Where are all the Massachusetts tech IPOs?
If you had a friend who touted himself as an Olympic prospect, you might think it odd if a few Olympics blew by — and this friend was watching them next to you on the couch, still talking about his future on the medal stand.
In Massachusetts, tech companies often like to portray themselves as candidates for an initial public offering, in part to attract skilled employees and convey a sense of momentum. But they’re on the couch munching chips and watching as faster-growing companies in California take the stand and listen to the fanfares play.
In recent months, the transportation services Lyft and Uber have gone public, as have the content-sharing site Pinterest, as well as Zoom, which makes videoconferencing software. All are based in the San Francisco Bay area, along with most of the other tech firms that are considered likely to go public in 2019.
In Massachusetts, biotech is where the action is. Companies like Cambridge-based Axcella Health hit the stock exchanges as often as the Red Line has signal problems. So why don’t you hear about them? They’re tiny: Axcella, working on treatments for liver disease, had its Nasdaq debut earlier this month, but it has fewer than 100 employees and a market capitalization of about $315 million. Compare that with the IPO of Pinterest, which went public in April. It has a market cap of $15 billion and has created 1,700 jobs. (Pinterest was launched nine years ago; Axcella is 11 years old.)
One argument would say that it doesn’t matter. Housing prices are already high enough in Massachusetts, and traffic is sclerotic. The state’s unemployment rate is among the lowest in the country. And obviously, if you know someone who suffers from a liver disease that Axcella can treat, that’s going to be a far more important development than something that allows you to organize photos of curtains you might buy for the guest room.
But tech companies generate more jobs, which can help Massachusetts do better at retaining young people who come here for a college degree. And their IPOs generate wealth that is used not only to buy flashy boats and second homes but to fund companies started by their friends and former employees. That creates a pool of money that often backs wild-and-crazy ideas that traditional venture capital firms wouldn’t.
Then, there’s the issue of state tax revenue from IPOs. Some have estimated that the 2019 class of newly public companies could add $1 billion to California’s coffers.
“California will get this huge windfall in revenue, which they can invest in social services, infrastructure, education, or other things,” says Todd Dagres, managing partner of Spark Capital, a Boston venture capital firm. “One Uber IPO is worth more than all of the biotech IPOs we’ve had in Massachusetts over the last two or three years, in terms of the impact it has on state revenue.”
Dagres notes that Massachusetts state government has been pouring money into the biotech industry to support its growth, “yet we’re really not encouraging high tech, where we used to be a major player. We’re falling way behind California, and falling behind New York.”
His firm is a mirror: Though it was founded in Boston, its San Francisco office is now larger, both in terms of people and investment activity, Dagres says.
“That’s the ecosystem that is producing the most valuable companies,” he says. “The data doesn’t lie. We have to go where the heat is.”
Though Spark was a big investor in Wayfair, the Boston e-commerce site that is now publicly traded, it has also backed California companies like Twitter (public), Cruise Automation (acquired by General Motors), and Slack (expected to go public soon).
Ben Howe of the Boston investment bank ACG Partners put together a list of Massachusetts companies that could plausibly go public. At the top were DraftKings, the fantasy sports competition site, and American Well, which facilitates doctor consultations by videoconference. But Howe acknowledges about 30 percent of the companies on his list will probably go public, while “the rest will get bought.”
In contrast, on a list of California IPO prospects, “about 80 percent will go public versus selling out,” Howe says.
That creates what I refer to as pillar companies: — the oak trees of any regional economy — as opposed to branch offices of companies based elsewhere.
So can we do anything about the dearth of tech IPOs here? Right now, it feels like we’re chasing a train that has left the station.
At the core of the problem are Massachusetts tech founders and investors who have created a decent number of companies that grow to a few hundred employees and get sold for $100 million or $200 million. But founders and investors here don’t have as much of a track record when it comes to creating companies worth billions. Once you’re talking about billions versus millions, observes Bilal Zuberi of Lux Capital, “your psychology starts to change. You start to think bigger. The seasoning and maturation of both investors and founders who have this experience and the resulting mentality started decades ago in the Valley. We in Boston are probably 10 to 20 years behind the Valley in the supply of these types of individuals. But, they do exist in Boston.”
Zuberi is a California venture capitalist and former entrepreneur who worked in Boston until 2013.
While it may not be possible to clone the founders of successful tech companies like Wayfair, HubSpot, Carbon Black, and TripAdvisor, it is possible to better support employees who splinter off from those companies to do their own thing. And to nudge the CEOs of those companies to provide more mentorship of the next generation of founders here.
“We have a poor culture of mentorship relative to the Valley and now New York,” says Michael Greeley, an investor at Flare Capital Partners in Boston. “In biopharma, you look at somebody who runs a big company, like Jeff Leiden [of Vertex Pharmaceuticals.] He chairs the governor’s digital health council. He’s a big angel investor. You have Vertex employees running around and participating in the community. It reinforces a dynamic cluster. But we don’t have those guys on the tech side.”
California companies also “beat their PR drum harder than Boston companies,” Zuberi says. “Boston has adopted the persona of ‘We stay quiet and build great companies,’ which is fine, but doesn’t do enough to attract outside capital into early-stage companies, or to build a ‘seal of approval’ for employees from these companies who wish to leave and start companies” of their own.
Beating the PR drum doesn’t just mean touting yourself as the next hot IPO prospect, as many Massachusetts companies have done over the past decade. It means building buzz among customers, having employees who evangelize the company’s offerings, and attracting the kind of funding that fuels continued growth.
And eventually, it means winding up on that Olympic medal stand — rather than watching from the couch.