[Updated 2/6/17, 5:15 pm. See notes in photo slideshow.] Boston’s venture investing community looks a lot different today than it did just two years ago.
A new crop of venture funds has emerged to back the next wave of technology startups and, as Xconomy observed last year, perhaps change the way companies get funded and built in the Boston area.
Our recent analysis of the local venture scene found 15 early-stage, primarily tech-focused funds that have either started investing or announced their formation since the beginning of 2015. We only included brand new venture firms and other types of organizations that have raised (or are in the process of raising) their first venture fund. (See slideshow above, and drop me a line at email@example.com if I’ve missed any.)
The first-time funds have arrived at a time of change for the Boston venture investing scene. Some long-standing local venture capital firms—such as CRV and Greylock Partners—have shifted much of their focus to the San Francisco Bay Area in recent years. And just last week, Accomplice (formerly the tech side of Atlas Venture) said it plans to expand on the West Coast, after years of focusing on Boston-area investments.
Meanwhile, other firms have stopped raising new funds. The 2015 decision by Waltham, MA-based North Bridge Venture Partners to put the brakes on raising its eighth early-stage fund, for example, has had ripple effects on the local investor community. Two former North Bridge general partners have started new venture firms: Jamie Goldstein founded Pillar, and Michael Skok co-founded Underscore.VC.
Now, the new local players will get a chance to make their mark.
“To me, this is huge,” Founder Collective managing partner Eric Paley says of the new funds. “It’s exciting, new energy being infused on the capital side, which I think will really help entrepreneurs.”
Paley considers his eight-year-old firm the first of the “next-generation seed funds in Boston,” he says, along with NextView Ventures (founded in 2010), Project 11 Ventures (2010), and Data Point Capital (2012). (Boston Seed Capital, launched in 2010, is another one.) Paley thinks the recent influx of new funds will be a boon for both company builders and investors.
“I think you’ll see a lot more collaboration among VCs over time … and a lot of new, interesting venture experiments that should provide value to entrepreneurs,” he says.
The new funds boost the amount of seed capital available in Boston, a metric by which it has trailed places like San Francisco and New York in recent years, says CRV general partner Izhar Armony. He notes that about half of CRV’s investments are at the seed stage, but firms specifically focused on earlier-stage investments make a lot more of those deals.
“I really welcome this,” Armony says of the new Boston funds. “It basically gives early-stage companies more opportunity to get funded.”
Although CRV now has six investors based in the San Francisco area and four at its office in Cambridge, MA, Armony says the firm hasn’t given up on its hometown. “We are very bullish on Boston,” he says. “The market has shrunk a bit, but for the venture firms that are still here, like CRV, I think there are great opportunities.”
Some of the new Boston-area funds are led by familiar faces in the local venture community, such as ex-North Bridge partners Goldstein and Skok, as well as Glasswing Ventures’ Rudina Seseri and Rick Grinnell, both previously with Fairhaven Capital.
The 15 funds represent a broad mix of structures and strategies. Many of them fit the general mold of a traditional venture firm. But the group also includes a corporate venture fund (Liberty Mutual Strategic Ventures); a fund launched by a university (MIT’s The Engine); hybrid firms that make investments and offer business services (LaunchByte, Companyon); and a firm that “creates venture funds for universities and other affinity-based groups,” according to its website (Good Growth Capital).
Some of the new funds are departing from the typical venture capital model in key ways. Pillar, for example, has said it’s buying common stock in startups, not preferred stock. And Pillar, Underscore.VC, and G20 Ventures have each built their funds and strategies explicitly around networks of local tech founders and executives who serve as investors, mentors, and other roles with portfolio companies.
Several of the funds have specific investment criteria they’ve shared publicly. For example, Vestigo backs financial technology startups; the Massachusetts Innovation Catalyst Fund plans to invest in digital health companies; and The Graduate Syndicate focuses on startups led by Harvard grads.
It’s not surprising that many of the funds are focusing on niche sectors and taking different approaches as compared to other investors (or at least saying that they’re doing things differently). The competition for deals has gotten fierce, as hundreds of new micro-venture firms have set up shop in the past several years.
“I think if you’re going into that market right now, you’ve got to think about very strongly how you want to tell your story and how you’re going to differentiate yourself,” Paley says.
And that’s a good thing for the startup community, he says. “You get a lot of experimentation with companies and experimentation with models,” Paley says. “Not everything will stick, but I think overall these are smart people putting forth useful hypotheses worthy of being tested.”
Still, CRV’s Armony doesn’t expect experiments by early-stage venture firms to have a significant impact on how the industry operates. He argues that most of the innovation in venture capital has come from larger, more established firms like Andreessen Horowitz and Sequoia Capital. One example, he says, is that CRV and others have hired staff members dedicated to providing services to portfolio companies, such as help with recruiting talent.
“I think the venture model has changed,” Armony says. “But I respectfully disagree with the notion that the venture model is broken, and also that seed funds will be the ones that will change it from below.”
And perhaps it’s not imperative for every fund to have some sort of calling card or feature that sets it apart from other VCs. Vivjan Myrto—founder and managing partner of Hyperplane Venture Capital, one of the new Boston firms—says the important things for investors are to stay focused on their “core thesis and strategy,” execute on that vision, stay ahead of trends, and put entrepreneurs first. (Myrto’s firm invests in seed-stage machine intelligence and data technology startups, and all but one of its 16 investments to date have been made in Boston-area companies, he says.)
“At the end of the day, every VC firm is only as good as their entrepreneurs and their investments,” Myrto says.
Indeed, Founder Collective’s Paley says one of the keys for the new funds will be to stick to their stated missions and truly support entrepreneurs. “There are a lot of reasons VCs compromise on their model over time. I hope these VCs won’t,” Paley says.
He also cautions the new venture funds to “stay disciplined” and “resist the urge” to raise more capital than they need to invest in early-stage companies, which he argues can lead to decisions that end up hurting entrepreneurs. Founder Collective’s debut fund was $40 million. It went bigger on its second fund—about $75 million—but kept the third one roughly the same size as its predecessor.
“There’s always incentive for VCs to raise bigger funds if they can,” Paley says. But “there’s a whole narrative of why it’s terrific that I don’t think bears out in reality. … Let’s not repeat the mistakes of the past.”
That’s a familiar refrain if you talk to the younger generation of VCs. And leaders of the new funds certainly have ideas for shaping the future of venture investing in Boston.
Hyperplane’s Myrto says it’s important “to be more inclusive, risk-taking, and take bigger bets” on entrepreneurs and their vision.
And part of Glasswing Ventures’ approach, Seseri says, involves giving fast, candid feedback to entrepreneurs pitching her firm, which focuses on companies in artificial intelligence and cybersecurity.
“We’re going to do it right,” she says of Glasswing. “It’s about building a platform that’s not stodgy.”
Xconomy’s Greg Huang contributed to this report.