The Once and Future Hub

By Jason Schwartz | Boston Magazine |

Fidelity fired 1,300 people in November and plans to ax 1,700 more this quarter. Dozens of local car dealerships could go belly-up along with the Big Three. The malls are empty. The "collections" that used to be malls are empty. The state has no money and whatever town you live in has less. Oh, and the last time the U.S. economy hit the skids, back in the early ’90s, Boston recovered with all the speed of an asthmatic banana slug.

But as a wise man once said: Don’t have a cow, man. If history tells us anything, it’s that a recovery will come. And when it does—be it in a month, a year, or a decade—Boston will be out in front. Says Ed Glaeser, Harvard economist and director of the school’s Rappaport Institute for Greater Boston, "I certainly expect our economy to come back, and come roaring back."

So put on your rose-colored glasses and look past the current hardships. Boston is positioned for an economic dominance unseen since our 19th-century merchant fleet (yes, you have to go back that far) ruled the high seas. Here are 14 big reasons why.

1. Because we’ve learned from our past missteps.

Whereas the local economy used to lean all too heavily on our mutual-fund giants and a few large, vulnerable corporations, it now rests on a diversified group of industries drawing their strength from Boston’s greatest asset, its collective brain power. "Last time, we led the charge down the toilet," says Wellesley College economist Karl Case, recalling the early-’90s collapses of Digital, Wang, and Bank of New England. Boston’s real estate market imploded, too, and for much of 1991 the area’s unemployment rate ran a full point higher than the national average. "Having lived through it once before, we didn’t get the excesses again," Case says. While the financial world’s demise cripples New York, costing that city an estimated 225,000 jobs over the next two years, the damage here will be a lot less severe.

2. Because the policies of a new president, sworn in on the 20th of this month, will usher in a new epoch for America—and profits for Boston.

3. Because, for instance, Barack Obama has promised near-universal healthcare.

And since Massachusetts is the only place this side of Canada already providing it, we stand to benefit from such a push. Obama’s proposed National Health Insurance Exchange, which would create a market that allows people who don’t have employer-sponsored health insurance to buy their own, "is very much modeled on the idea of the [Massachusetts Health] Connector," says Katherine Swartz, Harvard professor of health policy and economics. Studying Massachusetts, she adds, will help the Obama administration determine what the minimum offering of services should be, and who should be eligible for them. "Clearly, they’re going to learn a lot from the types of issues the Connector board had to struggle with."

4. Because, even more important, a vibrant culture of healthcare entrepreneurship has sprung up here in response to the challenges of universal coverage, and Obama’s agenda could mean big business for those firms.

One such startup is Cambridge-based Sermo, which has developed a networking website that allows doctors to log on anonymously and compare notes on new drugs and treatments. The company makes money by selling access to interested non-physician parties (pharmaceutical concerns, potential investors, etc.), and with 500,000 doctors already members and 10 of the world’s top 12 pharmaceutical companies as paying customers, its future looks bright. Even in these tough times, Sermo officials say they’re hiring away, "actively increasing" their current 90-person staff.

The bosses at American Well are also in hiring mode. The three-year-old Boston firm, which provides patients with M.D. consultations via webcam, has doubled its workforce every year since its inception. As more Americans gain health insurance and appointments for primary-care physicians become consequently even harder to schedule, American Well should do quite well. Not that it’s hurting right now: It recently struck a reimbursement deal with Hawaii’s largest health insurer. Say aloha to 610,000 new customers.

5. Because these startups and others like them are the byproducts of the universities and teaching hospitals that, despite the recent gloomy headlines, remain the engines of our local economy.

Start with the schools. Sure, budgets have been slashed; even MIT and Harvard are looking to cut $50 million and $105 million in annual spending, respectively. But the universities’ principal output—brains—makes for a highly adaptable infrastructure. In places like Michigan and Ohio, after any bailout they’ll still need to literally rebuild their economic landscapes, since too many jobs will be lost for good. By contrast, there will always be demand for top minds and the institutions that school them. "We employ close to 100,000 people, and we aren’t going to relocate out of state," notes Richard Doherty, president of the Association of Independent Colleges and Universities in Massachusetts. All told, the universities pad out the state’s bottom line to the tune of $27 billion. Yes, Harvard has lost $8 billion this fiscal year from its endowment, but it’s still got $29 billion in the kitty. You can’t say that for Lehman Brothers.

Similarly, our medical complexes remain fundamentally strong. Brigham and Women’s and Mass General are perennial top-10 finishers in U.S. News and World Report‘s hospital rankings. Taken together, the city’s teaching hospitals and affiliated med schools provide 110,000 jobs and $24 billion a year for our local economy. Like the universities, they aren’t going anywhere. Actually, they’re getting bigger: Despite everything, Mass General is still on track to spend $686 million on the state’s most expensive hospital expansion, set to open in 2011.

