Boston Startup Market Surges: Record-Breaking Start to the Year

Boston's Startup Funding Surge: A New Era for Venture Capital

The global startup ecosystem is experiencing a remarkably successful fundraising period, potentially unmatched in the annals of technology and venture capital. While this trend is widespread, the city of Boston is witnessing a particularly significant increase in its capacity to secure investment.

Historically recognized as a prominent venture capital center, Boston had seemingly lagged behind competitors like Silicon Valley and New York City in recent times. However, current data reveals that Boston’s startup fundraising activity has attained a new peak, channeling unprecedented amounts of capital into the city’s emerging tech firms this year.

Local investors suggest that there is potential for even greater increases in capital distribution.

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Understanding the Drivers Behind Boston’s Growth

The Exchange sought to investigate the factors fueling Boston’s impressive fundraising performance and to identify any potential areas of caution. Is the market becoming excessively inflated? According to Rob Go of NextView, Jamie Goldstein of Pillar VC, Lily Lyman of Underscore, and Sanjiv Kalevar of OpenView, the situation is certainly robust, but Boston’s accelerating venture capital figures for 2021 are rooted in substantial shifts rather than fleeting trends like FOMO.

Boston is currently capitalizing on broader structural changes within the U.S. venture capital landscape. These changes are helping to bridge historical disparities in startup funding and provide access to resources that previously bypassed the region.

The Role of Universities and Structural Shifts

The high concentration of universities within the city is also proving advantageous, enhancing Boston’s ability to foster new company formation during this period of abundant investment.

Let's examine the data, and then explore the insights from these investors regarding the developments unfolding in Boston.

Key Factors Contributing to Success

• Increased Capital Availability: Structural changes in the U.S. venture capital market are directing more funds to Boston.
• Strong University Presence: A dense network of universities fuels the creation of new startups.
• Sustainable Growth: The current surge is based on fundamental shifts, not temporary market phenomena.

Boston is poised to continue its ascent as a leading hub for startup funding and venture capital investment.

An Exceptional Year for Boston Startups

When analyzing venture capital data, it’s important to acknowledge inherent delays. Rounds are frequently announced after their actual closure. This characteristic means recent data may underestimate the true performance of a given quarter. In the case of Boston’s performance through 2021, it appears that even accounting for typical lags, the results will be remarkably impressive.

Fundraising Trends in the Boston Area

According to a recent report by CB Insights, the following chart illustrates the historical fundraising activity of Boston-area startups:

Boston’s venture capital performance stands out, exceeding expectations in both the number of deals and the total dollar amount invested. The city has experienced a higher volume of rounds and greater investment in the last two quarters than any previously recorded period.

Significant Growth in Q1 and Q2 2021

Specifically, Q1 2021 witnessed an 81% increase in capital invested in Boston-area startups, spread across 7% more rounds compared to the same quarter in the previous year. Furthermore, Q2 2021 saw capital investment rise by 100% year-over-year, fueled by 25% more rounds. These are demonstrably positive indicators for the Boston startup ecosystem.

Analyzing the Strength of Different Stages

We will delve into the sectors within Boston’s startup market that are attracting the most funding, and identify areas where venture capitalists are observing previously lacking activity. However, a perspective from Pillar’s Goldstein provides valuable insight into the overall dynamics of Boston’s venture capital landscape.

When questioned about potential weaknesses in capital access for specific stages, Goldstein suggested that the definition of “strength” is crucial. He pointed to PathAI’s $165 million Series C round and Circle’s pre-IPO progress, noting that “late stage is very strong.”

Seed Stage Successes

However, he also posed a question: are these late-stage results inherently stronger than a seed-stage company securing $9 million at a $20 million pre-money valuation, when just a year prior they might have raised $4 million at $12 million? This highlights a key trend.

In essence, both the later stages and the earlier stages of Boston’s startup market are thriving, with younger companies successfully securing funding.

Drivers of Investment

What factors are contributing to this surge in investment activity?

Boston's Growing Appeal to Remote Investors

Similar to the situation in Chicago, Boston-based startups have experienced significant advantages as a result of the increased prevalence of virtual investment practices, as confirmed by multiple sources. The elimination of mandatory travel for deal closures has enabled venture capital firms from various locations to invest in Boston-area companies, and they are actively doing so.

