Boston’s Next Tech Gold Mine
The regionâs newest multibillion-dollar industry is massive and invisible. It is a tech revolution that is silently and stealthily connecting companies to us in ever-more-cunning ways. And it may be the one enterprise that locks in Bostonâs hegemony over tech for years to come.
Unlike in decades past, when office parks along 128 hummed with startup energy, the Red and Green lines are the new corridor of the regionâs tech sector. Enterprises of every size splay out from its nodes in a parade of quirky names: Swoop is off the Alewife stop; HubSpot is near the Lechmere stop, not far from the Cambridge Innovation Center, where it got its start; Localytics is at Park Street. Fiksu left the Park Street area in June 2013, after it more than doubled its number of employees, to 160, in less than a year. Nanigans is in a tower near Government Center thatâs also home to eTradeâs local office, because the real estate prices in Cambridge and in the Innovation District have gone through the roof.
These companies are exploding because, around the planet, people are shifting away from desktops and over to smartphones and tablets, leaving the $500 billion global advertising industry scrambling for streamlined, effective, and bespoke ways of reaching us. To do this, companies need lightning-fast answers to a litany of questions: Of the billions of people on hundreds of thousands of sites and apps, who should see their ads, and which ads? And how much should they spend at any given moment to beat out someone elseâs ad? In a word, the future of marketing and advertising is now in the hands of those who can wrangle with big data.
And thatâs just part of the equation. To make complex ad-buying decisions without human intervention, the best technology needs to approximate artificial intelligenceâand improve its success rate with every interaction. And the software needs to be nimble enough to crank through billions of calculations at a pace approaching the speed of light. Ultimately, all of these calculations result in a single decision: to buy an ad spot or not, at that moment, at the right price, just for you. No wasted dollars, no wasted ads. At least, thatâs the general idea.
Fortunately, Boston is profoundly gifted in the artificial intelligence department. In fact, the term itself was coined by John McCarthy, a computer scientist at MIT who, along with fellow AI pioneer Marvin Minsky, cofounded MITâs Computer Science and Artificial Intelligence Laboratory in the late ’50s. MIT remains the top-ranked university for machine learning, the branch of AI crucial to the kinds of predictions marketers need to make. MIT also fosters smart researchers with an eye toward commerce. (Professor Robert Langer, for example, had helped start 25 companies and had licensed or sublicensed his patents to more than 250 businesses as of 2012.)
MIT research served as the basis for DataXĆ«, one of the Hubâs biggest ad-tech companies yet. Itâs the company youâve never heard of whose software is helping multinational corporations manage their ad campaigns in real-time. Currently valued at several hundred million dollars, with revenue well over $100 million in 2013, DataXĆ« was fifth on last yearâs “Inc. 5,000” list of the fastest-growing private companies in America.
DataXĆ« is just one of the local advertising and marketing companies racing to reach $1 billion in revenue. Of course, just getting to $100 million in revenue is a significant milestone; a billion dollars is rarer than rare, which is why venture capitalists call those companies that do “unicorns.” Even a fast-growing business typically needs 10 to 15 years to hit a billion dollars in sales. And yet thatâs not out of the realm of reason for Bostonâs recent startups.
If the ad-tech enterprises here can stay independent, theyâre after big enough markets to become massive companies in their own right. But for that to happen, theyâll need determined leadership, patient investors, and a healthy stock market. If even one or two of these ad-tech companies succeed, theyâll break a two-decade cycle of Boston as a feeder market for larger tech companies elsewhere, making this industry the regionâs next biotech. That would reshape the local real estate market, ripple through the job market, and restore some of the lost luster of the 1980s tech heyday.
There are many obstacles that Bostonâs ad-tech ventures will need to overcome on the road to a billion. The first is that historically, our most promising companies have been bought out before they can get that big. The software company Endeca Technologies, on the verge of going public, was purchased by Oracle for $1.1 billion in 2011. ITA Software was bought by Google for $700 million the previous year. On a smaller scale, Crashlytics had no revenue when Twitter bought it for $38 million in 2013. When local businesses like these sell out, they become satellite offices to big corporations and, as a result, arenât nurtured in the same way theyâd been when they were independent. Employees jump ship, and finding new, young star power is no longer a priority. Conversely, when companies are given the opportunity to grow where they were planted, they end up training the next generation of leaders in the mysteries of running big businessesâpeople who eventually gain the tools to start companies, think big, and continue developing the regionâs economy.