6. Because much of what goes on in that new building will doubtless be aided by the National Institutes of Health, which for 14 straight years has sent more cash to Boston than to any other city.

Massachusetts’ total haul has habitually led that of all states, save California (though per capita we get roughly four times more). Between 2005 and 2007, the NIH plowed over $6.7 billion into the commonwealth, more than five times what the average state received, and more than one-tenth of all the money doled out nationwide.

Sure, there’s concern that NIH dollars will disappear as the economy worsens. But that didn’t happen during the last downturn, in 2000—funding increased that year and in the years following, and that with a conservative president in the White House. Even more auspicious: As a candidate, Obama pledged to double the agency’s funding over the next 10 years. Anything he does to even come close to that goal will help not only Boston’s medical industry (which includes the top five NIH-funded hospitals), but also our universities. Last year MIT alone received just under $200 million in NIH money, which was more than 26 entire states reeled in.

There’s another local sector fortified by the NIH’s pipeline. Some 450 biotechs are located in Massachusetts, and last year 69 of them received a total of almost $86 billion from the NIH. That free money helped account for $5 billion of the industry’s payroll. For scientists and medical innovators interested in working at top-flight universities and hospitals while having the opportunity to spin their research into startups, the proven flow of NIH backing to local institutions makes Boston exceptionally attractive.

7. Because the links among our universities, hospitals, and the aforementioned startups have created what’s often referred to as a "biotech ecosystem."

It works more or less like this: You start with an idea, incubated and nourished in one of the universities or hospitals. Angel investors provide seed money to get the venture off the ground. For the ensuing rounds of fundraising, other area venture capitalists pitch in, offering not just cash but coaching that’s informed by a deep understanding of both early-stage development and the local terrain. As the fledgling biotech staffs up, it can turn back to the universities for talent to fill the jobs it’s creating. As it needs business services, it can look to the many technology-support companies to help with everything from animal experiments to producing the proteins needed for lab work. The hospitals right next door can be accessed for human trials. Finally, while it takes its products to market, the biotech can tap the city’s large pool of lawyers who specialize in licensing and commercial deals for new drugs. All the organizations within the ecosystem interact with and need one another, which means one can’t just be yanked from this habitat and expected to perform as well.

Jeff Elton, a senior VP in Novartis’s Cambridge office, notes that the ecosystem has spawned a flurry of new medical drugs, as well as a few successful companies you may have heard of: Genzyme, which enjoyed a $480 million profit last year, is one; Biogen Idec, which boasted a $638 million margin, is another. That performance "is something that a lot of regions just can’t replicate," Elton says.

8. Because the people who inhabit this ecosystem aren’t panicking.

Oh really, you say. Didn’t the investment bank Rodman & Renshaw just publish a report warning that 113 biotechs nationwide (a fair share of them in Boston, to be sure) have less than a year’s cash on hand and are in danger of going under? Yes, that’s a serious concern (and my, how well read you are!). There’s no doubt that some area biotechs will fold if the economy stays this scary. So many local jobs have already been cut that the tech website Xconomy keeps a deathwatch tally.

But none of this seemed to greatly trouble the businesspeople and biotechies at a recent MIT cocktail reception for alumni entrepreneurs. The function was held at the Stata Center, on a day when the Dow plunged 400 points. As the assembled entrepreneurs sipped wine, snacked on bacon-wrapped scallops, and made the networking rounds, no one threatened to jump out of the building’s famous herky-jerky windows. They all knew Boston’s hold on biotech is safe. Says Elton, who was among the minglers, "Here we have enough activity going on that even if one venture fails, the talent stays. We preserve not just our intellectual assets but our human assets, too, and that’s important as you’re going through a recession."

9. Because retrenchment could help shore up Boston’s standing as one of the world’s top biotech centers.

According to Christoph Westphal, CEO of Sirtris (his fourth biotech), the loss of VC funds will "probably be more of a problem for the secondary biotech centers, like Raleigh-Durham, Atlanta…six months ago every little place was saying, ‘We want to be a biotech hub.’ I think there’s probably [going to be] this concentration of more and more money in Boston."
Highland Capital partner Bob Davis adds, "When you find a challenging time and you hunker down, you hunker down in familiar territory where you know where all the tunnels and foxholes are."

10. Because its ecosystem makes biotech different from the leading local industries preceding it.

Until recently, biotechs used initial public offerings to fund their midstage research. (It can be 10 to 15 years before a biotech startup thinks about profits.) But with that option shut off by volatile markets, companies at that stage of development have increasingly been forced to rely on big pharmaceutical companies like GlaxoSmithKline and Pfizer to come in with the money they need.