However, the majority of this investment originates from U.S.-based funds, rather than international entities, according to Kalevar in a discussion with TechCrunch. A notable influx of capital from California VCs, and larger VC firms generally, has been observed.

Go corroborated this emerging pattern, emphasizing its recent development. “We’ve observed portfolio companies successfully securing funding rounds from West Coast investment firms that had previously shown limited local activity.”

Goldstein has also observed the heightened interest from California-based venture capital firms in Boston. He believes that local investors retain a competitive edge. “Many of the seed funding rounds we’re currently involved in include West Coast investors, sometimes even leading the investment.”

While these investors are comfortable with primarily virtual communication, they appreciate the presence of local partners who can conduct in-person meetings with founders and assist with local recruitment efforts.

Founders in Boston place a greater emphasis on these relationship dynamics compared to their counterparts in the Bay Area, Kalevar explained. “The sentiment that dissolving a venture capital partnership can be more challenging than ending a personal relationship is widely held in Boston, and many entrepreneurs approach it as such.”

Kalevar, currently located in California, is scheduled to return to Boston later this year, where OpenView maintains its headquarters. He highlighted the value of in-person interactions, stating, “Whenever feasible, meeting founders face-to-face, while adhering to safety protocols, is undoubtedly beneficial.”

Beyond the benefits of in-person meetings, local investors are reassured by the ample opportunities available, largely attributable to Boston’s strong academic institutions and talent pool. This creates a favorable environment where sufficient investment opportunities exist for all.

Boston’s Competitive Advantage in Startup Funding

A significant strength of Boston lies in its robust educational infrastructure, which directly fuels the volume of promising investment opportunities, as Kalevar observes. The presence of renowned institutions – notably MIT and Harvard, alongside numerous other universities – consistently generates a highly skilled talent pool.

This advantage is already being leveraged by local venture capital firms. Lyman notes that founders originating from Boston’s academic institutions comprise over 25% of Underscore’s investment portfolio, though they are no longer the sole investors focused on these university-based ventures.

The increasing adoption of remote investment strategies has further amplified attention towards the Boston academic startup landscape. A surge of talented individuals from these institutions are pursuing ambitious projects and successfully securing the necessary funding to realize them.

The scope of these ambitious projects is surprisingly diverse. Kalevar emphasizes that innovation in Boston isn’t concentrated within a single industry. While sectors closely linked to local universities are thriving, particularly “hard tech” – encompassing robotics exemplified by Kiva and Boston Dynamics, advanced AI and neural networks, and engineering software – Boston also excels in both life sciences and traditional technology.

This convergence results in a particularly strong showing in “health-related software and services,” as highlighted by Go and others. Interestingly, Go also identifies consumer startups as a key strength of Boston, a fact often underestimated, according to Lyman.

Recent funding rounds demonstrate this variety. Significant investments were made in AI, with DataRobot securing $300 million in Series G funding, and in health tech, with Adagio Therapeutics raising $336 million in Series C. Furthermore, $440 million was allocated to cryptocurrency firm Circle, while Perch ($775 million Series A) and Klaviyo ($320 million Series D) operate within the e-commerce sphere.

Goldstein conveyed to TechCrunch that, despite substantial capital within the industry, Boston remains an underinvested market. He believes the city possesses considerable potential for growth, driven by the increasing number of entrepreneurs emerging from local universities. Reduced computational costs have also broadened access to entrepreneurship.

These new founders are also demonstrating a greater inclination to remain in Boston after launching their companies, Kalevar suggests.

“Historically, Boston has experienced a degree of talent outflow – companies like Facebook and Dropbox originated in Boston but relocated to California,” Kalevar explains. “This was often due to the risk tolerance of local investors. The shift towards remote investment, accelerated by recent events, offers hope that this ‘brain drain’ will be mitigated.”

Beyond preventing talent from leaving, this shift may also reduce the rate of early-stage failures. Goldstein notes a decline in the “Series A cliff” phenomenon, where seed-stage companies struggled to secure subsequent funding.

Go corroborates this observation, stating that a previous shortage of Series A and B capital, coupled with difficulty attracting attention from investors on the coasts, is diminishing with the prevalence of virtual investment practices.

