Chris Lynch, a founder and former general partner at Boston-based seed-stage fund Accomplice, remembers “VC Mountain in Waltham.”
Back then, entrepreneurs on funding quests would visit a building overlooking the Waltham Reservoir near Boston where they pitched to a few investors: Matrix Partners, Charles River Ventures and Highland Capital Partners.
“And if they didn’t invest in you, you weren’t getting money to start your company,” Lynch said.
Since then, Lynch has watched the area’s startup ecosystem reach the point where seed-stage firms are ubiquitous, but in a city populated with firms waiting to make first bets, the scene is unsurprisingly undergoing a funding drought. Crunchbase data indicates that the city’s Q2 venture capital pace slowed dramatically, with April seeing far fewer rounds and dollars invested in 2020 than in 2019.
Boston saw just seven known equity funding rounds in April, investments worth a hair under $60 million. In the year-ago April, Boston recorded 24 equity funding rounds worth more than $500 million.
Yet, while the numbers are slow, some Boston tech leaders think seed startups will continue to thrive thanks to accelerators and a healthy base of local early-stage investors. And Lynch, who left Accomplice in 2017, says the venture slowdown might help firms recalibrate their appetite for new deals to a more healthy pace.
“The advantage of more access to capital without a proportional increase in great ideas really waters down the fort,” he said, referring to upmarkets. “A lot of money has been invested in companies before they even proved their ideas were right, and I think even I fell into a trap of competing so hard for deals that I lost sight of a good deal.” He estimates that in our COVID-19 world, investors will start to again take three months for due diligence on a deal, versus three weeks to a signed term sheet.
If Boston’s seed investors becomes more conservative, that means that accelerators — homes of the brightest founders, often before they even have their first customer — will be pressed to react.
Accelerators
Venture Lane, a co-working space and startup incubator for early-stage companies, was nearing its one-year anniversary in the heart of Boston when COVID-19 hit the city.
The incubator, which traditionally hosts 10 startups at a time, made its whole program virtual and reworked existing content to help navigate the climate. Plus, per founder Christian Magel, its tips and workshops were opened up to any early-stage founder, not just the ones enrolled with Venture Lane. Hundreds have signed up, he said.
Venture Lane solves an interesting niche in the early-stage world: It helps companies right after they leave an accelerator, of which Boston has a ton: Harvard iLabs, Techstars, Greentown Labs, MassChallenge and others. Instead, Venture Lane helps companies seeking seed and Series A rounds that still want the help of networks and microecosystems.
The fact that it is up and running — and now accepting two more startups to join its cohort — tells us that Boston isn’t shutting down in the face of this crisis.
Another accelerator that’s come to our attention is Petri, which provides capital, guidance and — pre-COVID-19, at least — lab space for startups that need it. Its year-long program is funded in part by Pillar VC, a Boston-area venture capital firm. Even more, Petri announced this week that it’s working with Pillar on a new effort called Breakout, a six-week virtual series for individuals interested in building companies.
Given how active Pillar is in Boston’s early-stage scene, we caught up with its founder, Jamie Goldstein.
Seed and survival
Goldstein said the city has more seed-focused firms than Series A and B-focused firms, which could lead to a bottleneck, or what was once called a Series A or B “crunch.”
With travel impossible and VCs cutting their risk profile, the Silicon Valley and New York firms that helped fill out Boston’s middle-stage rounds might not be as ready to write checks to companies that they can’t meet in person, he noted.
Goldstein told TechCrunch that from a “comparative health” perspective, Boston’s startups are in sectors that “are going to do pretty well.” The Pillar investor also cited how academic institutions bring a regular flow of new companies, and while there will be a difficult period for them, they will “come out the downturn strong.”
But not all companies in the city will make it, and Goldstein has a perspective on which will survive — and which won’t.
“There’s a lot of discussion out there right now about months,” the venture capitalist told TechCrunch, advising that every startup should “have at least 12 months or 18 months or 24 months” of cash. In his view, runway expectations miss the point.
What, then, should startups focus on? The critical question for young companies to answer is, “what do you need to do to position yourself to raise your next round of funding on attractive terms?” That’s a different question than how to survive until December of 2021, he noted, adding that nothing magical happens if a startup merely endures until a certain date.
That said, Goldstein did note that as investor expectations grow, it’s smart to “give yourself extra time to be able to survive and then grow into some really meaningful run rate so you can get a healthy financing done.”
It’s not enough to just survive, then; startups will need to thrive in order to make it through the downturn.
Don’t think that Goldstein is being overly harsh, mind; we’ve been reminded by other investors that the startups that survive this downturn won’t just have to compete against each other for capital on the other side. They’ll also have to jockey with new companies that were born after the winter.
The Boston startups that make it are going to be a hardy bunch.