The second obstacle is that local venture capitalists put in far less, want quicker returns, and demand much more control than their Silicon Valley cohorts. Boston lacks high-profile billionaires like John Doerr, Vinod Khosla, and Michael Moritzâvisionaries who have famously fueled the industryâs change the world and get rich mythos. Those three happened to be in Silicon Valley as the personal computer ascended, crushing the minicomputer companies that were the basis of the Massachusetts Miracle with Intel, Oracle, Cisco Systems, and Sun Microsystems. In turn, they funded second-generation West Coast companies, including Compaq, Netscape, Amazon, Yahoo!, Google, and Twitter.
Silicon Valley VCs like Kleiner Perkins Caulfied Byers, NEA, and Sequioa Capital might have multiple billion-dollar funds, and they occasionally invest $200 million, sometimes $500 million. New England firms typically put in far less, and demand quicker buyouts. To demonstrate the shortsighted nature of local VCs, consider that TripAdvisor will hit a billion dollars in revenue only now, 14 years after its launch and a full decade after its local investors sold it. Google, which hit a billion dollars in revenue in five years, and Facebook, which did it in six, regularly rebuffed substantial buyout offers.
So what does the ad-tech sector have going for it? That all of these companies launched around the same time gives the industry a huge boost. “Clusters [of talent] are very important,” says Bill Aulet, managing director of the Martin Trust Center for MIT Entrepreneurship, which supports MIT students who want to become entrepreneurs. “A cluster allows for more-rapid iterations on ideas, which allows you to be more competitive.” Micah Adler, president and CEO of Fiksu, has experienced the benefits of the ad-tech cluster firsthand: “We become like a center of excellence in an area. I can call up Ric [Calvillo, CEO of Nanigans] and say, ‘Hey, what do you make of this? or any of those guys.”
One can witness the cluster effect in action in the field of large-data storage: As Massachusetts’ biggest tech company, EMC serves as a storage-related epicenter, inspiring those around it to explore data management in ever-more-innovative ways. Walthamâs Actifio, for example, is a storage-related company that pulled in a $100 million venture-capital round in late March, valuing it at a billion dollars. That’s the first Boston-area startup to achieve unicorn status since the travel site Kayak went public in 2012.
Venture capitalist Jeffrey Bussgang can put all of Bostonâs startup travails in perspective. Heâs one of the four general partners at Flybridge Capital Partners, an up-and- coming venture capital firm with about $560 million under management, and is also an investor in DataXĆ«. “There are three distinct stages in a companyâs development: jungle, dirt road, and highway,” he says over breakfast one morning at Rebeccaâs CafĂ©, on Boylston Street.
The toughest part around here, Bussgang says, seems to be getting from dirt road to highway. Sure, the region’s plethora of entrepreneurial programs breed plenty of creators who thrive in the early stagesâthat heady period during which anything anyone does can move the needle. But those same entrepreneurs often cool when things become more routine. The trick is to find sales and marketing executives who know how to grow a company from $100 million in sales to $1 billion in salesâsomething that, according to many experts, is difficult to do in this region, thanks to the dearth of big businesses.
Bucking the trend, he says, DataXĆ« may have all the pieces it needs to make it onto the highway. Its technology is based in sophisticated mathematical algorithms developed for NASA over three and a half years by DataXĆ« CTO Bill Simmons while he was at MIT. The tool analyzes the 35 billion possible paths we could use to get to Mars, how many astronauts to send, what sort of engine to use, what kind of trajectory to take, and what kinds of missions to perform.
In the end, Simmons realized he had an excellent all-purpose decision-making tool, and he suspected that his technology could have applications beyond aerospace. In 2008, when Simmons was getting his Ph.D. at MIT, the head of his lab, Edward Crawley, introduced Simmons and analytics specialist Sandro Catanzaro to Bruce Journey, a former Time Inc. executive whoâd been running MITâsÂ Technology Review. The three began to meet on Monday nights to brainstorm how they could capitalize on their math. Then came the “aha” moment: Could Simmonsâs Mars algorithms help develop a way to sell ads by predicting consumer behavior? To find out, they needed investors.