National behemoths buying out our local flagships may make Bostonians fidgety. After all, Manulife turned John Hancock into a Canadian, Gillette’s run by a bunch of gomers in Ohio, and the thing that used to be Shawmut/BayBank/Bank of Boston/BankBoston/Fleet Boston now sits deep in the vast belly of Bank of America in North Carolina. But Westphal, whose firm was acquired by Glaxo last spring for $720 million, says the life sciences are a whole other animal. His new parent company threw him a three-year, $200 million budget and has since more or less left him alone. "What’s really interesting is what these big [pharmaceutical] companies want…is literally, expressly, an access to this ecosystem," he says.

A final example, for fans of symbolism: On December 3, the same day the news broke that the venerable company State Street would slash up to 1,800 jobs, a South Korean life-sciences firm called Oscotec announced the opening of a new Cambridge office. Like everyone else in biotech, the South Koreans saw what was going on here, and wanted in.

11. Because the biotech ecosystem provides a model for the emerging field of green technology, a.k.a. cleantech.

"There is some crossover in the underlying technologies," Elton says, noting that biotech touches on certain aspects of energy generation and storage. That leg up could prove quite useful, because as big a boon as biotech has been for the local economy, it’s nothing compared with what cleantech could do. "We talk about how many billions in the tech world," says Tim Rowe, CEO of Cambridge Innovation Center. "In the energy world they talk about how many trillions."

Obama seems to be thinking this way, too: His environmental plan calls for investing $150 billion in private cleantech enterprises over the next decade. The $500 billion economic stimulus proposal he unveiled last month reportedly includes the first $50 billion of the sum. Essentially, he’s answering the fall of Wall Street by pushing the rise of alternative energy. That means the same kind of federal money that has powered the growth of Boston’s biotechs could also spark our budding green sector.

Investors, taking notice, are pumping their own cash into cleantech. Nick d’Arbeloff, head of the New England Clean Energy Council, says that as recently as 2007 "there might have been one or two venture firms that even mentioned energy on their websites." Now there are at least a dozen local firms with a dedicated energy practice.

12. Because while Boston doesn’t yet have a fully formed cleantech ecosystem, neither does anyone else.

So, as Curt Schilling so famously asked in 2004, why not us?

Kenneth Morse, managing director of the MIT Entrepreneurship Center, is certainly on board. "MIT probably has as many people working on alternative energy today as we had working on the Manhattan Project," he says. Statewide, there are about 60 fully funded cleantech firms up and running. They include GreatPoint Energy, the world leader in the conversion of coal to natural gas. It burst out of the gates with a heady $100 million in startup funds and is now building a $30 million plant in Somerset, due to open in the next few months. There’s also Evergreen Solar, which opened a solar panel manufacturing facility in Devens last summer, doubling its plant workforce to 700. Another notable new player, Wilbraham-based Flo-design, has developed jet engine-inspired wind turbines that are three times more efficient than the standard propeller getup. After winning the 2008 MIT Clean Energy Entrepreneurship prize and the MIT Enterprise Forum’s Ignite Clean Energy competition, both run by Morse’s Entrepreneurship Center, Flodesign received $200,000 cash, PR services from Boston firm Bell Pottinger USA, legal services from Mintz Levin, and a year of free office space from either Cummings Properties or UMass Dartmouth. Take note, friends: This is an emerging ecosystem at work.

13. Because Tim Rowe’s Cambridge  Innovation Center is wet-nursing even more cleantech concerns.

Established in 1999, the CIC, which operates out of a hulking slab of concrete in Kendall Square, today houses 170 startups of all varieties, many of them filtering out of the neighboring universities. Five years ago, none were in the energy industry; today more than 20 are.

That number should rise, given the long-established tradition of young strivers going back to school for another degree when the economy tanks. The CIC last saw this in 2003. Back then, roughly two graduate-school years after the dot-com bubble burst, Web 2.0 ideas poured out of the universities, and the CIC doubled in size—and then doubled again in 2004. And then again in 2005. Four years later, Rowe is anticipating the next boom, its ideas unlike any other’s and fueled—quite literally—by Obama’s proposed $150 billion.

"The president-elect understands that driving the industrial sector of America toward the development of a green-energy economy can have a tremendous positive impact on our over-all economic health," says d’Arbeloff. Again, Obama’s plan is right now nothing more than that—a plan—but he is hardly alone in his thinking on this issue. "Green" used to be a word for hippies and do-gooders; these days, it’s for anyone interested in smart business.

14. Because the current state of the local economy is like a mosaic.

Stare intently from close up and you’ll go cross-eyed. But step back to take in the long view and it all comes together beautifully. Our new army of green entrepreneurs and opportunistic venture capitalists can together create a new, cleantech ecosystem, leading Boston to a place at the center of a burgeoning industry, one that ultimately could be the most important on the planet. We could be the hub of the universe in the way Oliver Wendell Holmes never imagined. All we need is a few campaign-trail promises to come through.

See, what’s to worry about?

Source URL: http://www.bostonmagazine.com/2008/12/the-once-and-future-hub/