 jobs open for engineers.
But is a $75,000 starting salary more appealing than getting $100,000 or $150,000 to see whether your big idea might be the next Twitter or TripAdvisor? Those are the amounts of funding guaranteed to every company that wins acceptance to the TechStars and Y Combinator programs, which can be thought of as “finishing schools’’ for fledgling businesses.
A dozen companies participated in TechStars Boston this year. Earlier this month, Y Combinator founder Paul Graham said his program was receiving one application every minute as its deadline approached. Next week, MassChallenge will dole out $1 million in cash - taking no equity in return - to between 10 and 20 start-ups.
Even entrepreneurs who don’t get into these programs feel like there’s no time like the present to start a company.
Anton Shevchenko is a software engineer who left a start-up last fall to work on his own venture, HubInsider. It will help filter the most relevant discounts available in a city, to help consumers avoid “being bombarded by an avalanche of deals,’’ he says. He’s funding the start-up from his own bank account, and money he earns from consulting projects.
“You enjoy the sense of ownership that you have,’’ Shevchenko says. “It’s not someone else’s idea.’’
That sort of creative latitude is hard to argue with.
So what are companies doing? They’re waiting until these Smart Car-sized start-ups run out of gas to make offers to acquire the company, or selectively hire a few of the employees.
HubSpot, for example, acquired two small Cambridge companies focused on helping businesses better manage online marketing. The two companies, Performable and Oneforty, brought HubSpot about a dozen new software developers. Last month, HubSpot hired Ryan Neu after his two-person start-up, BloggerOffer, dissolved.
HubSpot, which has raised more than $60 million, is aggregating people in Boston who have a gut sense for how social media like blogs, Twitter, and Facebook are changing marketing. That’s a good thing for the city.
Craig Driscoll, a recruiting specialist at Highland Capital Partners in Lexington, notes that “it’s the mid-sized companies that really add the vast volumes of people. Two-person start-ups aren’t exactly creating a tax base.’’ But Driscoll says companies that hope to grow need to do more than complain about how tight the talent market is.
“They need to figure out how to recruit and create jobs that are attractive for entrepreneurial people,’’ he said.
Start-up diversity is obviously important for any innovation cluster. You want lots of little companies trying to solve problems in lots of different niches, so a few might survive to be healthy, big companies. (And I’d be the last person to discourage someone who feels compelled to start a start-up.) But I do think Boston would benefit from more talent concentration, where larger teams of skilled technologists, designers, and product developers get together to make a bigger dent in the universe.