While external capital is addressing the post-Series A funding gap, Boston is also reaping the benefits of long-term investments in early-stage ventures. Goldstein asserts that, given the five-year maturation period for early-stage ideas, Boston’s future appears promising.

Lyman anticipates that recent initiatives will yield positive results, with capital circulating back into the ecosystem. “As Boston continues to generate successful companies – with over 80 private and public firms now valued at over $1 billion in the Boston area – I expect experienced leaders to reinvest their success through angel investing, both in terms of time and capital.”

Increased investor attention has also led to the elimination of the valuation discrepancies previously experienced by Boston-based startups. According to Kalevar of OpenView, “the geographic discounts have disappeared,” meaning Boston companies no longer need to accept lower valuations to remain local.

Consequently, startup valuations in the Boston area are not only rising but are doing so at an accelerated pace.

Startup Valuations in Boston

An influx of capital into a comparatively small number of funding rounds is resulting in increased average deal sizes within the Boston startup scene. Both the median and average are experiencing growth, according to our analysis.

Consequently, startup pricing is increasing, which translates directly into larger post-money valuations. This trend isn't isolated to Boston; it mirrors the broader market dynamics observed in other tech ecosystems.

We surveyed a panel of investors regarding local valuations and their perceived reasonableness. Lyman of Underscore Venture Capital stated that defining “sanity” in current valuations is challenging, as what previously seemed excessive has now become the accepted “market” standard.

This phenomenon is attributable to the venture capital industry currently operating with valuations that surpass historical norms. This is driven by increased capital availability and the anticipation of larger returns due to expanded total addressable markets (TAM).

This aligns with previous research on escalating valuations, demonstrating how investors aim to maintain historical return rates. Essentially, heightened long-term growth projections, coupled with larger TAM estimates, justify higher valuations and contribute to inflation in startup funding rounds.

Lyman concurred, noting that growth pace expectations have also risen in this environment. While Boston’s ecosystem has traditionally been characterized by “slow and steady” growth with strong fundamentals, local startups are now experiencing accelerated growth rates.

Boston-based companies may not be expanding as rapidly as those in San Francisco, but their growth is now comparable to emerging tech firms in cities like New York or Los Angeles.

The surge in valuations isn't entirely negative. Early-stage investors stand to benefit significantly from the current funding boom. Goldstein of Pillar Ventures shared that their recent communication to Limited Partners (LPs) described the current pricing environment as “nuts,” but acknowledged that the firm is largely benefiting from these changes.

Specifically, Goldstein reported that “six of our first 24 companies have already achieved unicorn status.”

However, rising prices aren’t universally positive for early-stage investors. Goldstein observed that the price inflation seen in later-stage investments is beginning to permeate even the earliest funding rounds.

This is leading to larger check sizes; pre-seed deals that previously averaged $250,000 are now frequently ranging from $3 million to $4 million.

Should a significant valuation correction occur, Boston will inevitably be affected. However, the city may experience less impact than other global markets. Boston is positioned to capture a greater share of the upside while potentially facing only average downside risk, representing a favorable trade-off.

Future Outlook for Boston's Venture Capital Scene

According to NextView’s Go, the Boston fundraising market is expected to remain robust, demonstrating clear sustainability. He posits that increased new company creation, alongside the rapid growth of existing firms, will contribute to a higher volume of deals.

Specifically, Go anticipates a surge in significant financing announcements from growth-stage companies in the near future.

He further expressed a belief that funding levels in the second half of the year will surpass those of the first half – a prediction that garnered our attention.

Underscore VC's Perspective

Lyman of Underscore VC indicated her firm is actively responding to the dynamic market conditions, intensifying their efforts.

Underscore is preparing for continued operation at a fast pace for several quarters to come.

However, Lyman also acknowledged the expectation of a market correction in the medium term, though she refrained from specifying a precise timeframe for this adjustment.

Overall Trajectory

The prevailing sentiment suggests Boston's venture capital landscape is poised for continued success, with no immediate signs of deceleration.

The forecast points towards sustained strong performance or even accelerated growth in venture capital activity.

We anticipate the Q3 data, available in approximately one month, will likely corroborate these observations and expectations.