The classic capital efficient start-up, in the eyes of an investor, ought to be able to take a million bucks (or less), build a product that works, and land some early customers. The craze started in the tech sector, where open source software and pay-as-you-go cloud computing services radically reduced the cost to create a Web business. Apple’s iTunes Store and the Android Market also made it far easier to distribute a new mobile app. But now investors in energy, medical device, and biotech industries have started chanting the mantra of capital efficiency.
What impact will that have on Boston’s innovation economy, which is much better at producing new robots, stents, and cancer drugs - hardly inexpensive ventures - than games like Angry Birds?
At the root of the emphasis on doing more with less is shrinkage in the venture capital industry: There are fewer venture capital firms with less money to dole out. The most recent data from the National Venture Capital Association, for the third quarter of 2011, shows that venture firms nationally raised half as much in that quarter as a year earlier.
“Returns just have not been good,’’ says Jeffrey Bussgang, a partner at Flybridge Capital Partners in Boston. The venture capital industry as a whole has lost nearly 5 percent on investments over the past 10 years, according to Cambridge Associates, a local advisory firm that tracks industry performance.
As a result, says entrepreneur Greg Schmergel, “VCs who used to be interested in things like hardware and semiconductors now say they’re more interested in making $250,000 or $500,000 investments. They want the two guys who just got out of MIT and are building a Facebook app.’’
Schmergel has raised just over $30 million for Woburn-based Nantero, which is developing a new memory chip for computers. “It’s unfortunate, because if you look at our competitive advantage relative to Silicon Valley, it probably isn’t in making Facebook apps. It’s in biotech and nanotech and semiconductors,’’ he says.
