I think the original question was a bit rigged. Whether you are in SF or in Boston, there are always companies that ’should be funded’. Whether or not they get funded is a function of the company’s ability to market themselves or VCs/angels’ abilities to find them.

In terms of thinking for solutions to find these companies? I think one way (from the buy side pov) is to leverage the fact that like-minds tend to congregate. Entrepreneurs tend to form groups and want to meet other entrepreneurs to share ideas. From this it’s simple, VCs/Angels shouldn’t be hiring ex-bankers or consultants, they should be hiring good ex-entrepreneurs (preferably from the areas they reside in).

The more difficult problem is motivating entrepreneurs (who have good ideas) to market themselves and come out of the wood work. As an engineering alumni of MIT I’ve seen many ‘would be’ profitable inventions tossed to the side simply because the inventor invents it ‘for fun’. I think one of the questions is: how do you motivate entrepreneurs to share their ideas?

“The amount of seed funding available needs to be drastically raised, and the process to get it needs to be made immensely more efficient. Then we need to SHOUT IT FROM THE ROOFTOPS!!!!! Let it be known that it is available here in Boston. It has to be more then a press campaign, but back it up with some real investments. A stereotype is growing on Boston for being difficult at the seed stage of funding and its going to take some large, loud moves to break it.”

I agree with a lot of the points above wholeheartedly but, in my opinion, there are a number of reasons why $25k – $50k deals are not happening right now in Boston. The context? The original model for LC, which did not work, was to do 100 investments annually at ~$50k.

Reason 1: The economics of a $50k deal does not work at a large scale given the current market dynamics.
• Low Probability of Reward: With a low probability of a positive exit for a seed stage deal, the better option, rather than spray and pray, is to do deep diligence around a number of industries, pick one or two companies will have a lower risk for burnout and fund them with a more substantial amount of money (to help them get through the inflection point of a start up lifecycle, which usually costs more than $50k).

• Overhead Costs: An institutional seed investment firm/fund could, in theory, take an index approach to investing and throw small amounts in a large number of companies. However, staying active in these deals means that the overhead expenses of managing such a large portfolio are unjustified given the size of the fund. These early stage companies need much more than dollars to help them succeed. When I first started LaunchCapital, a well-respected angel told me that the money we provide is the least valuable thing for our portfolio companies. After 42 investments and deep involvement with TechStars, I can definitively say she was correct.

Reason 2: There is a well-developed angel and venture ecosystem in Boston but my perception is that they have not worked closely together over (at least) the last two years.
• Angels = Moderate Exits: I hear repeatedly that angel-funded companies in Boston will remain angel funded and aim for moderate sized exits. The economics of these deals provide a great return for both the investor and the entrepreneur. Introducing their deal flow to venture investors increases the risk for dilution to a point that is greater than the immediate term upside from a sale.

• VC = Large Exits: Venture funds in Boston tend to focus on different types of investments that have higher growth trajectories. They also tend to focus on experienced entrepreneurs with whom they have existing relationships – so their ecosystem grows slowly.

Many of the economic issues that I bring up are similar in Silicon Valley, with one key difference: Silicon Valley has a larger number of venture funds with different criteria for success. Many smaller cap VCs in SV are happy to invest in companies with a 3 – 5 year time horizon with a moderate exit. Since the majority of Boston-based VCs are large cap ($250M+), the math for moderate, quick exits doesn’t work. If there was an emergence of smaller cap VC funds with more moderate exit expectations, more companies could be funded at lower up-front levels.