Enter Mike Baker. When I meet Baker on a breezy day in March, at Barrington Coffee on Congress Street, he is walking like a man on iceâstiffly and gingerly. Baker had torn his ACL doing an inadvertent cartwheel while heli-snowboarding in British Columbia a couple of weeks earlier, but he shrugged it off. Later this spring, heâll have Thomas Gill, former team physician for the Patriots, take care of it. “Iâll be back heli-boarding this time next year,” he says.
Baker, whoâs made 29 investments as an angel investor, is known for making quick decisions when it comes to moneyâand attracting other investors in his network to his ventures. “I put my money in, people go, âMikeâs not an idiot,â and I bring people in with bigger pockets,” he says.
Baker is a Boston cheerleader; he moved one of his startups here from New York, and made one of the companies he invested in relocate from Silicon Valley to Boston. He was at CMGI in the late ’90s, when it had naming rights to what we now call Gillette Stadium. Baker ran two marketing-tech companies, one of which, Engage, pioneered the development of an ad network built around targeting consumersâ online behavior. It went public in 1999. The other, Enpocket, an early mobile-advertising company, was purchased by Nokia. Baker retired at 41, planning to teach and act as an angel investor.
When the DataXĆ« trio presented their business idea to him in early 2008, Baker didnât like itâthey didnât have a product yet, so it was hard to see how what they were proposing would be different from what heâd done at Engage. But he liked the math, and thought they could use it to help companies automate their advertising decisions. So he gave them $100,000 and started introducing them to friends in the venture capital world. Trouble was, nobody wanted to invest. The market had crashed, and everyone was spooked. “I was like, ‘This is going to be my quickest fail ever,'” he says.
Eventually, in December 2008, a VC told Baker, “Iâll do a deal if youâre in,” meaning if heâd become the CEO of DataXĆ«. Baker felt torn. On the one hand, heâd promised his wife heâd retire, maybe do a little teaching. Running a company takes a lot of time. But he had already been trekking in from Needham every day to be with the DataXĆ« team at their offices in the old American Twine Building, in Cambridge, and he wanted the idea to succeed.
So he told his wife his dilemma, and his intended solution.
“What? Are you crazy?” she replied. What he is, Baker says, is addicted to the business of business. And heâs good at it, too. Bussgang, who led Flybridgeâs investment in DataXĆ«, says, “Mike can go from jungle to dirt road, and I think he can go from dirt road to highway.” But not without some “oh, shit” moments.
Under Baker, DataXĆ« now offers big companies that spend a lot of money on advertisingâFord, Lexus, Sony, and Universalâthe ability to make ad-buying decisions in fractions of a second, a process called real-time bidding. It sees 800,000 opportunities to buy ads every secondâ50 billion a day. The software decides what to bid on in less than 10 milliseconds, or 40 times faster than we can blink.In that time, DataXĆ« learns a lot about usâall anonymously, mind you, but still eerily specific. For instance, it can tell you that 25- to 34-year-olds in the Great Lakes region and on the Pacific coast are looking at ads for a certain American-made luxury car typically favored by the geriatric crowd. That requires deep algorithmic chops, and it’s incredibly valuable technology.
DataXĆ« isnât the only Boston ad-tech company heading for the highway. Founded in 2006 by Brian Halligan and Dharmesh Shah, HubSpot touts the concept of “inbound marketing,” which basically means getting people to find your site instead of some other guyâs. Once youâre there, sites use HubSpotâs tools to personalize what they show you, hoping to turn you into a consumer. With its business website tools, HubSpot has become very popular among small companies, claiming to have more than 10,000 customers and $78 million in sales last year, a 50 percent increase from 2012.
HubSpot is a great Boston story. Halligan, 46, went to Westwood public schools, then to the University of Vermont. He worked at Boston-area companies such as Parametric Technology Corporation and Groove Networks, which was started by the local tech legend Ray Ozzie and eventually bought by Microsoft. Shah had built a financial- services-software company called Pyramid Digital Solutions, which he sold to SunGard, part of Bainâs private equity portfolio, in 2005. He runs a blog, OnStartups.com, and has 225,000 followers on Twitter.
Halligan and Shah started out in the Cambridge Innovation Center, an accelerator in Kendall Square, and they became one of its biggest successes. They pulled in $65 million in venture capital from blue-chip firms like Bostonâs General Catalyst and Matrix Partners, and West Coast stalwarts such as Sequoia, Google Ventures, and Salesforce .com. The company is known for its fun cultureâit even has a nap room. But it isnât slothful: Employees gather during the week to do pushups in the lobby.
