Mark Zuckerberg was the big one that got away.
Boston venture capitalists declined to fund the founder of Facebook, the world’s most popular social-networking service, when he wanted to expand his start-up in 2004. Zuckerberg’s move that year to Palo Alto, Calif., from his Harvard University dorm was a wake-up call for New England firms, which have lost market share to Silicon Valley and New York, says Michael Greeley, a general partner at Flybridge Capital Partners.
“There was a little bit of shock that we missed it, as a community,” said Greeley, a board member of the National Venture Capital Association. Since then, Boston “really rallied around ‘how do you let these kids know that the state is open for business and a great place to start companies?’ Sort of a post-Facebook echo boom effect. Zuckerberg should never have left.”
In 2009, Greeley’s firm started Stay in MA, one of several programs designed to entice young entrepreneurs to stay in the region. Incubators such as Dogpatch Labs, started by Polaris Venture Partners, and TechStars Boston offer free space to aspiring entrepreneurs, and angel investors are scouting campuses in search of the next Zuckerberg, Greeley said.
Boston, the birthplace of modern venture capitalism, accounted for 11 percent of U.S. venture investments last year, down from 15 percent in 2003. Silicon Valley firms increased their share to 39 from 34 percent in the same period.
Boston has missed out on much of the recent surge in initial public offerings, driven in part by Internet start-ups. Of $6.83 billion in venture-backed IPOs in the first half of this year, Massachusetts accounted for $209 million, or about 3 percent.
Part of the reason, says Bill Aulet, managing director at the MIT entrepreneurship center, is that Boston’s venture capitalists have traditionally focused on industries that make “real products,” such as software, telecommunications, material sciences and biotechnology.
To be closer to the universities, at least seven firms have opened offices in Cambridge in the past two years.
Spark Capital, an early investor in Twitter and Tumblr, started in downtown Boston. “We were on Newbury Street right in Back Bay, and everyone kind of laughed at us,” said Alex Finkelstein, 35, a general partner. Now, “we’re seeing more of these old-school firms moving from [Route] 128 into Boston or Cambridge because that’s where the entrepreneurs are.”
Facebook — turned down by Battery Ventures and MetroPCS — is valued at $82.4 billion on SharesPost, a secondary exchange for shares of private firms.
Boston area firms missed out on the social networking boom in part because many didn’t grasp its significance, said Howard Anderson, a senior lecturer at the MIT Sloan School of Management and co-founder of Battery Ventures. He said the average angel investor in Boston is about 55 years old. In California, the average is 32, he said. “It became a generational issue,” he said. “To understand things like Facebook, you have to be 19 to 24 years old. If you’re 56, you don’t quite get it.”
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