Can Massachusetts produce the next Google?
Vijay Manwani remembers the meeting in 2008 when the board of directors agreed to sell the Waltham company that he cofounded. BladeLogic, which sold software to help big companies run data centers, had spurned purchase offers before, but the $800 million offer from Houston-based BMC Software was too good to turn down.
Eighteen months after the deal, Manwani and two other BladeLogic executives said good-bye, launching a Lexington firm that recently debuted a mobile app that delivers product recommendations from friends. Another group of BladeLogic veterans left to join Aveksa, a Waltham company that helps corporations manage employee access to data.
We’ve seen the same thing happen with Quattro Wireless (acquired by Apple in 2010), and Genzyme (acquired by Sanofi SA of France earlier this year), with employees dispersing to start or lead fledgling businesses.
The optimistic view of this phenomenon is to see Massachusetts as one of the world’s great research and development labs. We take ideas, often generated by our great universities and hospitals, and turn them into products that fill an “innovation hole’’ at bigger companies, which end up paying a fine price. Those acquisitions create wealth for entrepreneurs, early employees, and venture capitalists who supplied the initial funding, and everyone is free to do it again.
But I often find myself wondering whether being the R&D lab to the world is enough to keep Massachusetts vibrant. My worry is that we aren’t producing new “pillar’’ companies, which employ thousands of workers, recruit new talent to the state, and set the direction for their industries. If all you do is grow guppies, it’s hard for people to regard you as anything other than a small pond.
You might look at today’s unemployment figures - 7 percent in Massachusetts compared with 8.6 percent nationally - and conclude that nothing’s wrong. But the hidden problem, observes Ross Gittell, a University of New Hampshire economics professor, is that Massachusetts and its neighboring states aren’t attracting new residents. That creates a “future growth problem,’’ Gittell says, starving the region of new taxpayers, entrepreneurs, and skilled workers.
Everyone - myself included - sings the praises of the nimble start-up. But what are the benefits of the home-grown behemoth?
While start-ups may create a small number of high-paying jobs writing software or designing new medical devices, bigger companies offer a wider range of jobs - such as customer service, order fulfillment, and even manufacturing, says Gittell. “Big companies offer these lower-paid positions that give people an opportunity to get in the door and move up,’’ he says. They also pull in people from outside the region.
And while Massachusetts is home to plenty of “branch offices’’ of big companies, from Oracle to Pfizer to Manulife, I don’t think those branches are equivalent to having our own indigenous giants. People who work in branches feel far from the decision-making epicenter of their companies. They often need to move to the headquarters location if they want to rise through the ranks. They don’t tend to make the decisions about which suppliers their companies use or which new ideas get a green light.
So, where is the new generation of Boston-bred biggies? Biogen was founded in 1978, EMC in 1979, Fidelity in 1946. When I went hunting for companies born in the past decade that now employ 1,000 or more people, I came up with one answer: the battery-maker A123 Systems, which has just over 2,000 employees (but only 330 work in Massachusetts). The runner-up: Wayfair, an e-commerce company focused on home decor, which has 900 employees.
Last week, IBM acquired another contender in Emptoris, a Burlington software company that had about 750 employees and was frequently mentioned as an IPO candidate. It was IBM’s seventh purchase of a Massachusetts company in the past two years.
So how do we change the status quo? The first thing, says Wayfair chief executive Niraj Shah, is “you need entrepreneurs who are excited about the idea of building something big,’’ and who can resist - along with their investors - the temptation to jump at the first acquisition check with a lot of zeros.
More successful entrepreneurs making angel investments in start-ups would help, Shah says, “since their mentality is about helping to grow big things, as opposed to just having a good financial exit.’’
Andy Palmer, a serial entrepreneur, says investors need to “abandon their Yankee conservatism’’ and offer small amounts of early funding to “lots of new ideas rapidly.’’ Venture capitalist Bijan Sabet, an early investor in Twitter, agrees that more start-ups may be the solution - especially ones focused on consumers, as opposed to business users.
Brian Halligan, chief executive of Cambridge digital marketing company HubSpot, says California venture capitalists often let start-up founders cash in part of their stake before they’ve taken the company public, so they can achieve a degree of financial security (and reduce the appeal of selling the company). While that happened in recent funding rounds at HubSpot (which now has 300 employees) and Wayfair, it isn’t widespread in Massachusetts.
Russ Wilcox, a founder of Cambridge-based E Ink, says many companies get acquired because federal regulations make it too difficult to go public; his company, which developed the screen for Amazon’s Kindle, was acquired in 2009.
“I’m a believer in building to last,’’ says Vick Vaishnavi, chief executive of Aveksa and a BladeLogic veteran. “But I think on the East Coast you don’t see enough emphasis put on longer-term strategy development. People need to say, ‘How am I going to become the next Google or Apple?’ ’’
To create new pillar companies here in New England, we need to bet on seasoned executives, like Vaishnavi, who have been through an acquisition or two. But we also need to support the first-timers who think big. After all, entrepreneurs like Michael Dell, Mark Zuckerberg, and Amar Bose built pretty decent companies on their first try.
Correction: An earlier version of this story misstated the number of Massachusetts companies IBM acquired in recent years.