HubSpot wouldnât make its executives available for interviews, citing schedule conflicts. But it could also be that the company isnât talking because itâs close to filing the paperwork it needs to go publicâspeculation is rampant.
Another promising company is Fiksu, which applies its algorithms to the $26 billion app market, working through several hundred ad networks to help apps get noticed. Fiksu (Finnish for “clever”) was founded by Micah Adler, a peripatetic Finn who was born in Australia, spent his formative years in Finland, graduated from high school in Concord, New Hampshire, and got his BS at MIT and Ph.D. at Berkeley. He came back to Massachusetts to teach computer science at UMass Amherst, publishing papers with titles like “Towards Asymptotic Optimality in Probabilistic Packet Marking.” Fiksu is his fifth startup. He says that the company has been used to promote more than 2,300 apps, which have been downloaded 2 billion times. At peak usage times, Fiksuâs algorithms are choosing among 150,000 potential ad placements a second. “The speed of light matters,” he says. The company has raised $18 million, and Adler is wary of seeking more funding, as raising more money can mean ceding control. Instead, he says he wants to grow Fiksu into a long- term business.
Boston-based Nanigans offers the equivalent of a virtual auction house for advertisers bidding to get their ads on Facebook. The company is growing so quickly it canât even be bothered to replace the two lobby chairs and some of the art left by the previous tenant. Itâs taking over the rest of the floor it occupies at 60 State Street, overlooking Government Center. To get to the space, you walk past a life-size cutout of cofounder and CEO Ric Calvillo at a company Halloween party, wearing a double-breasted suit and a bearâs head and holding a Bud Light. A stack of Ikea Galant tables and some knockoff Aeron chairs are waiting to be set up. Here and there, a few overeager employees are sitting on the floor.
When I travel to the office in mid-March, Calvillo is wearing black jeans and a pullover sweater. Fit at 45, he has deep circles under his eyesâhe tells me he often wakes up at 4 in the morning to start working. And yet Calvillo doesnât have to work. His third startup, Conley Corporation, was bought by EMC in 1998. That helped him buy a place on Nantucket. His fourth company, Incipient, failed, and Calvillo could have just stopped and gone kite-surfing (he knows all the good spots in New England), âbut retiring at 40 years old sounds stupid,â he says. Witnessing the early success of Zynga, founded by Calvilloâs fellow Penn alums Andrew Trader and Mark Pincus, helped convince him to develop a social game portal on Facebook. He called it Nanigans, short for shenanigans. “Itâs memorable,” Calvillo says, then adds, “Google is a weird name, too, and Yahoo!”
Nanigans switched gears when Calvillo and cofounder Claude Denton found that it was hard to attract users to their games. They started developing algorithms to get more downloads, and that became the basis for their business, which now is doing more than $20 million in sales and is on track to grow exponentially. This spring, he says, it will expand its ad platform to channels beyond Facebook. Calvillo has taken on a limited amount of funding for Nanigans, less than $10 million, suggesting that the founders can control their own fate. With Facebook surging and social media still an emergent phenomenon around the globe, if his team continues to execute, Calvillo looks like he might just take his company to unicorn status.
As companies like DataXĆ« and HubSpot shift into high gear, thereâs a follow-on wave of ad- and marketing-tech companies starting out. One of them is Swoop. Based in Cambridge, Swoop puts text ads with small icons into relevant spots in online stories, almost like a combined search-and-display ad.
On a Tuesday morning in February, Ron Elwell, Swoopâs CEO, is on the 6:20 a.m. train to New York for two days of meetings, mostly with the digital-ad agencies of companies such as American Express and Starbucks. At 53, Elwell is decidedly lean, thanks to a passion for trail running and triathlons. He ran a Tough Mudder last summerâelectrified water obstacle and allâafter one of Swoopâs twentysomething developers said he wanted to do it. “I beat him by two hours,” he says.
When Elwell later recounted the story to colleagues, one asked, “Isnât it supposed to be a cooperative race, where you help each other?”
Elwell grinned. “Everything I do is a competition,” he answered.
Back in New York, Elwellâs meetings with prospects are almost perfunctory; at every one, he either gets a promise for a new campaign or an agreement to try the fledgling product. Swoop has run more than 90 ad campaigns, and the results are promising. Even at lunch, Elwell gets news that one of the worldâs largest consumer-goods companies has signed up for a campaign.
Entrepreneurs like to talk about disrupting marketsâthat is, creating a product that makes people stop using what came before. Social media famously disrupted old media: Today, Google and Facebook each make more than $3 billion from display ads. Swoop now hopes to disrupt the disruptorsâto grab a chunk of that newly liberated revenue, or well enough to make it onto the radars of companies like Microsoft and Yahoo!
There are all kinds of ways a startup can cartwheel off the path to a billion dollars. Companies in the ad business might decide they want to buy a venture for its idea. In February, as I started reporting this story, Facebook paid $19 billion for WhatsApp, a five-year-old maker of a messaging app with minimal revenue but 450 million users. If Facebook itself had accepted any one of the multibillion-dollar offers it received in its infancy, it would have blown an opportunityâthe companyâs stock is now worth $150 billion.
Baker, of DataXĆ«, wants to see his business get big. One thing in his favor is that the field of programmatic marketing is just getting started. “Weâre in the second or third inning,” says Joanna OâConnell, director of research at AdExchanger, a New York publishing and research company. The ad-tech market is indeed still being defined. And while Wall Street can be fickle when it comes to new industries, HubSpot has rivals that have gone public and succeeded, which bodes well for it. Ad-tech companies like DataXĆ« and Fiksu are still new, still really proving their business models. As long as they donât stumble, theyâre on the right path to making Wall Street happy, which means they could go public. That would put Boston back in the mix.
Itâs not hard to imagine how a robust ad-tech sector would affect the region. In short, it would mean more jobs for techâs rising stars. But it would also offer mentoring opportunities we have yet to seeâhighway-level guidance to grow the next generation of big-thinking entrepreneurs. Regionally, the effects could be larger. Consider the impact of Twitterâs success on San Francisco: Dozens of companies followed its lead and settled in the city; together they are slated to bring an additional $54 million in tax revenue to the city over the next 20 years.
âBuying and selling attention is the lifeblood of the Internet, and weâre automating that business. Weâre like the mint behind the Internet economy,â Baker says as he takes a break from getting ready to host a LunchSpotting event for MITXâthe Massachusetts Innovation & Technology Exchange, a group of business and marketing leaders in the region. “This is a big, big market and will sustain many competitors and large successful companies. Theyâre not from Boston yet, but thatâs whatâs next.”
In Search of Unicorns
COMPANIES ON THE CUSP
TripAdvisor, which launched in 2000, makes money from ads as well as from referral fees from its former sister company Expedia. When it was acquired by Barry Dillerâs IAC, it became part of Expedia, then was spun out in a public offering in 2011. In 2013 revenues hit $945 million. The Needham-based company is still run by CEO and cofounder Stephen Kaufer.
Wayfair, which started in cofounder Steve Conineâs house, offers 7 million home products from 12,000 brands. The Back Bay venture had $915 million in sales in 2013. Conine continues to be co-chairman and CTO, and cofounder Niraj Shah is CEO. There is speculation that Wayfair could go public, perhaps in 2015.
Watertownâs Athenahealth makes a popular electronic medical-records system. The 17-year-old company, which went public in 2007, had $595 million in revenues in 2013. One of its foundersâ president, chairman, and CEO Jonathan Bushâ presides over the business.
COMPANIES TO WATCH
Actifio, founded by Ash Ashutosh, has drawn more than $200 million in funding. Acquia, meanwhile, hosts one of the most popular tools for content management, and in 2013 sales neared $100 million. It was named the fastest-growing private company in the U.S. by Deloitteâs Technology Fast 500 list.
Veracode, founded by noted white-hat hackers Chris Wysopal and Christien Rioux, makes software that helps developers build more-secure programs. The Burlington outfitâs sales could hit $75 million this year, and it may go public.
As the industry leader in cloud commerce technology, Demandware boasts clients such as New Balance and Pier 1 Imports among its more than 200 global retailers. With market capitalization now valued at around $2 billion, the Burlington-based company is on track to have another record-breaking year.
Source URL: http://www.bostonmagazine.com/news/article/2014/04/29/bostons-technology-companies-gold-mine/